File No. 33-24962
Investment Company No. 811-5186
As filed with the Securities and Exchange Commission on March 2, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
Registration Statement under The Securities Act of 1933
Post-Effective Amendment No. 25
Registration Statement under The Investment Company Act of 1940
Amendment No. 27
AMERICAN SKANDIA TRUST
(Exact Name of Registrant as Specified in Charter)
One Corporate Drive, Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
(203) 926-1888
(Registrant's Telephone Number, Including Area Code)
ERIC C. FREED, ESQ., SECRETARY
AMERICAN SKANDIA TRUST
ONE CORPORATE DRIVE, SHELTON, CONNECTICUT 06484
(Name and Address of Agent for Service)
Copies to:
ROBERT K. FULTON, ESQ.
WERNER & KENNEDY
1633 BROADWAY, 46TH FLOOR, NEW YORK, NEW YORK 10019
It is proposed that this filing will become effective (check appropriate space)
_____ immediately upon filing pursuant to paragraph (b).
_____ on _______ pursuant to paragraph (b) of rule 485.
[X] 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
_____ 75 days after filing pursuant to paragraph (a)(2).
_____ on _______ pursuant to paragraph (a)(2) of rule 485.
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Shares of Beneficial Interest of the Various Series of American Skandia Trust
(Title of Securities Being Registered)
AMERICAN SKANDIA TRUST
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Form N-1A
Item Number
Part A Prospectus Caption
1. Cover Page
2. Portfolio Annual Expenses
3. (a)(d) Financial Highlights
(b) *
(c) Performance
4. Investment Objectives and
Policies; Certain Risk Factors and
Investment Methods; Organization and
Management of the Trust
5. (a)(b)(c)(d) Organization and Management of the Trust
(e) Transfer and Shareholder Servicing Agent
(f) Portfolio Annual Expenses
(g) Brokerage Allocation
5A. *
6. (a) Description of Shares of the Trust
(b) Purchase and Redemption of Shares
(c)(d)(f)(h) *
(e) Cover Page; Other Information
(g) Tax Matters
7. (a) *
(b) Purchase and Redemption of Shares;
Net Asset Values
(c)(d)(e)(f)(g) *
8. Purchase and Redemption of Shares
9. *
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Statement of Additional
Part B Information Caption
10. Cover Page
11. Table of Contents
12. General Information and History
13. (a)(b)(c) Investment Objectives and Policies;
Investment Restrictions;
Allocation of Investments
(d) Portfolio Turnover
14. Management
15. Other Information
16. (a) (b) Investment Advisory and Other Services;
See also Prospectus
(c)(e)(f)(g)(i) *
(d) Investment Advisory and Other Services
(h) See Prospectus
17. (a)(b)(c) Brokerage Allocation
(d)(e) *
18. See Prospectus
19. (a) Purchase and Redemption of Shares;
See also Prospectus
(b) Computation of Net Asset Values
(c) *
20. Tax Matters; See also Prospectus
21. Underwriter
22. Performance
23. Financial Statements
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Part C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement.
* Not Applicable
PROSPECTUS May 1, 1998
Lord Abbett Growth and Income Portfolio seeks long-term growth of capital and income while attempting to avoid excessive fluctuations in market value. Lord Abbett Small Cap Value Portfolio seeks long-term capital appreciation. JanCap Growth Portfolio seeks growth of capital in a manner consistent with preservation of capital. AST Janus Overseas Growth Portfolio seeks long-term growth of capital. AST Money Market Portfolio seeks high current income and maintenance of high levels of liquidity. Federated High Yield Portfolio seeks high current income by investing primarily in a diversified portfolio of fixed income securities. T. Rowe Price Asset Allocation Portfolio seeks a high level of total return by investing primarily in a diversified group of fixed income and equity securities. T. Rowe Price International Equity Portfolio seeks total return on its assets from long-term growth of capital and income principally through investments in common stocks of established, non-U.S. companies. T. Rowe Price Natural Resources Portfolio seeks long-term growth of capital through investments primarily in common stocks of companies which own or develop natural resources and other basic commodities. T. Rowe Price International Bond Portfolio seeks to provide high current income and capital appreciation by investing in high-quality, non dollar-denominated government and corporate bonds outside the United States. T. Rowe Price Small Company Value Portfolio seeks long-term capital appreciation by investing primarily in small-capitalization stocks that appear to be undervalued. Founders Capital Appreciation Portfolio seeks capital appreciation. Founders Passport Portfolio seeks capital appreciation. INVESCO Equity Income Portfolio seeks high current income while following sound investment practices. Capital growth potential is an additional, but secondary, consideration in the selection of portfolio securities. PIMCO Total Return Bond Portfolio seeks to maximize total return, consistent with preservation of capital. PIMCO Limited Maturity Bond Portfolio seeks to maximize total return, consistent with preservation of capital and prudent investment management. Robertson Stephens Value + Growth Portfolio seeks capital appreciation. Twentieth Century International Growth Portfolio seeks capital growth. Twentieth Century Strategic Balanced Portfolio seeks capital growth and current income. AST Putnam Value Growth & Income Portfolio seeks capital growth. Current income is a secondary objective. AST Putnam International Equity Portfolio seeks capital appreciation. AST Putnam Balanced Portfolio seeks a balanced investment composed of a well-diversified portfolio of stocks and bonds which will produce both capital growth and current income. Cohen & Steers Realty Portfolio seeks to maximize total return through investment in real estate securities. Stein Roe Venture Portfolio seeks long-term capital appreciation. Bankers Trust Enhanced 500 Portfolio seeks to outperform the total return of the Standard & Poor's 500 Composite Stock Price Index, an index emphasizing large capitalization stocks. Marsico Capital Growth Portfolio seeks capital growth. Neuberger&Berman Mid-Cap Value Portfolio seeks capital growth. Neuberger&Berman Mid-Cap Growth Portfolio seeks capital appreciation.
Investments in the Trust are neither insured nor guaranteed by the United States Government. Such investments are not bank deposits, and are not insured by, guaranteed by, obligations of, or otherwise supported by, any bank. Although the AST Money Market Portfolio seeks to maintain a stable net asset value of $1.00 per share, there can be no assurance that it will be able to do so.
This Prospectus sets forth concisely the information that a prospective investor
should know before investing in shares of the Trust and should be retained for
future reference. A Statement of Additional Information, dated May 1, 1998 (the
"SAI"), containing additional information about the Trust has been filed with
the Securities and Exchange Commission (the "Commission") and is hereby
incorporated by reference into this Prospectus. The Trust's SAI is available
without charge upon request to the Trust at the above address or by calling
(800) 752-6342. The Commission maintains a Web site (http:/ /www.sec.gov) that
contains the SAI, material incorporated by reference, and other information
regarding the Trust.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. (continued on page 2)
Shares of the Trust are available to, and are marketed as a pooled funding vehicle for, life insurance companies ("Participating Insurance Companies") writing variable annuity contracts and variable life insurance policies. As of the date of this Prospectus, the only Participating Insurance Companies are American Skandia Life Assurance Corporation and Kemper Investors Life Insurance Company. From time to time, however, the Trust may enter into participation agreements with other Participating Insurance Companies. Shares of the Trust also may be offered directly to qualified pension and retirement plans, including, but not limited to, plans under sections 401, 403, 408 and 457 of the Internal Revenue Code of 1986, as amended ("Qualified Plans"). The Trust sells and redeems its shares at net asset value without any sales charges, commissions or redemption fees. Each variable annuity contract and variable life insurance policy involves fees and expenses not described in this Prospectus. Certain Portfolios may not be available in connection with a particular variable annuity contract or variable life insurance policy or Qualified Plan. Please read the Prospectus of the variable annuity contracts and variable life insurance policies issued by Participating Insurance Companies for information regarding contract fees and expenses and any restrictions on purchases.
TABLE OF CONTENTS
Caption Page
Portfolio Annual Expenses..........................................................................................4
Financial Highlights...............................................................................................8
Investment Objectives and Policies.................................................................................16
Lord Abbett Growth and Income Portfolio.......................................................................16
Lord Abbett Small Cap Value Portfolio.........................................................................17
JanCap Growth Portfolio.......................................................................................20
AST Janus Overseas Growth Portfolio...........................................................................22
AST Money Market Portfolio....................................................................................24
Federated High Yield Portfolio................................................................................26
T. Rowe Price Asset Allocation Portfolio......................................................................29
T. Rowe Price International Equity Portfolio..................................................................32
T. Rowe Price Natural Resources Portfolio.....................................................................34
T. Rowe Price International Bond Portfolio....................................................................37
T. Rowe Price Small Company Value Portfolio...................................................................40
Founders Capital Appreciation Portfolio.......................................................................43
Founders Passport Portfolio...................................................................................47
INVESCO Equity Income Portfolio...............................................................................51
PIMCO Total Return Bond Portfolio.............................................................................53
PIMCO Limited Maturity Bond Portfolio.........................................................................60
Robertson Stephens Value + Growth Portfolio...................................................................67
Twentieth Century International Growth Portfolio..............................................................70
Twentieth Century Strategic Balanced Portfolio................................................................74
AST Putnam Value Growth & Income Portfolio....................................................................78
AST Putnam International Equity Portfolio.....................................................................80
AST Putnam Balanced Portfolio.................................................................................83
Cohen & Steers Realty Portfolio...............................................................................86
Stein Roe Venture Portfolio...................................................................................88
Bankers Trust Enhanced 500 Portfolio..........................................................................91
Marsico Capital Growth Portfolio..............................................................................94
Neuberger&Berman Mid-Cap Value Portfolio......................................................................96
Neuberger&Berman Mid-Cap Growth Portfolio.....................................................................100
Certain Risk Factors and Investment Methods........................................................................105
Regulatory Matters.................................................................................................112
Portfolio Turnover.................................................................................................112
Brokerage Allocation...............................................................................................113
Investment Restrictions............................................................................................113
Net Asset Values...................................................................................................113
Purchase and Redemption of Shares..................................................................................113
Organization and Management of the Trust...........................................................................114
Tax Matters........................................................................................................125
Description of Shares of the Trust.................................................................................126
Performance........................................................................................................127
Transfer and Shareholder Servicing Agent...........................................................................128
Custodian..........................................................................................................128
Counsel and Auditors...............................................................................................128
Other Information..................................................................................................128
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PORTFOLIO ANNUAL EXPENSES (as a percentage of average net assets): Unless otherwise indicated, the expenses shown below are for the year ending December 31, 1997. "N/A" indicates that no entity has agreed to reimburse the particular expense indicated. The expenses of the portfolios either are currently being partially reimbursed or may be partially reimbursed in the future. Management Fees, Other Expenses and Total Annual Expenses are provided on both a reimbursed and not reimbursed basis, if applicable.
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) NONE* Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price) NONE* Deferred Sales Load (as a percentage of original purchase price or redemption proceeds, as applicable) NONE* Redemption Fees (as a percentage of amount redeemed, if applicable) NONE* Exchange Fee NONE*
* Because shares of the Portfolios may be purchased through variable insurance contacts, the prospectus of the Participating Insurance Company sponsoring such contract should be carefully reviewed for information on relevant charges and expenses. The table on the following page does not reflect any such charges.
Annual Fund Operating Expenses (as a percentage of average net assets)
Total Total
Annual Annual
Management Management Other Other Expenses Expenses
Fee Fee Expenses Expenses after any without any
after any without any after any without any applicable applicable
Portfolio: voluntary voluntary applicable applicable waiver or waiver or
waiver waiver reimbursement reimbursement reimbursementreimbursement
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Lord Abbett Growth and Income N/A 0.75% N/A 0.18% N/A 0.93%
Lord Abbett Small Cap Value(1) N/A 0.95% N/A 0.39% N/A 1.34%
JanCap Growth 0.88% 0.90% N/A 0.18% 1.06% 1.08%
AST Janus Overseas Growth N/A 1.00% N/A 0.35% N/A 1.35%
AST Money Market 0.45% 0.50% 0.15% 0.19% 0.60% 0.69%
Federated High Yield N/A 0.75% N/A 0.23% N/A 0.98%
T. Rowe Price Asset Allocation N/A 0.85% N/A 0.28% N/A 1.13%
T. Rowe Price International Equity N/A 1.00% N/A 0.26% N/A 1.26%
T. Rowe Price Natural Resources N/A 0.90% N/A 0.26% N/A 1.16%
T. Rowe Price International Bond N/A 0.80% N/A 0.31% N/A 1.11%
T. Rowe Price Small Company Value N/A 0.90% N/A 0.26% N/A 1.16%
Founders Capital Appreciation N/A 0.90% N/A 0.23% N/A 1.13%
Founders Passport N/A 1.00% N/A 0.35% N/A 1.35%
INVESCO Equity Income N/A 0.75% N/A 0.20% N/A 0.95%
PIMCO Total Return Bond N/A 0.65% N/A 0.21% N/A 0.86%
PIMCO Limited Maturity Bond N/A 0.65% N/A 0.23% N/A 0.88%
Robertson Stephens Value + Growth N/A 1.00% N/A 0.23% N/A 1.23%
Twentieth Century International GrowthN/A 1.00% N/A 0.75% N/A 1.75%
Twentieth Century Strategic Balanced N/A 0.85% 0.40% 0.50% 1.25% 1.35%
AST Putnam Value Growth & Income N/A 0.75% N/A 0.48% N/A 1.23%
AST Putnam International Equity N/A 0.88% N/A 0.27% N/A 1.15%
AST Putnam Balanced N/A 0.74% N/A 0.29% N/A 1.03%
Cohen & Steers Realty(1) N/A 1.00% N/A 0.40% N/A 1.40%
Stein Roe Venture(1) N/A 0.95% N/A 0.39% N/A 1.34%
Bankers Trust Enhanced 500(1) N/A 0.60% 0.20% 0.57% 0.80% 1.17%
Marsico Capital Growth(2) N/A 0.90% N/A 0.38% N/A 1.28%
Neuberger&Berman Mid-Cap Value(3) N/A 0.90% N/A 0.25% N/A 1.15%
Neuberger&Berman Mid-Cap Growth(4) N/A 0.90% N/A 0.24% N/A 1.14%
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(1) These Portfolios commenced operations in January 1998. "Other Expenses" shown are based on estimated amounts for the current fiscal year.
(2) This Portfolio commenced operation in December 1997. "Other Expenses" shown are based on estimated amounts for the current fiscal year.
(3) Prior to May 1, 1998, the Investment Manager had engaged Federated Investment Counseling as Sub-advisor for the Portfolio, for a total Investment Management fee payable at the annual rate of .75% of the first $50 million of the average daily net assets of the Portfolio, plus .60% of the Portfolio's average daily net assets of the Portfolio in excess of $50 million. As of May 1, 1998, the Investment Manager engaged Neuberger&Berman Management Incorporated as Sub-advisor for the Portfolio, for a total Investment Management fee payable at the annual rate of 0.90% of the average daily net assets of the Portfolio. The Management Fee in the above chart reflects the current Investment Management fee payable to the Investment Manager.
(4) Prior to May 1, 1998, the Investment Manager had engaged Berger Associates, Inc. as Sub-advisor for the Portfolio, for a total Investment Management fee payable at the annual rate of .75% of the average daily nets assets of the Portfolio. As of May 1, 1998, the Investment Manager engaged Neuberger&Berman Management Incorporated as Sub-advisor for the Portfolio, for a total Investment Management fee payable at the annual rate of 0.90% of the average daily net assets of the Portfolio. The Management Fee in the above chart reflects the current Investment Management fee payable to the Investment Manager.
EXPENSE EXAMPLES:
The examples shown assume that the total annual expenses for the Portfolios throughout the period specified will be the lower of the total annual expenses without any applicable reimbursement or expenses after any applicable reimbursement.
You would pay the following expenses rounded to the nearest dollar on a
$1,000 investment, assuming a 5% hypothetical annual return at the end of each
time period shown below:
After:
Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs.
--------- ------------------------------------------------------------
Lord Abbett Growth and Income 10 30 52 116
Lord Abbett Small Cap Value 14 43 N/A N/A
JanCap Growth 11 34 59 130
AST Janus Overseas Growth 14 43 74 162
AST Money Market 6 19 33 75
Federated High Yield 10 31 54 120
T. Rowe Price Asset Allocation 12 36 62 137
T. Rowe Price International Equity 13 40 69 152
T. Rowe Price Natural Resources 12 37 64 141
T. Rowe Price International Bond 11 35 61 135
T. Rowe Price Small Company 12 37 64 141
Founders Capital Appreciation 12 36 62 137
Founders Passport 14 43 74 162
INVESCO Equity Income 10 31 53 117
PIMCO Total Return Bond 9 28 48 107
PIMCO Limited Maturity Bond 9 28 49 108
Robertson Stephens Value + Growth 13 40 69 150
Twentieth Century International Growth 18 56 96 208
Twentieth Century Strategic Balanced 13 40 69 152
AST Putnam Value Growth & Income 13 40 69 150
AST Putnam International Equity 12 37 64 140
AST Putnam Balanced 11 33 57 126
Cohen & Steers Realty 14 44 N/A N/A
Stein Roe Venture 14 43 N/A N/A
Bankers Trust Enhanced 500 8 26 N/A N/A
Marsico Capital Growth 13 41 N/A N/A
Neuberger&Berman Mid-Cap Value 12 37 64 140
Neuberger&Berman Mid-Cap Growth 12 37 64 140
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The above tables are provided to assist you in understanding the various costs and expenses that you would bear directly or indirectly as an investor in the Portfolio(s). THE ABOVE EXPENSE EXAMPLES ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF THE PORTFOLIOS' PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(This page has been intentionally left blank.)
FINANCIAL HIGHLIGHTS (Selected Per Share Data for an Average Share Outstanding and Ratios Throughout Each Period): The tables below contain unaudited financial information and financial information which has been audited in conjunction with the annual audits of the financial statements of American Skandia Trust by Deloitte & Touche LLP, Independent Auditors. Audited Financial Statements for the year ended December 31, 1997 and the Independent Auditors' Report thereon are included in the Trust's SAI, which is available without charge upon request to the Trust at One Corporate Drive, Shelton, Connecticut or by calling (800) 752-6342. Further information about the performance of the Portfolios is contained in the annual reports of the separate accounts funding the variable annuity contracts and variable life insurance policies, which also may be obtained without charge upon request to the Trust at that address or phone number. The information presented in these financial highlights is historical and is not intended to indicate future performance of the Portfolios. No financial information is included for the Lord Abbett Small Cap Value Portfolio, the Cohen & Steers Realty Portfolio, the Stein Roe Venture Portfolio, or the Bankers Trust Enhanced 500 Portfolio, which were first offered publicly on January 2, 1998.
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INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------- -------------------------------------
NET ASSET NET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS
------------------------ ------------ --------- ---------- ------------ ---------- ---------- -------- -------------
AST Putnam 1997 $19.22 $ 0.36 $ 2.96 $ 3.32 $ (0.30) $ (0.95) $ (1.25)
International Equity 1996 18.20 0.16 1.55 1.71 (0.32) (0.37) (0.69)
1995 17.61 0.14 1.44 1.58 -- (0.99) (0.99)
1994 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19)
1993 12.74 0.14 4.46 4.60 -- -- --
1992 13.90 (0.17) (0.99) (1.16) -- -- --
1991 12.99 0.01 0.90 0.91 -- -- --
1990 13.76 0.22 (0.63) (0.41) (0.23) (0.13) (0.36)
1989(2) 10.00 0.06 3.70 3.76 -- -- --
Lord Abbett 1997 $17.17 $ 0.24 $ 3.76 $ 4.00 $ (0.23) $ (0.41) $ (0.64)
Growth and Income 1996 14.98 0.23 2.48 2.71 (0.17) (0.35) (0.52)
1995 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40)
1994 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32)
1993 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10)
1992(3) 10.00 0.07 0.63 0.70 -- -- --
JanCap Growth 1997 $18.79 $ 0.06 $ 5.16 $ 5.22 $ (0.05) $ (0.81) $ (0.86)
1996 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82)
1995 11.22 0.06 4.18 4.24 (0.06) -- (0.06)
1994 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03)
1993 10.53 0.03 1.22 1.25 -- -- --
1992(4) 10.00 (0.01) 0.54 0.53 -- -- --
------------------------ ----------
NET ASSET
VALUE
END
PORTFOLIO OF PERIOD
------------------------ ----------
AST Putnam $21.29
International Equity 19.22
18.20
17.61
17.34
12.74
13.90
12.99
13.76
Lord Abbett $20.53
Growth and Income 17.17
14.98
12.00
12.06
10.70
JanCap Growth $23.15
18.79
15.40
11.22
11.78
10.53
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(1) Annualized.
(2) Commenced operations on April 19, 1989.
(3) Commenced operations on May 1, 1992.
(4) Commenced operations on November 6, 1992.
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RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
----------------------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- ---------- -------------- --------------- -------------- ---------------
18.15% $ 412,270 116% $0.0209 1.15% 1.15% 1.04% 1.04%
9.65% 346,211 124% 0.0151 1.16% 1.26% 0.88% 0.78%
10.00% 268,056 59% -- 1.17% 1.27% 0.88% 0.78%
2.64% 238,050 49% -- 1.22% 1.32% 0.55% 0.46%
36.11% 150,646 32% -- 1.52% 1.52% 0.28% 0.28%
(8.35%) 24,998 55% -- 2.50% 2.50% (1.62%) (1.62%)
7.01% 15,892 59% -- 2.50% 2.82% 0.12% (0.20%)
(2.97%) 6,015 76% -- 2.38% 8.80% 1.67% (4.75%)
37.60% 1,299 55% -- 1.17%(1) 67.51%(1) 3.72%(1) (62.62%)(1)
23.92% $ 936,986 41% $0.0640 0.93% 0.93% 1.60% 1.60%
18.56% 530,497 43% 0.0655 0.97% 0.97% 1.92% 1.92%
28.91% 288,749 50% -- 0.99% 0.99% 2.50% 2.50%
2.22% 92,050 60% -- 1.06% 1.06% 2.45% 2.45%
13.69% 48,385 57% -- 1.22% 1.33% 2.05% 1.94%
7.00% 10,159 34% -- 0.99%(1) 1.75%(1) 2.49%(1) 1.73%(1)
28.66% $1,511,563 94% $0.0628 1.07% 1.08% 0.24% 0.23%
28.36% 892,324 79% 0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.30% 15,218 2% -- 1.33%(1) 2.21%(1) (0.90%)(1) (1.78%)(1)
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AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------- -------------------------------------
NET ASSET NET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS
------------------------ ------------ --------- ---------- ------------ ---------- ---------- -------- -------------
AST Money Market 1997 $ 1.00 $0.0507 $0.0002 $0.0509 $(0.0507) $(0.0002) $(0.0509)
1996 1.00 0.0492 0.0005 0.0497 (0.0492) (0.0005) (0.0497)
1995 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494)
1994 1.00 0.0367 0.0002 0.0369 (0.0367) (0.0002) (0.0369)
1993 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252)
1992(2) 1.00 0.0032 -- 0.0032 (0.0032) -- (0.0032)
Neuberger&Berman Mid-
Cap Value* 1997 $12.83 $ 0.32 $ 2.87 $ 3.19 $ (0.36) $ (0.51) $ (0.87)
1996 11.94 0.36 0.97 1.33 (0.44) -- (0.44)
1995 9.87 0.40 2.09 2.49 (0.42) -- (0.42)
1994 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18)
1993(3) 10.00 0.17 0.62 0.79 -- -- --
AST Putnam Balanced 1997 $13.19 $ 0.33 $ 1.85 $ 2.18 $ (0.31) $ (1.42) $ (1.73)
1996 12.53 0.32 1.02 1.34 (0.25) (0.43) (0.68)
1995 10.49 0.26 2.06 2.32 (0.28) -- (0.28)
1994 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09)
1993(3) 10.00 0.08 0.49 0.57 -- -- --
Federated High Yield 1997 $12.13 $ 0.75 $ 0.83 $ 1.58 $ (0.54) $ (0.06) $ (0.60)
1996 11.14 0.56 0.90 1.46 (0.47) -- (0.47)
1995 9.69 0.38 1.46 1.84 (0.39) -- (0.39)
1994(4) 10.00 0.55 (0.86) (0.31) -- -- --
T. Rowe Price 1997 $13.27 $ 0.33 $ 2.03 $ 2.36 $ (0.26) $ (0.24) $ (0.50)
Asset Allocation 1996 12.01 0.27 1.28 1.55 (0.25) (0.04) (0.29)
1995 9.94 0.26 2.02 2.28 (0.21) -- (0.21)
1994(4) 10.00 0.21 (0.27) (0.06) -- -- --
------------------------ ----------
NET ASSET
VALUE
END
PORTFOLIO OF PERIOD
------------------------ ----------
AST Money Market $ 1.00
1.00
1.00
1.00
1.00
1.00
Neuberger&Berman Mid-
Cap Value* $15.15
12.83
11.94
9.87
10.79
AST Putnam Balanced $13.64
13.19
12.53
10.49
10.57
Federated High Yield $13.11
12.13
11.14
9.69
T. Rowe Price $15.13
Asset Allocation 13.27
12.01
9.94
|
* Prior to May 1, 1998, Federated Investment Counseling served as Sub-advisor to the Neuberger&Berman Mid-Cap Value Portfolio (formerly, the Federated Utility Income Portfolio). Neuberger&Berman Management, Incorporated has served as Sub-advisor to the Portfolio since May 1, 1998.
(1) Annualized.
(2) Commenced operations on November 10, 1992.
(3) Commenced operations on May 4, 1993.
(4) Commenced operations on January 4, 1994.
-------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
----------------------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- ---------- -------------- --------------- -------------- ---------------
5.18% $ 759,888 N/A N/A 0.60% 0.69% 5.06% 4.98%
5.08% 549,470 N/A N/A 0.60% 0.71% 4.87% 4.76%
5.05% 344,225 N/A -- 0.60% 0.72% 5.38% 5.26%
3.75% 288,588 N/A -- 0.64% 0.76% 3.90% 3.78%
2.55% 114,074 N/A -- 0.65% 0.84% 2.53% 2.34%
0.32% 4,294 N/A -- 0.65%(1) 1.15%(1) 2.43%(1) 1.93%(1)
26.42% $ 201,143 91% $0.0395 0.90% 0.90% 3.34% 3.34%
11.53% 123,138 81% 0.0446 0.93% 0.93% 3.14% 3.14%
26.13% 107,399 71% -- 0.93% 0.93% 4.58% 4.58%
(6.95%) 71,205 54% -- 0.99% 0.99% 5.11% 5.11%
7.90% 57,643 5% -- 1.18%(1) 1.18%(1) 5.09%(1) 5.09%(1)
18.28% $ 357,591 170% $0.0282 1.03% 1.03% 2.81% 2.81%
11.23% 286,479 276% 0.0516 0.94% 0.94% 2.66% 2.66%
22.60% 255,206 161% -- 0.94% 0.94% 3.28% 3.28%
0.09% 145,624 87% -- 0.99% 0.99% 3.08% 3.08%
5.70% 91,591 46% -- 1.13%(1) 1.13%(1) 2.53%(1) 2.53%(1)
13.59% $ 434,420 28% N/A 0.98% 0.98% 8.83% 8.83%
13.58% 205,262 43% N/A 1.03% 1.03% 8.02% 8.02%
19.57% 83,692 30% -- 1.11% 1.11% 8.72% 8.72%
(3.10%) 21,308 41% -- 1.15%(1) 1.34%(1) 9.06%(1) 8.87%(1)
18.40% $ 213,075 10% $0.0299 1.13% 1.13% 2.95% 2.95%
13.14% 120,149 31% 0.0366 1.20% 1.20% 3.02% 3.02%
23.36% 59,399 18% -- 1.25% 1.29% 3.53% 3.49%
(0.60%) 23,463 32% -- 1.25%(1) 1.47%(1) 3.64%(1) 3.42%(1)
|
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
--------------------------------------
NET ASSET NET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS
------------------------- ------------ --------- ---------- ------------ ----------
PIMCO Total 1997 $11.11 $ 0.48 $ 0.58 $ 1.06
Return Bond 1996 11.34 0.46 (0.10) 0.36
1995 9.75 0.25 1.55 1.80
1994(2) 10.00 0.26 (0.51) (0.25)
INVESCO Equity Income 1997 $13.99 $ 0.31 $ 2.84 $ 3.15
1996 12.50 0.27 1.79 2.06
1995 9.75 0.25 2.65 2.90
1994(2) 10.00 0.16 (0.41) (0.25)
Founders Capital 1997 $16.80 $(0.05) $ 1.06 $ 1.01
Appreciation 1996 14.25 (0.03) 2.85 2.82
1995 10.84 (0.04) 3.54 3.50
1994(2) 10.00 0.11 0.73 0.84
T. Rowe Price 1997 $12.07 $ 0.09 $ 0.08 $ 0.17
International Equity 1996 10.65 0.06 1.44 1.50
1995 9.62 0.07 0.99 1.06
1994(2) 10.00 0.02 (0.40) (0.38)
T. Rowe Price 1997 $10.90 $ 0.20 $(0.57) $(0.37)
International Bond 1996 10.60 0.23 0.38 0.61
1995 9.68 0.31 0.75 1.06
1994(3) 10.00 0.27 (0.59) (0.32)
Neuberger&Berman 1997 $14.39 $ 0.01 $ 2.36 $ 2.37
Mid-Cap Growth* 1996 12.40 0.01 2.01 2.02
1995 9.97 0.04 2.40 2.44
1994(4) 10.00 0.01 (0.04) (0.03)
Founders Passport 1997 $11.63 $ 0.03 $ 0.21 $ 0.24
1996 10.33 0.09 1.24 1.33
1995(5) 10.00 0.03 0.30 0.33
------------------------- -------------------------------------------------
LESS DISTRIBUTIONS
-------------------------------------
NET ASSET
FROM NET FROM NET VALUE
INVESTMENT REALIZED TOTAL END
PORTFOLIO INCOME GAINS DISTRIBUTIONS OF PERIOD
------------------------- ---------- -------- ------------- ---------
PIMCO Total $(0.45) $ -- $(0.45) $11.72
Return Bond (0.28) (0.31) (0.59) 11.11
(0.21) -- (0.21) 11.34
-- -- -- 9.75
INVESCO Equity Income $(0.26) $(0.37) $(0.63) $16.51
(0.24) (0.33) (0.57) 13.99
(0.15) -- (0.15) 12.50
-- -- -- 9.75
Founders Capital $ -- $ -- $ -- $17.81
Appreciation -- (0.27) (0.27) 16.80
(0.09) -- (0.09) 14.25
-- -- -- 10.84
T. Rowe Price $(0.07) $(0.08) $(0.15) $12.09
International Equity (0.08) -- (0.08) 12.07
(0.01) (0.02) (0.03) 10.65
-- -- -- 9.62
T. Rowe Price $(0.16) $(0.26) $(0.42) $10.11
International Bond (0.14) (0.17) (0.31) 10.90
(0.14) -- (0.14) 10.60
-- -- -- 9.68
Neuberger&Berman $(0.02) $(0.13) $(0.15) $16.61
Mid-Cap Growth* (0.03) -- (0.03) 14.39
(0.01) -- (0.01) 12.40
-- -- -- 9.97
Founders Passport $(0.08) $(0.01) $(0.09) $11.78
(0.03) -- (0.03) 11.63
-- -- -- 10.33
|
+ Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions are charged. This disclosure is required by the SEC beginning in 1996.
* Prior to May 1, 1998, Berger Associates, Inc. served as Sub-advisor to the Neuberger&Berman Mid-Cap Growth Portfolio (formerly, the Berger Capital Growth Portfolio). Neuberger&Berman Management, Incorporated has served as Sub-advisor to the Portfolio since May 1, 1998.
(1) Annualized.
(2) Commenced operations on January 4, 1994.
(3) Commenced operations on May 3, 1994.
(4) Commenced operations on October 20, 1994.
(5) Commenced operations on May 2, 1995.
-------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
----------------------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- ---------- -------------- --------------- -------------- ---------------
9.87% $572,100 320% N/A 0.86% 0.86% 5.56% 5.56%
3.42% 360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57%(1) 5.57%(1)
23.33% $602,105 73% $0.0595 0.95% 0.95% 2.54% 2.54%
17.09% 348,680 58% 0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41%(1) 3.41%(1)
6.01% $278,258 77% $0.0538 1.13% 1.13% (0.32%) (0.32%)
20.05% 220,068 69% 0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59%(1) 2.34%(1)
1.36% $464,456 19% $0.0036 1.26% 1.26% 0.71% 0.71%
14.17% 402,559 11% 0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45%(1) 0.43%(1)
(3.42%) $130,408 173% N/A 1.11% 1.11% 4.73% 4.73%
5.98% 98,235 241% N/A 1.21% 1.21% 5.02% 5.02%
11.10% 45,602 325% -- 1.53% 1.53% 6.17% 6.17%
(3.20%) 15,218 163% -- 1.68%(1) 1.68%(1) 7.03%(1) 7.03%(1)
16.68% $185,050 305% $0.0603 0.99% 0.99% 0.07% 0.07%
16.34% 136,247 156% 0.0614 1.01% 1.01% 0.24% 0.24%
24.42% 45,979 84% -- 1.17% 1.17% 0.70% 0.70%
(0.30%) 3,030 5% -- 1.25%(1) 1.70%(1) 1.41%(1) 0.97%(1)
2.03% $117,938 73% $0.0110 1.35% 1.35% 0.43% 0.43%
12.91% 117,643 133% 0.0190 1.36% 1.36% 1.25% 1.25%
3.30% 28,455 4% -- 1.46%(1) 1.46%(1) 0.94%(1) 0.94%(1)
-------------------------------------------------------------------------------------------------------------------------
|
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
---------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
--------------------------------------
NET ASSET NET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS
-------------------------- ------------ --------- ---------- ------------ ----------
T. Rowe Price 1997 $14.47 $ 0.14 $ 0.35 $ 0.49
Natural Resources 1996 11.11 0.05 3.35 3.40
1995(2) 10.00 0.04 1.07 1.11
PIMCO Limited 1997 $10.81 $ 0.55 $ 0.22 $ 0.77
Maturity Bond 1996 10.47 0.56 (0.15) 0.41
1995(2) 10.00 0.05 0.42 0.47
Robertson Stephens 1997 $10.99 $(0.05) $ 1.68 $ 1.63
Value + Growth 1996(3) 10.00 (0.01) 1.00 0.99
AST Janus Overseas
Growth 1997(4) $10.00 $ 0.02 $ 1.85 $ 1.87
AST Putnam Value
Growth & Income 1997(4) $10.00 $ 0.07 $ 2.16 $ 2.23
Twentieth Century
Strategic Balanced 1997(4) $10.00 $ 0.11 $ 1.23 $ 1.34
Twentieth Century
International Growth 1997(4) $10.00 $(0.03) $ 1.55 $ 1.52
T. Rowe Price Small
Company Value 1997(4) $10.00 $ 0.06 $ 2.82 $ 2.88
Marsico Capital Growth 1997(5) $10.00 $ 0.01 $ 0.02 $ 0.03
-------------------------- -------------------------------------------------
LESS DISTRIBUTIONS
-------------------------------------
NET ASSET
FROM NET FROM NET VALUE
INVESTMENT REALIZED TOTAL END
PORTFOLIO INCOME GAINS DISTRIBUTIONS OF PERIOD
-------------------------- ---------- -------- ------------- ---------
T. Rowe Price $(0.07) $(0.32) $(0.39) $14.57
Natural Resources (0.02) (0.02) (0.04) 14.47
-- -- -- 11.11
PIMCO Limited $(0.56) $ -- $(0.56) $11.02
Maturity Bond (0.05) (0.02) (0.07) 10.81
-- -- -- 10.47
Robertson Stephens $ -- $ -- $ -- $12.62
Value + Growth -- -- -- 10.99
AST Janus Overseas
Growth $ -- $ -- $ -- $11.87
AST Putnam Value
Growth & Income $ -- $ -- $ -- $12.23
Twentieth Century
Strategic Balanced $ -- $ -- $ -- $11.34
Twentieth Century
International Growth $ -- $ -- $ -- $11.52
T. Rowe Price Small
Company Value $ -- $ -- $ -- $12.88
Marsico Capital Growth $ -- $ -- $ -- $10.03
|
+ Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions are charged. This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(2) Commenced operations on May 2, 1995.
(3) Commenced operations on May 2, 1996.
(4) Commenced operations on January 2, 1997.
(5) Commenced operations on December 22, 1997.
-------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
----------------------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- ---------- -------------- --------------- -------------- ---------------
3.39% $111,954 44% $0.0221 1.16% 1.16% 0.98% 0.98%
30.74% 88,534 31% 0.0238 1.30% 1.30% 1.08% 1.08%
11.10% 9,262 2% -- 1.35%(1) 1.80%(1) 1.28%(1) 0.83%(1)
7.46% $288,642 54% N/A 0.88% 0.88% 5.71% 5.71%
3.90% 209,013 247% N/A 0.89% 0.89% 5.69% 5.69%
4.70% 161,940 205% -- 0.89%(1) 0.89%(1) 4.87%(1) 4.87%(1)
14.83% $235,648 219% $0.0568 1.23% 1.23% (0.59%) (0.59%)
9.90% 48,790 77% 0.0529 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
18.70% $255,705 94% $0.0158 1.35%(1) 1.35%(1) 0.36%(1) 0.36%(1)
22.30% $117,438 81% $0.0375 1.23%(1) 1.23%(1) 1.24%(1) 1.24%(1)
13.40% $ 28,947 76% $0.0337 1.25%(1) 1.35%(1) 2.02%(1) 1.92%(1)
15.10% $ 33,125 171% $0.0064 1.75%(1) 1.75%(1) (0.58%)(1) (0.58%)(1)
28.80% $199,896 7% $0.0477 1.16%(1) 1.16%(1) 1.20%(1) 1.20%(1)
0.30% $ 7,299 -- $0.0550 1.00%(1) 1.00%(1) 3.62%(1) 3.62%(1)
-------------------------------------------------------------------------------------------------------------------------
|
INVESTMENT OBJECTIVES AND POLICIES: The investment objective and policies for each of the Portfolios are described below, and should be considered separately. While certain policies apply to all Portfolios, generally each Portfolio has a different investment objective and certain policies may vary. As a result, the risks, opportunities and returns in each Portfolio may differ. Those investment policies specifically labeled as "fundamental" may not be changed without approval of the shareholders of the affected Portfolio. Each Portfolio's investment objective or investment policies, unless otherwise specified, is not a fundamental policy and may be changed without shareholder approval. There can be no assurance that any Portfolio's investment objective will be achieved. Risk factors in relation to various securities and instruments in which the Portfolios may invest are described in the sections of this Prospectus and the Trust's SAI entitled "Certain Risk Factors and Investment Methods." Additional information about the investment objectives and policies of each Portfolio may be found in the Trust's SAI under "Investment Objectives and Policies."
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Lord, Abbett & Co.: Lord Abbett Growth and
Income Portfolio, Lord Abbett Small Cap Value Portfolio; (b) Janus Capital
Corporation: JanCap Growth Portfolio, AST Janus Overseas Growth Portfolio; (c)
J.P. Morgan Investment Management Inc.: AST Money Market Portfolio; (d)
Federated Investment Counseling: Federated High Yield Portfolio; (e) T. Rowe
Price Associates, Inc.: T. Rowe Price Asset Allocation Portfolio, T. Rowe Price
Natural Resources Portfolio, T. Rowe Price Small Company Value Portfolio; (f)
Rowe Price-Fleming International, Inc.: T. Rowe Price International Equity
Portfolio, T. Rowe Price International Bond Portfolio; (g) Founders Asset
Management, Inc.: Founders Capital Appreciation Portfolio, Founders Passport
Portfolio; (h) INVESCO Funds Group, Inc.: INVESCO Equity Income Portfolio; (i)
Pacific Investment Management Company: PIMCO Total Return Bond Portfolio, PIMCO
Limited Maturity Bond Portfolio; (j) Robertson, Stephens & Company Investment
Management, L.P.: Robertson Stephens Value + Growth Portfolio; (k) American
Century Investment Management, Inc. (formerly, Investors Research Corporation):
Twentieth Century International Growth Portfolio, Twentieth Century Strategic
Balanced Portfolio; (l) Putnam Investment Management, Inc.: AST Putnam Value
Growth & Income Portfolio, AST Putnam International Equity Portfolio, AST Putnam
Balanced Portfolio; (m) Cohen & Steers Capital Management, Inc.: Cohen & Steers
Realty Portfolio; (n) Stein Roe & Farnham Incorporated: Stein Roe Venture
Portfolio; (o) Bankers Trust Company: Bankers Trust Enhanced 500 Portfolio; (p)
Marsico Capital Management, LLC: Marsico Capital Growth Portfolio; (q)
Neuberger&Berman Management Incorporated: Neuberger&Berman Mid-Cap Value
Portfolio, Neuberger&Berman Mid-Cap Growth Portfolio.
Subject to approval of the Board of Trustees of the Trust, the Trust may add one or more portfolios and may cease to offer one or more portfolios, any such cessation to be subject to obtaining required regulatory approvals.
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Portfolio is long-term growth of capital and income while attempting to avoid excessive fluctuations in market value. This is a fundamental objective of the Portfolio.
Investment Policies:
The Sub-advisor will try to keep the Portfolio's assets invested in those securities which are selling at reasonable prices in relation to value. To do so, the Portfolio may forgo some opportunities for gains when, in the judgment of the Sub-advisor, they carry excessive risk. The Sub-advisor will try to anticipate major changes in the economy and select stocks for the Portfolio which it believes will benefit most from these changes.
The Portfolio normally will invest in common stocks (including securities convertible into common stocks) of seasoned companies which are expected to show above-average growth and which the Sub-advisor believes to be in sound financial condition. Although the prices of common stocks fluctuate and their dividends vary, historically, common stocks held over long periods of time have appreciated in value and their dividends have increased when the companies they represent have prospered and grown.
The Sub-advisor will be constantly balancing the opportunity for profit against the risk of loss for the Portfolio. In the past, very few industries have continuously provided the best investment opportunities. The Sub-advisor will take a flexible approach and adjust the Portfolio to reflect changes in the opportunity for sound investments relative to the risks assumed. Therefore, the Portfolio will sell securities that the Sub-advisor judges to be overpriced and reinvest the proceeds in other securities which the Sub-advisor believes offer better values.
At such times that the Sub-advisor deems appropriate and consistent with this Portfolio's investment objective, the Portfolio may: (a) write covered call options which are traded on a national securities exchange with respect to securities in the Portfolio; (b) invest up to 10% of the Portfolio's net assets (at the time of investment) in foreign securities; and (c) invest in straight bonds and other debt securities, including lower-rated high-yield bonds. It is not intended for the Portfolio to write covered call options with respect to securities with an aggregate market value of more than 10% of the Portfolio's gross assets at the time an option is written. For a discussion of the risks involved in options transactions and in investing in lower-rated high-yield debt securities or foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." For an additional description of covered options, see the Trust's SAI under "Investment Objectives and Policies."
The Portfolio will not purchase securities for trading purposes. To create reserve purchasing power and also for temporary defensive purposes, the Portfolio may invest in short-term debt and other high quality fixed-income securities.
Lending Portfolio Securities. The Portfolio may engage in the lending of its securities. It is expected that no more that 5% of the Portfolio's gross assets may be committed to securities lending. For a discussion of the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5% of its net assets (at the time of investment) in lower-rated (BB/Ba or lower) high-yield bonds. For a description of these instruments and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest in securities eligible for resale pursuant to Rule 144A of the Securities Act of 1933. For a discussion of these instruments and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Portfolio and risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Lord Abbett Small Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek long-term capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will seek its objective through investments primarily in equity securities which are believed to be undervalued in the marketplace. In its search for value, the Portfolio seeks companies which are primarily small-sized, based on the value of their outstanding stock. As a result, under normal circumstances, at least 65% of the Portfolio's total assets will be invested in common stocks issued by smaller, less well-known companies (with market capitalizations of less than $1 billion) selected on the basis of fundamental investment analysis. The Portfolio may invest up to 35% of its total assets in the securities of issuers without regard to their size or the market capitalization of their common stock.
The stocks in which the Portfolio generally invests are those which, in the Sub-advisor's judgment, are selling below intrinsic value and at prices that do not adequately reflect their long-term business potential. Selected smaller stocks may be undervalued because they are often overlooked by many investors, or because the public is overly pessimistic about a company's prospects. Accordingly, their prices can rise either as a result of improved business fundamentals, particularly when earnings grow faster than general expectations, or as more investors come to recognize the full extent of a company's underlying potential. The price of shares in relation to book value, sales, asset value, earnings, dividends and cash flow, both historical and prospective, are key determinants in the security selection process. These criteria are not rigid, and other stocks may be included in the Portfolio's portfolio if they are expected to help it attain its objective.
Dividend and investment income is of incidental importance, and the Portfolio may invest in securities which do not produce any income. Although the Portfolio typically will hold a large, diversified number of securities identified through a quantitative, value-driven investment strategy, it does entail above-average investment risk in comparison to the overall U.S. stock market. Shares of the Portfolio should be purchased with a long-term view in mind.
The Portfolio also may invest in preferred stocks and bonds, which have either attached warrants or a conversion privilege into common stocks. In addition, the Portfolio may: purchase options on stocks that it holds as protection against a significant price decline; purchase and sell stock index options and futures to hedge overall market risk and the investment of cash flows; and write listed put and listed covered call options. See "Hedging and Income Enhancement Strategies" below.
Risks of Small Cap Investing. Although the Portfolio may invest, from time to time, in stocks of large-sized and small-sized companies guided by the policies mentioned above, the small capitalized companies in which it primarily invests may offer significant appreciation potential. However, smaller companies may carry more risk than larger companies. Generally, small companies rely on limited product lines and markets, financial resources, or other factors, and this may make them more susceptible to setbacks or economic downturns. Small capitalized companies may be more volatile in price, normally have fewer shares outstanding and trade less frequently than large companies. Therefore, the securities of smaller companies may be subject to wider price fluctuations. In many instances, the securities of smaller companies are traded over the counter and may not be traded in the volume typical of securities traded on a national securities exchange.
Hedging and Income Enhancement Strategies. The Portfolio may engage in various portfolio strategies to reduce certain risks of its investments and to attempt to enhance income, but not for speculation. These strategies include the purchase and sale of put and call options, the purchase and sale of stock index futures, and combinations of these investment practices. The Sub-advisor will use such techniques as market conditions warrant. The Portfolio's ability to use these strategies may be limited by market conditions, regulatory limitations and tax considerations and there can be no assurance that any of these strategies will succeed. New financial products and risk management techniques continue to be developed and the Portfolio may use these new investments and techniques to the extent consistent with its investment objective and policies.
Options Transactions. The Portfolio may purchase and write (i.e., sell) put and call options on equity securities or stock indices that are traded on national securities exchanges. The Portfolio will write only "covered" options. An option is covered if, so long as the Portfolio is obligated under the option, it owns an offsetting position in the underlying securities or maintains cash or other liquid assets with a value sufficient at all times to cover its obligations in a segregated account. For an additional discussion of options transactions and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Apart from the requirement that call options be covered, there is no limitation on the amount of such options the Portfolio may write. The Portfolio does not currently intend to write covered call options with respect to securities with an aggregate market value of more than 5% of its gross assets at the time an option is written. The Portfolio may only write covered put options to the extent that cover for such options does not exceed 25% of the Portfolio's net assets. The Portfolio will not purchase an option if, as a result of such purchase, more than 20% of its total assets would be invested in premiums for such options. For an additional discussion of the Portfolio's limitations with respect to options transactions, see the Trust's SAI under "Investment Objectives and Policies."
Stock Index Futures. The Portfolio may purchase and sell stock index futures, which are traded on a commodities exchange or board of trade for certain hedging and risk management purposes, in accordance with regulations of the Commodities Futures Trading Commission. The Portfolio may not purchase or sell stock index futures if, immediately thereafter, more than one-third of its net assets would be hedged. In addition, except in the case of a call written and held on the same index, the Portfolio will write call options on indices or sell stock index futures only if the amount resulting from the multiplication of the then current level of the index (or indices) upon which the options or futures contract(s) is based, the applicable multiplier(s), and the number of futures or options contracts which would be outstanding would not exceed one-third of the value of the Portfolio's net assets. For a discussion of futures contracts and related options and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
The Portfolio's ability to enter into stock index futures and listed options is limited by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company ("RIC"). For a discussion of the requirements for qualification as a RIC under the Code, see this Prospectus under "Tax Matters."
Foreign Investments. The Portfolio may invest up to 35% of its net assets (at the time of investment) in securities (of the type described above) that are primarily traded in foreign countries. For a discussion of the risks involved in foreign investing, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Hedging Techniques. The Portfolio may enter into
forward foreign currency contracts. The Portfolio also may purchase foreign
currency put options and write foreign currency call options on U.S. exchanges
or U.S. over-the-counter markets (OTC options are generally less liquid and
involve issuer credit risk). A foreign currency put option gives the Portfolio,
upon payment of a premium, the right to sell a currency at the exercise price
until the expiration of the option and serves to insure against adverse currency
price movements in the underlying portfolio assets denominated in that currency.
The premiums paid for such foreign currency put options will not exceed 5% of
the net assets of the Portfolio. A foreign currency call option written by the
Portfolio gives the purchaser, upon payment of a premium, the right to purchase
from the Portfolio a currency at the exercise price until the expiration of the
option. The Portfolio may write a call option on a foreign currency only in
conjunction with a purchase of a put option on that currency. Such a strategy is
designed to reduce the cost of downside currency protection by limiting currency
appreciation potential. The face value of such writing or cross-hedging
(described above) may not exceed 90% of the value of the securities denominated
in such currency (a) invested in by the Portfolio to cover such call writing or
(b) to be crossed. Unlisted options, together with other illiquid securities,
may comprise no more than 15% of the Portfolio's net assets. For an additional
discussion of foreign currency transactions and certain risks involved therein,
see this Prospectus and the Trust's SAI under "Certain Risks Factors and
Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may, on occasion, enter into repurchase agreements whereby the seller of a security agrees to repurchase that security at a mutually agreed-upon time and price. The Portfolio's repurchase agreements will at all times be fully collateralized in an amount at least equal to the purchase price, including accrued interest earned on the underlying securities. The instruments held as collateral are valued daily, and if the value of the instruments declines, the Portfolio will require additional collateral. For an additional discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued Securities. The Portfolio may purchase or sell securities on a when-issued or delayed delivery basis. At the time of delivery of securities so purchased, the value may be more or less than the purchase price and an increase in the percentage of the Portfolio's assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of the Portfolio's net asset value. For an additional discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may make short sales of securities or maintain a short position, provided that at all times when a short position is open the Portfolio owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for an equal amount of the securities of the same issuer as the securities sold short (a "short sale against-the-box"), and that not more than 25% of the Portfolio's net assets (determined at the time of the short sale) may be subject to such sales. Notwithstanding this 25% limitation, the Portfolio does not currently intend to have more than 5% of its net assets (determined at the time of the short sale) subject to short sales against-the-box.
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid securities. Securities determined by the Trustees to be liquid pursuant to Rule 144A under the Securities Act of 1933 (the "Rule") will not be subject to this limit. Investments in Rule 144A securities initially determined to be liquid could have the effect of diminishing the level of the Portfolio's liquidity during periods of decreased market interest in such securities. Under the Rule, a qualifying unregistered security may be resold to a qualified institutional buyer without registration and without regard to whether the seller originally purchased the security for investment.
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Temporary Investments. For temporary defensive purposes or to create reserve purchasing power pending other investments, the Portfolio may invest in high-quality, short-term debt obligations of banks, corporations or the U.S. Government of the type normally owned by a money market fund. Neither an issuer's ceasing to be rated investment grade nor a rating reduction below that grade will require elimination of a bond from the Portfolio's portfolio.
Other Investment Policies. The Portfolio may invest in (a) other investment companies to the extent permitted under applicable law, and (b) straight bonds or other debt securities, including lower rated, high-yield bonds. The Portfolio has no present intention to commit more than 5% of gross assets to any one of these identified practices, except that the Portfolio may invest up to 10% of gross assets in those other investment companies described in this Prospectus under "Certain Risk Factors and Investment Methods." For a discussion of certain risks involved in investing in lower rated securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." For a description of securities ratings, see the Appendix to the Trust's SAI.
JanCap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek growth of capital in a manner consistent with the preservation of capital. Realization of income is not a significant investment consideration and any income realized on the Portfolio's investments, therefore, will be incidental to the Portfolio's objective. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in common stocks. Common stock investments will be in industries and companies that the Sub-advisor believes are experiencing favorable demand for their products and services, and which operate in a favorable competitive and regulatory environment. Although the Sub-advisor expects to invest primarily in equity securities, the Sub-advisor may increase the Portfolio's cash position without limitation when the Sub-advisor is of the opinion that appropriate investment opportunities for capital growth with desirable risk/reward characteristics are unavailable. The Portfolio may also invest to a lesser degree in preferred stocks, convertible securities, warrants, and debt securities when the Portfolio perceives an opportunity for capital growth from such securities or so that the Portfolio may receive a return on its idle cash. Debt securities that the Portfolio may purchase include corporate bonds and debentures (not to exceed 5% of net assets in bonds rated below investment grade), government securities, mortgage- and asset-backed securities, zero-coupon bonds, indexed/structured notes, high-grade commercial paper, certificates of deposit and repurchase agreements. For a discussion of risks involved in lower-rated securities, mortgage- and asset-backed securities and zero coupon bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Although it is the general policy of the Portfolio to purchase and hold securities for capital growth, changes in the Portfolio will be made as the Sub-advisor deems advisable. For example, portfolio changes may result from liquidity needs, securities having reached a price objective, or by reason of developments not foreseen at the time of the original investment decision. Portfolio changes may be effected for other reasons. In such circumstances, investment income will increase and may constitute a large portion of the return on the Portfolio and the Portfolio will not participate in the market advances or declines to the extent that it would if it were fully invested.
The Portfolio may invest in "special situations" from time to time. A "special situation" arises when, in the opinion of the Sub-advisor, the securities of a particular company will be recognized and appreciate in value due to a specific development, such as a technological breakthrough, management change or new product at that company. Investment in "special situations" carries an additional risk of loss in the event that the anticipated development does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may also purchase securities of foreign issuers, including foreign equity and debt securities and depositary receipts. Foreign securities are selected on a stock-by-stock basis without regard to any defined allocation among countries or geographic regions. However, certain factors such as expected levels of inflation, government policies influencing business conditions, the outlook for currency relationships, and prospects for economic growth among countries, regions or geographic areas may warrant greater consideration in selecting foreign stocks. No more than 25% of the Portfolio's assets may be invested in foreign securities denominated in foreign currency and not publicly traded in the United States. For a discussion of depositary receipts and the risks involved in investing in foreign securities, including the risk of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. Subject to certain limitations, the Portfolio may purchase and write options on securities, financial indices, and foreign currencies, and may invest in futures contracts on securities, financial indices, and foreign currencies ("futures contracts"), options on futures contracts, forward contracts and swaps and swap-related products. These instruments will be used primarily to hedge the Portfolio's positions against potential adverse movements in securities prices, foreign currency markets or interest rates. To a limited extent, the Portfolio may also use derivative instruments for non-hedging purposes such as increasing the Portfolio's income or otherwise enhancing return. The Portfolio will not use futures contracts and options for leveraging purposes. There can be no assurance, however, that the use of these instruments by the Portfolio will assist it in achieving its investment objective. The use of futures, options, forward contracts and swaps involves investment risks and transaction costs to which the Portfolio would not be subject absent the use of these strategies. The Sub-advisor may, from time to time, at its own expense, call upon the experience of experts to assist it in implementing these strategies. The Portfolio may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk with respect to investments exposed to foreign currency fluctuations. For an additional discussion of futures and options transactions and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements, which involve the purchase of a security by the Portfolio and a simultaneous agreement (generally with a bank or dealer) to repurchase the security from the Portfolio at a specified date or upon demand. The Portfolio's repurchase agreements will at all times be fully collateralized. Pursuant to an exemptive order granted by the Securities and Exchange Commission, the Portfolio and other funds advised by the Sub-advisor may invest in repurchase agreements and other money market instruments through a joint trading account. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a security and agrees to repurchase it at a mutually agreed upon date and price. For a discussion of reverse repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio may purchase securities on a when-issued or delayed delivery basis, which generally involves the purchase of a security with payment and delivery due at some time in the future. The Portfolio does not earn interest on such securities until settlement and bears the risk of market value fluctuations between the purchase and settlement dates. For an additional discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may also invest up to 15% of its net assets in securities that are considered illiquid because of the absence of a readily available market or due to legal or contractual restrictions. Securities eligible for resale under Rule 144A of the Securities Act of 1933, and commercial paper issued under Section 4(2) of the Securities Act of 1933, could be deemed "liquid" when saleable in a readily available market. For a discussion of illiquid securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5% of its net assets (at the time of investment) in lower-rated high-yield bonds. For a discussion of these instruments and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Borrowing. Subject to the Portfolio's restrictions on borrowing, the Portfolio may also borrow money from banks. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Portfolio Turnover. Because investment changes usually will be made without reference to the length of time a security has been held, a significant number of short-term transactions may result. To a limited extent, the Portfolio may also purchase individual securities in anticipation of relatively short-term price gains, and the rate of portfolio turnover will not be a determining factor in the sale of such securities. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
AST Janus Overseas Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek long-term growth of capital. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio pursues its objective primarily through investments in common stocks of issuers located outside the United States. The Portfolio has the flexibility to invest on a worldwide basis in companies and organizations of any size, regardless of country of organization or place of principal business activity.
The Portfolio normally invests at least 65% of its total assets in securities of issuers from at least five different countries, excluding the United States. Although the Portfolio intends to invest substantially all of its assets in issuers located outside the United States, it may at times invest in U.S. issuers and it may at times invest all of its assets in fewer than five countries or even a single country.
The Portfolio invests primarily in common stocks of foreign issuers selected for their growth potential. The Portfolio may invest to a lesser degree in other types of securities, including preferred stocks, warrants, convertible securities and debt securities. Debt securities that the Portfolio may purchase include corporate bonds and debentures (not to exceed 35% of net assets in high-yield/high-risk securities); government securities; mortgage- and asset-backed securities (not to exceed 25% of assets); zero coupon bonds (not to exceed 10% of assets); indexed/structured securities; high-grade commercial paper; certificates of deposit; and repurchase agreements. Such securities may offer growth potential because of anticipated changes in interest rates, credit standing, currency relationships or other factors. The Portfolio may also invest in short-term debt securities, including money market funds managed by the Sub-advisor, as a means of receiving a return on idle cash.
When the Sub-advisor believes that market conditions are not favorable for profitable investing or when the Sub-advisor is otherwise unable to locate favorable investment opportunities, the Portfolio's investments may be hedged to a greater degree and/or its cash or similar investments may increase. In other words, the Portfolio does not always stay fully invested in stocks and bonds. Cash or similar investments are a residual - they represent the assets that remain after the Sub-advisor has committed available assets to desirable investment opportunities. When the Portfolio's cash position increases, it may not participate in stock market advances or declines to the extent that it would if it remained more fully invested in common stocks.
The fundamental risk associated with any common stock fund is the risk that the value of the stocks it holds might decrease. Stock values may fluctuate in response to the activities of an individual company or in response to general market and/or economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than other investment choices. Smaller or newer issuers are more likely to realize more substantial growth as well as suffer more significant losses than larger or more established issuers. Investments in such companies can be both more volatile and more speculative.
The Portfolio may invest in "special situations" from time to time. A special situation arises when, in the opinion of the Sub-advisor, the securities of a particular issuer will be recognized and appreciate in value due to a specific development with respect to that issuer. Developments creating a special situation might include, among others, a new product or process, a technological breakthrough, a management change or other extraordinary corporate event, or differences in market supply of and demand for the security. Investment in special situations may carry an additional risk of loss in the event that the anticipated development does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may invest without limit in foreign securities. The Portfolio may invest substantially all of its assets in common stocks of foreign issuers to the extent the Sub-advisor believes that the relevant market environment favors profitable investing in those securities. The Sub-advisor generally takes a "bottom up" approach to building the Portfolio. In other words, the Sub-advisor seeks to identify individual companies with earnings growth potential that may not be recognized by the market at large regardless of country of organization or place of principal business activity. Although themes may emerge in the Portfolio, securities are generally selected without regard to any defined allocation among countries, geographic regions or industry sectors, or other similarly defined selection procedure. Realization of income is not a significant investment consideration. Any income realized on the Portfolio's investments will be incidental to its objective. For a discussion of the risks involved in investing in foreign securities, including the risk of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. The Portfolio may use options, futures and other types of derivatives for hedging purposes or as a means of enhancing return. The Portfolio may enter into futures contracts on securities, financial indices and foreign currencies and options on such contracts ("futures contracts") and may invest in options on securities, financial indices and foreign currencies ("options"), forward contracts and interest rate swaps and swap-related products (collectively "derivative instruments"). The Portfolio intends to use most derivative instruments primarily to hedge the value of its portfolio against potential adverse movements in securities prices, foreign currency markets or interest rates. To a limited extent, the Portfolio may also use derivative instruments for non-hedging purposes such as seeking to increase the Portfolio's income or otherwise seeking to enhance return.
Although the Sub-advisor believes the use of derivative instruments will benefit the Portfolio, the Portfolio's performance could be worse than if the Portfolio had not used such instruments if the Sub-advisor's judgment proves incorrect.
When the Portfolio invests in a derivative instrument, it may be required to segregate cash or other liquid assets with its custodian to "cover" the Portfolio's position. Assets segregated or set aside generally may not be disposed of so long as the Portfolio maintains the positions requiring segregation or cover. Segregating assets could diminish the Portfolio's return due to the opportunity losses of foregoing other potential investments with the segregated assets.
The Portfolio may also use futures, options and other derivative instruments to protect the portfolio from movements in securities prices and interest rates. The Portfolio may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk with respect to investments exposed to foreign currency fluctuations. For an additional discussion of futures and options transactions and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio may purchase securities on a when-issued or delayed delivery basis, which generally involves the purchase of a security with payment and delivery due at some time in the future. The Portfolio does not earn interest on such securities until settlement and bears the risk of market value fluctuations in between the purchase and settlement dates. For an additional discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may engage in a repurchase agreement with respect to any security in which it is authorized to invest. Repurchase agreements that mature in more than seven days will be subject to the 15% limit on illiquid investments. While it is not possible to eliminate all risks from these transactions, it is the policy of the Portfolio to limit repurchase agreements to those parties whose creditworthiness has been reviewed and found satisfactory by the Sub-advisor. Pursuant to an exemptive order granted by the Securities and Exchange Commission, the Portfolio and other funds advised by the Sub-advisor may invest in repurchase agreements and other money market instruments through a joint trading account. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio may use reverse repurchase agreements to provide cash to satisfy unusually heavy redemption requests or for other temporary or emergency purposes without the necessity of selling portfolio securities, or to earn additional income on portfolio securities, such as Treasury bills or notes. In a reverse repurchase agreement, the Portfolio sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time. While a reverse repurchase agreement is outstanding, the Portfolio will maintain cash and appropriate liquid assets in a segregated custodial account to cover its obligation under the agreement. The Portfolio will enter into reverse repurchase agreements only with parties that the Sub-advisor deems creditworthy. For a discussion of reverse repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid investments, including restricted securities or private placements that are not deemed to be liquid by the Sub-advisor. An illiquid investment is a security or other position that is deemed as such because of the absence of a readily available market or due to legal or contractual restrictions. Some securities cannot be sold to the U.S. public because of their terms or because of SEC regulations. The Sub-advisor may determine that securities that cannot be sold to the U.S. public but that can be sold to institutional investors (for example, Rule 144A securities) are liquid. The Sub-advisor will follow guidelines established by the Trustees of the Trust in making liquidity determinations for Rule 144A securities and other securities, including privately placed commercial paper. For a discussion of illiquid securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Borrowing and Lending. Subject to the Portfolio's restrictions on lending and borrowing, the Portfolio may borrow money and lend securities or other assets, as follows. The Portfolio may borrow money for temporary or emergency purposes in amounts up to 33 1/3% of its total assets. The Portfolio may mortgage or pledge securities as security for borrowings in amounts up to 15% of its net assets. The Portfolio may lend securities or other assets if, as a result, no more than 25% of its total assets would be lent to other parties.
Lower-Rated High-Yield Bonds. The Portfolio may invest up to 35% of its net assets in corporate debt securities that are rated below investment grade (securities rated BB or lower by Standard & Poor's Ratings Services ("Standard & Poor's") or Ba or lower by Moody's Investors Services, Inc. ("Moody's") (commonly referred to as "junk bonds")).
The Portfolio may also invest in unrated debt securities of foreign and domestic issuers. Unrated debt, while not necessarily of lower quality than rated securities, may not have as broad a market. Unrated debt securities will be included in the 35% limit of the Portfolio unless the Sub-advisor deems such securities to be the equivalent of investment grade securities. For a discussion of these instruments and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio generally intends to purchase securities for long-term investment rather than short-term gains. However, short-term transactions may result from liquidity needs, securities having reached a price or yield objective, anticipated changes in interest rates or the credit standing of an issuer, or by reason of economic or other developments not foreseen at the time of the investment decision. Changes are made in the Portfolio whenever the Sub-advisor believes such changes are desirable, and portfolio turnover rates are generally not a factor in making buy and sell decisions.
To a limited extent, the Portfolio may purchase securities in anticipation of relatively short-term price gains. The Portfolio may also sell one security and simultaneously purchase the same or a comparable security to take advantage of short-term differentials in bond yields or securities prices. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
AST Money Market Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high current income and maintain high levels of liquidity. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio attempts to accomplish its objectives by maintaining a dollar-weighted average portfolio maturity of not more than 90 days and by investing in the types of high quality U.S. dollar-denominated securities described below which have effective maturities of not more than 397 days. The Portfolio will invest in one or more of the types of investments described below.
United States Government Obligations. The Portfolio may invest in
obligations of the U.S. Government and its agencies ("U.S. Government
Obligations") and instrumentalities ("U.S. Government Instrumentalities")
maturing 397 days or less from the date of acquisition or purchased pursuant to
repurchase agreements that provide for repurchase by the seller within 397 days
from the date of acquisition. U.S. Government Obligations, for purposes of this
Portfolio, include: (i) direct obligations issued by the United States Treasury
such as Treasury bills, notes and bonds; and (ii) instruments issued or
guaranteed by government-sponsored agencies acting under authority of Congress,
such as, but not limited to, obligations of the Bank for Cooperatives, Federal
Financing Bank, Federal Intermediate Credit Banks, Federal Land Banks, and
Tennessee Valley Authority, Federal Home Loan Bank and Federal Farm Credit
Bureau. U.S. Government Instrumentalities are government agencies organized by
Congress under a Federal Charter and supervised and regulated by the U.S.
Government, such as the Federal National Mortgage Association and the Student
Loan Mortgage Association. Some of these U.S. Government Obligations are
supported by the full faith and credit of the U.S. Treasury; others 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; still others, such as those of the Student Loan Mortgage
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to the U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Bank Obligations. The Portfolio may invest in high quality United States dollar-denominated negotiable certificates of deposit, time deposits and bankers' acceptances of (i) banks, savings and loan associations and savings banks which have more than $2 billion in total assets and are organized under United States federal or state law, (ii) foreign branches of these banks or foreign banks of equivalent size (Euros), and (iii) United States branches of foreign banks of equivalent size (Yankees). The Portfolio may also invest in obligations of international banking institutions designated or supported by national governments to promote economic reconstruction, development or trade between nations (e.g., the European Investment Bank, the Inter-American Development Bank, or the World Bank). These obligations may be supported by appropriated but unpaid commitments of their member countries, and there is no assurance these commitments will be undertaken or met in the future.
Commercial Paper; Bonds. The Portfolio may invest in high quality commercial paper and corporate bonds issued by United States corporations. The Portfolio may also invest in bonds and commercial paper of foreign issuers if the obligation is United States dollar-denominated and is not subject to foreign withholding tax. For a discussion of the risks involved in foreign investing, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Asset-Backed Securities. As may be permitted by current laws and regulations, the Portfolio may invest in securities generally referred to as asset-backed securities, which directly or indirectly represent a participation interest in, or are secured by and payable from, a stream of payments generated by particular assets such as motor vehicle or credit card receivables. Asset-backed securities provide periodic payments that generally consist of both interest and principal payments. Consequently, the life of an asset-backed security varies with the prepayment experience of the underlying debt instruments. It is the current policy of the Portfolio not to invest more than 10% of its net assets in asset-backed securities. For more information about these instruments and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Synthetic Instruments. As may be permitted by current laws and regulations and if expressly permitted by the Trustees of the Trust, the Portfolio may invest in certain synthetic instruments. Such instruments generally involve the deposit of asset-backed securities in a trust arrangement and the issuance of certificates evidencing interests in the trust. The certificates are generally sold in private placements in reliance on Rule 144A of the Securities Act of 1933. The Sub-advisor will review the structure of synthetic instruments to identify credit and liquidity risks and will monitor such risks.
Quality Information. The Portfolio will limit its investments to those securities which, in accordance with guidelines adopted by the Trustees, present minimal credit risks. In addition, the Portfolio will not purchase any security (other than a United States Government security) unless: (i) if rated by only one nationally recognized rating organization (such as Moody's and Standard & Poor's), then such organization has rated it with the highest rating assigned to short-term debt securities; (ii) if rated by more than one nationally recognized rating organization, then at least two such rating organizations have rated it with the highest rating assigned to short-term debt securities; or (iii) it is not rated and is determined to be of comparable quality. Determinations of comparable quality shall be made in accordance with procedures established by the Trustees. These standards must be satisfied at the time an investment is made. If the quality of the investment later declines, the Portfolio may continue to hold the investment, subject in certain circumstances to a finding by the Trustees that disposing of the investment would not be in the Portfolio's best interest. For a description of securities ratings, see the Appendix to the Trust's SAI.
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 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 interest or income accrues to the Portfolio until settlement. The Portfolio maintains with the custodian a separate account with a segregated portfolio of securities in an amount at least equal to these commitments. When entering into a when-issued or delayed delivery transaction, the Portfolio will rely on the other party to consummate the transaction; if the other party fails to do so, the Portfolio may be disadvantaged. It is the current policy of the 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 these commitments. For an additional discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio is permitted to enter into repurchase agreements. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a security and agrees to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. It may also be viewed as the borrowing of money by the Portfolio. If interest rates rise during the term of a reverse repurchase agreement, entering into the reverse repurchase agreement may have a negative impact on the Portfolio's ability to maintain a net asset value of $1.00 per share. For a discussion of reverse repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated foreign securities. Any foreign commercial paper must not be subject to foreign withholding tax at the time of purchase. Foreign investments may be made directly in securities of foreign issuers or in the form of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and EDRs are receipts issued by a bank or trust company that evidence ownership of underlying securities issued by a foreign corporation and that are designed for use in the domestic, in the case of ADRs, or European, in the case of EDRs, securities markets. For a discussion of depositary receipts and the risks involved in investing in foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Portfolio's restriction on lending, the Portfolio is permitted to lend its securities. These loans must be secured continuously by cash or equivalent collateral or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. For an additional discussion of the Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Federated High Yield Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high current income by investing primarily in a diversified portfolio of fixed income securities. The fixed income securities in which the Portfolio intends to invest are lower-rated corporate debt obligations. This is a fundamental objective of the Portfolio. Lower-rated debt obligations are generally considered to be high risk investments.
Investment Policies:
The Portfolio will invest at least 65% of its assets in lower-rated (BBB or lower) corporate debt obligations. Under normal circumstances, the Portfolio will not invest more than 10% of the value of its total assets in equity securities. The fixed income securities in which the Portfolio may invest include, but are not limited to: preferred stocks, convertible securities, bonds, debentures, notes, equipment lease certificates and equipment trust certificates.
Other permitted investments for the Portfolio currently include, but are not limited to, the following: commercial paper; obligations of the United States; notes, bonds, and discount notes of the following U.S. government agencies or instrumentalities: Federal Home Loan Banks, Federal National Mortgage Association, Government National Mortgage Association, Federal Farm Credit Banks, Tennessee Valley Authority, Export-Import Bank of the United States, Commodity Credit Corporation, Federal Financing Bank, Student Loan Marketing Association, Federal Home Loan Mortgage Corporation, or National Credit Union Administration; time and savings deposits (including certificates of deposit) in commercial or savings banks whose deposits are insured by the Bank Insurance Fund ("BIF"), or the Savings Association Insurance Fund ("SAIF"), including certificates of deposit issued by and other time deposits in foreign branches of BIF-insured banks; bankers' acceptances issued by a BIF-insured bank, or issued by the bank's Edge Act subsidiary and guaranteed by the bank, with remaining maturities of nine months or less. The total acceptances of any bank held by the Portfolio cannot exceed 0.25 of 1% of such bank's total deposits according to the bank's last published statement of condition preceding the date of acceptance; and general obligations of any state, territory, or possession of the United States, or their political subdivisions, so long as they are either (1) rated in one of the four highest grades by nationally recognized statistical rating organizations or (2) issued by a public housing agency and backed by the full faith and credit of the United States.
The corporate debt obligations in which the Portfolio may invest are generally rated BBB or lower by Standard & Poor's Corporation ("Standard & Poor's") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are not rated but are determined by the Sub-advisor to be of comparable quality. For a description of securities ratings, see the Appendix to the Trust's SAI. There is no lower limit with respect to rating categories for securities in which the Portfolio may invest.
Special Risks of Lower-Rated Debt Obligations or "Junk Bonds." The corporate debt obligations in which the Portfolio invests are usually not in the three highest rating categories of a nationally recognized rating organization (AAA, AA, or A for Standard & Poor's and Aaa, Aa or A for Moody's) but are in the lower rating categories or are unrated but are of comparable quality and have speculative characteristics or are speculative. Lower-rated or unrated bonds are commonly referred to as "junk bonds." There is no minimal acceptable rating for a security to be purchased or held in the Portfolio, and the Portfolio may, from time to time, purchase or hold securities rated in the lowest rating category or securities in default.
Lower-rated securities will usually offer higher yields than higher-rated securities. However, there is more risk of loss of principal and interest associated with these investments. This is because of reduced creditworthiness and increased risk of default. Lower-rated securities generally tend to reflect short-term corporate and market developments to a greater extent than higher-rated securities which react primarily to fluctuations in the general level of interest rates. Short-term corporate and market developments affecting the prices or liquidity of lower-rated securities could include adverse news affecting major issuers, underwriters, or dealers in lower-rated securities. In addition, since there are fewer investors in lower-rated securities, it may be harder to sell the securities at an optimum time.
As a result of these factors, lower-rated securities tend to have more price volatility and carry more risk to principal and income than higher-rated securities. An economic downturn may adversely affect the value of some lower-rated bonds. Such a downturn may especially affect highly leveraged companies or companies in cyclically sensitive industries, where deterioration in a company's cash flow may impair its ability to meet its obligation to pay principal and interest to bondholders in a timely fashion. From time to time, as a result of changing conditions, issuers of lower-rated bonds may seek or may be required to restructure the terms and conditions of the securities they have issued. As a result of these restructurings, holders of lower-rated securities may receive less principal and interest than they had bargained for at the time such bonds were purchased. In the event of a restructuring, the Portfolio may bear additional legal or administrative expenses in order to maximize recovery from an issuer.
The secondary trading market for lower-rated bonds is generally less liquid than the secondary trading market for higher-rated bonds. Certain institutions, including federally insured savings and loan associations, may not legally purchase and hold lower-rated bonds, which could have an adverse impact on the overall liquidity of the market. Adverse publicity and the perception of investors relating to issuers, underwriters, dealers or underlying business conditions, whether or not warranted by fundamental analysis, may also affect the price or liquidity of lower-rated bonds. On occasion, therefore, it may become difficult to price or dispose of a particular security in the Portfolio. For an additional discussion of the risks involved in lower-rated securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid and Restricted Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may acquire securities which are subject to legal or contractual delays, restrictions and costs on resale. As a matter of investment policy which can be changed without shareholder approval, the Portfolio will not invest more than 15% of its net assets in illiquid securities, which include certain private placements not determined to be liquid under criteria established by the Board of Trustees and repurchase agreements providing for settlement in more than seven days after notice. Securities eligible for resale under Rule 144A of the Securities Act of 1933, and commercial paper issued under Section 4(2) of the Securities Act of 1933, could be deemed "liquid" when saleable in a readily available market. For an additional discussion of illiquid and restricted securities, and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
When-Issued and Delayed Delivery Transactions. The Portfolio may purchase securities on a when-issued or delayed delivery basis. In when-issued and delayed delivery transactions, the Portfolio relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause the Portfolio to miss a price or yield considered to be advantageous. For an additional discussion of these transactions and the risks involved therein, see the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may also invest all or a part of its assets temporarily in cash or cash items during time of unusual market conditions for defensive purposes or to maintain liquidity. Cash items may include, but are not limited to: certificates of deposit; commercial paper (generally lower-rated); short-term notes; obligations issued or guaranteed as to principal and interest by the U.S. government or any of its agencies or instrumentalities; and repurchase agreements.
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements and certain securities in which the Portfolio invests may be purchased pursuant to repurchase agreements. For an additional discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Lending Portfolio Securities. In order to generate additional income, the Portfolio may lend portfolio securities on a short-term or long-term basis to broker/dealers, banks, or other institutional borrowers of securities. The Portfolio will only enter into loan arrangements with broker/dealers, banks, or other institutions which the Sub-advisor has determined are creditworthy under guidelines established by the Board of Trustees and will receive collateral in the form of cash or U.S. government securities equal to at least 100% of the value of the securities loaned. For an additional discussion of the Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Zero Coupon Bonds. The Portfolio may, from time to time, own zero coupon bonds or pay-in-kind securities. A zero coupon bond makes no periodic interest payments and the entire obligation becomes due only upon maturity. Pay-in-kind securities make periodic payments in the form of additional securities (as opposed to cash). The price of zero coupon bonds and pay-in-kind securities are generally more sensitive to fluctuations in interest rates than are conventional bonds. Additionally, federal tax law requires that interest on zero coupon bonds and pay-in-kind securities be reported as income to the Portfolio even though the Portfolio received no cash interest until the maturity or payment date of such securities.
Many corporate debt obligations, including many lower-rated bonds, permit the issuers to call the security and thereby redeem their obligations earlier than the stated maturity dates. Issuers are more likely to call bonds during periods of declining interest rates. In these cases, if the Portfolio owns a bond which is called, the Portfolio will receive its return of principal earlier than expected and would likely be required to reinvest the proceeds at lower interest rates, thus reducing income to the Portfolio. For an additional discussion of zero coupon bonds, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 5% of its total assets in foreign securities which are not publicly traded in the United States. For a discussion of the risks involved in investing in foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Reducing Risks of Lower-Rated Securities. The Sub-advisor believes that the risks of investing in lower-rated securities may be reduced. There can, however, be no assurances that such risks will actually be reduced by the following methods. The professional portfolio management techniques used by the Sub-advisor to attempt to reduce these risks include:
Credit Research. The Sub-advisor will perform its own credit analysis in addition to using nationally recognized rating organizations and other sources, including discussions with the issuer's management, the judgment of other investment analysts, and its own informed judgment. The Sub-advisor's credit analysis will consider the issuer's financial soundness, its responsiveness to changes in interest rates and business conditions, and its anticipated cash flow, interest, or dividend coverage and earnings. In evaluating an issuer, the Sub-advisor places special emphasis on the estimated current value of the issuer's assets rather than historical cost.
Diversification. The Sub-advisor invests in securities of many different issuers, industries, and economic sectors to reduce portfolio risk.
Economic Analysis. The Sub-advisor will analyze current developments and trends in the economy and in the financial markets. When investing in lower-rated securities, timing and selection are critical, and analysis of the business cycle can be important.
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a high level of total return by investing primarily in a diversified group of fixed income and equity securities. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio is designed to balance the potential appreciation of common stocks with the income and principal stability of bonds over the long term. Under normal market conditions over the long-term, the Portfolio expects to allocate its assets so that approximately 40% of such assets will be in fixed income securities and approximately 60% in equity securities. This mix may vary over shorter time periods within the ranges set forth below:
Range
Fixed Income Securities 30-50%
Equity Securities 50-70%
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The primary consideration in varying from the 60-40 allocation will be the Sub-advisor's outlook for the different markets in which the Portfolio invests. Shifts between bonds and stocks will normally be done gradually and the Sub-advisor will not attempt to precisely "time" the market. There is, of course, no guarantee that even the Sub-advisor's gradual approach to allocating the Portfolio's assets will be successful in achieving the Portfolio's objective. The Portfolio will also maintain cash reserves to facilitate the Portfolio's cash flow needs (redemptions, expenses and purchases of Portfolio securities) and it may invest in cash reserves without limitation for temporary defensive purposes.
Assets allocated to the fixed income portion of the Portfolio primarily will be invested in U.S. and foreign investment grade bonds and high-yield bonds, and cash reserves.
Assets allocated to the equity portion of the Portfolio primarily will be invested in the common stocks of a diversified group of U.S. and foreign large and small companies.
The Portfolio's share price will fluctuate with changing market conditions and interest rate levels and your investment may be worth more or less when redeemed than when purchased. The Portfolio should not be relied upon for short-term financial needs, nor used to play short-term swings in the stock or bond markets. The Portfolio cannot guarantee that it will achieve its investment objectives.
Fixed Income Securities. The Portfolio's fixed income securities will be allocated among investment grade, high-yield and non-dollar debt securities generally within the ranges indicated below:
Range Investment Grade 50-100% High Yield 0-30% Non-dollar 0-30% Cash Reserves 0-20% |
Investment Grade. Long, intermediate and short-term investment grade debt securities (e.g., those rated AAA, AA, A or BBB by Standard & Poor's Corporation ("S&P"), or if not rated, of equivalent investment quality as determined by Sub-advisor). The weighted average maturity for this portion of the Portfolio is generally expected to be intermediate, although it may vary significantly.
High-Yield, Lower-Rated Securities. High-yielding, income-producing debt securities (commonly referred to as "junk bonds") and preferred stocks including convertible securities. Bonds may be purchased without regard to maturity. However, the average maturity of the bonds is expected to be approximately 10 years, although it may vary if market conditions warrant. Quality will generally range from lower-medium to low and the Portfolio may also purchase bonds in default if, in the opinion of the Sub-advisor, there is significant potential for capital appreciation. Lower-rated debt obligations are generally considered to be high risk investments. See this Prospectus and the Trust's SAI for a discussion of the risks involved in investing in high-yield, lower-rated debt securities.
Non-Dollar. Non-dollar denominated, high-quality (e.g., AAA and AA by S&P, or if not rated, of equivalent investment quality as determined by the Sub-advisor) government and corporate debt securities of at least three countries. See this Prospectus and the Trust's SAI for a discussion of the risks involved in foreign investing.
Cash Reserves. Liquid short-term investments of one year or less having the highest ratings by at least one established rating organization, or if not rated, of equivalent investment quality as determined by the Sub-advisor.
Equity Securities. The Portfolio's equity securities will be allocated among large and small-cap U.S. and non-dollar equity securities within the ranges indicated below:
Range Large Cap 45-100% Non-dollar 0-35% Small Cap 0-30% |
Large-Cap. Generally, stocks of well-established companies with capitalization over $1 billion which can produce increasing dividend income.
Non-Dollar. Common stocks of established non-U.S. companies. Investments may be made solely for capital appreciation or solely for income or any combination of both for the purpose of achieving a higher overall return. The Sub-advisor intends to diversify this portion of the Portfolio broadly among countries and to normally have at least three different countries represented. The countries of the Far East and Western Europe as well as South Africa, Australia, Canada, and other areas (including developing countries) may be included. Under unusual circumstances, however, investment may be substantially in one or two countries. See this Prospectus and the Trust's SAI for a discussion of the risks in international investing under "Certain Risk Factors and Investment Methods."
Small-Cap Investing and Associated Risks. Common stocks of small companies or companies which offer the possibility of accelerated earnings growth because of rejuvenated management, new products or structural changes in the economy. Current income is not a factor in the selection of these stocks. Higher risks are often associated with small companies. These companies may have limited product lines, markets and financial resources, or they may be dependent on a small or inexperienced management group. In addition, their securities may trade less frequently and in limited volume and move more abruptly than securities of larger companies. However, securities of smaller companies may offer greater potential for capital appreciation since they are often overlooked or undervalued by investors.
The Portfolio's investments include, but are not limited to, equity and fixed income securities of any type, as well as the investments described below.
Asset-Backed Securities. The Portfolio may invest in asset-backed securities. There are risks involved in asset-backed securities. For a discussion of asset-backed securities and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Cash Reserves. While the Portfolio will remain invested in primarily common stocks and bonds, it may, for temporary defensive purposes, invest in reserves without limitation. The Portfolio may establish and maintain reserves as Sub-advisor believes is advisable to facilitate the Portfolio's cash flow needs (e.g., redemptions, expenses and purchases of portfolio securities ) or for temporary, defensive purposes. The Portfolio's reserves will be invested in domestic and foreign money market instruments rated within the top two credit categories by a national rating organization, or if unrated, of equivalent investment quality as determined by the Sub-advisor.
Collateralized Mortgage Obligations (CMOs). There are risks involved in CMOs. The Portfolio may also invest in CMOs. For a discussion of CMOs and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Stripped Mortgage Securities. Stripped mortgage securities are created by separating the interest and principal payments generated by a pool of mortgage-backed bonds to create two classes of securities. Generally, one class receives interest only payments (IO's) and the other class receives principal only payments (PO's).
IO's and PO's are acutely sensitive to interest rate changes and to the rate of principal prepayments. They are very volatile in price and may have lower liquidity than most mortgage-backed securities. Certain CMO's may also exhibit these qualities, especially those which pay variable rates of interest which adjust inversely with and more rapidly than short-term interest rates. There is no guarantee the Portfolio's investment in CMO's, IO's or PO's will be successful, and the Portfolio's total return could be adversely affected as a result. For an additional discussion of stripped mortgage securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Convertible Securities, Preferred Stocks, and Warrants. The Portfolio may invest in debt or preferred equity securities convertible into or exchangeable for equity securities. Preferred stocks are securities that represent an ownership interest in a corporation providing the owner with claims on the company's earnings and assets before common stock owners, but after bond owners. Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrants (generally, two or more years).
Foreign Securities. The Portfolio may invest up to 35% of its total assets in U.S. dollar-denominated and non U.S. dollar-denominated securities issued by foreign issuers. Some of the countries in which the Portfolio may invest may be considered to be developing and may involve special risks. For a discussion of these risks as well as the risks involved in investing in foreign securities in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. Foreign securities of the Portfolio are subject to currency risk, that is, the risk that the U.S. dollar value of these securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. To manage this risk and facilitate the purchase and sale of foreign securities, the Portfolio will engage in foreign currency transactions involving the purchase and sale of forward foreign currency exchange contracts. For a discussion of foreign currency transactions, certain risks involved therein, and the risks of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into futures contracts (or options thereon) to hedge all or a portion of its portfolio, against changes in prevailing levels of interest rates or currency exchange rates, or as an efficient means of adjusting its exposure to the bond, stock, and currency markets. The Portfolio will not use futures contracts for leveraging purposes. The Portfolio may also write call and put options and purchase put and call options on securities, financial indices, and currencies. The aggregate market value of the Portfolio's portfolio securities or currencies covering call or put options will not exceed 25% of the Portfolio's net assets. For an additional discussion of futures contracts and options and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Hybrid Instruments. As part of its investment program and to maintain greater flexibility, the Portfolio may invest in instruments which have the characteristics of futures, options and securities. Such instruments may take a variety of forms, such as debt instruments with interest or principal payments determined by reference to the value of a currency, securities index or commodity at a future point in time. The risks of such investments would reflect both the risks of investing in futures, options and securities, including volatility and illiquidity. Under certain conditions, the redemption value of a hybrid instrument could be zero. For a discussion of hybrid securities and the risks involved therein, see the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
Lending of Portfolio Securities. As a fundamental policy, for the purpose of realizing additional income, the Portfolio may lend securities with a value of up to 33 1/3% of its total assets to broker-dealers, institutional investors, or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the security loaned. For an additional discussion on limitations on lending and risks of lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Restrictions."
Mortgage-Backed Securities. The Portfolio may invest in mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or institutions such as banks, insurance companies and savings and loans. Some of these securities, such as GNMA certificates, are backed by the full faith and credit of the U.S. Treasury while others, such as Freddie Mac certificates, are not. There are risks involved in mortgage-backed securities. For an additional discussion of mortgage-backed securities, see the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may acquire illiquid securities (no more than 15% of net assets). Because an active trading market does not exist for such securities, the sale of such securities may be subject to delay and additional costs. The Portfolio will not invest more than 10% of its total assets in restricted securities (other than securities eligible for resale under Rule 144A of the Securities Act of 1933). For a discussion of illiquid and restricted securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with a well-established securities dealer or a bank which is a member of the Federal Reserve System. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of the limitations on borrowing by the Portfolio and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a total return on its assets from long-term growth of capital and income, principally through investments in common stocks of established, non-U.S. companies. Investments may be made solely for capital appreciation or solely for income or any combination of both for the purpose of achieving a higher overall return. Total return consists of capital appreciation or depreciation, dividend income, and currency gains or losses. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio intends to diversify investments broadly among countries and to normally have at least three different countries represented in the Portfolio. The Portfolio may invest in countries of the Far East and Western Europe as well as South Africa, Australia, Canada and other areas (including developing countries). Under unusual circumstances, the Portfolio may invest substantially all of its assets in one or two countries.
In seeking its objective, the Portfolio will invest primarily in common stocks of established foreign companies which have the potential for growth of capital or income or both. However, the Portfolio may also invest in a variety of other equity-related securities, such as preferred stocks, warrants and convertible securities, as well as corporate and governmental debt securities, when considered consistent with the Portfolio's investment objectives and program. Under normal market conditions, the Portfolio's investment in securities other than common stocks is limited to no more than 35% of total assets. Under exceptional economic or market conditions abroad, the Portfolio may temporarily invest all or a major portion of its assets in U.S. government obligations or debt obligations of U.S. companies. The Portfolio will not purchase any debt security which at the time of purchase is rated below investment grade. This would not prevent the Portfolio from retaining a security downgraded to below investment grade after purchase.
The Portfolio may also invest its reserves in domestic as well as foreign money market instruments. Also, the Portfolio may enter into forward foreign currency exchange contracts in order to protect against uncertainty in the level of future foreign exchange rates.
In addition to the investments described below, the Portfolio's investments may include, but are not limited to, American Depositary Receipts (ADRs), bonds, notes, other debt securities of foreign issuers, and the securities of foreign investment funds or trusts (including passive foreign investment companies).
Cash Reserves. While the Portfolio will remain primarily invested in common stocks, it may, for temporary defensive measures, invest in cash reserves without limitation. The Portfolio may establish and maintain reserves as Sub-advisor believes is advisable to facilitate the Portfolio's cash flow needs (e.g., redemptions, expenses and purchases of portfolio securities) or for temporary, defensive purposes. The Portfolio's reserves may be invested in domestic and foreign money market instruments rated within the top two credit categories by a national rating organization, or if unrated, of equivalent investment quality as determined by the Sub-advisor.
Convertible Securities, Preferred Stocks, and Warrants. The Portfolio may invest in debt or preferred equity securities convertible into or exchangeable for equity securities. Preferred stocks are securities that represent an ownership interest in a corporation providing the owner with claims on the company's earnings and assets before common stock owners, but after bond owners. Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrants (generally, two or more years).
Foreign Currency Transactions. The Portfolio will normally conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. The Portfolio will generally not enter into a forward contract with a term of greater than one year.
The Portfolio will generally enter into forward foreign currency exchange contracts only under two circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell or buy the former foreign currency (or another currency which acts as a proxy for that currency) approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Under certain circumstances, the Portfolio may commit a substantial portion or the entire value of its portfolio to the consummation of these contracts. The Sub-advisor will consider the effect such a commitment of its portfolio to forward contracts would have on the investment program of the Portfolio and the flexibility of the Portfolio to purchase additional securities. For a discussion of foreign currency contracts and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into stock index or currency futures contracts (or options thereon) to hedge a portion of the Portfolio, to provide an efficient means of regulating the Portfolio's exposure to the equity markets, or as a hedge against changes in prevailing levels of currency exchange rates. The Portfolio will not use futures contracts for leveraging purposes. Such contracts may be traded on U.S. or foreign exchanges. The Portfolio may write covered call options and purchase put and call options on foreign currencies, securities, and stock indices. The aggregate market value of the Portfolio's currencies or portfolio securities covering call or put options will not exceed 25% of the Portfolio's total assets. The Portfolio will not commit more than 5% of its total assets to premiums when purchasing call or put options. For an additional discussion of futures contracts and options and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Hybrid Investments. The Portfolio may invest up to 10% of its total assets in hybrid instruments. As part of its investment program and to maintain greater flexibility, the Portfolio may invest in these instruments, which have the characteristics of futures, options and securities. Such instruments may take a variety of forms, such as debt instruments with interest or principal payments determined by reference to the value of a currency, security index or commodity at a future point in time. The risks of such investments would reflect both the risks of investing in futures, options, currencies, and securities, including volatility and illiquidity. Under certain conditions, the redemption value of a hybrid instrument could be zero. For a discussion of hybrid investments and the risks involved therein, see the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
Passive Foreign Investment Companies. The Portfolio may purchase the securities of certain foreign investment funds or trusts called passive foreign investment companies. Such trusts have been the only or primary way to invest in certain countries. In addition to bearing their proportionate share of the Portfolio's expenses (management fees and operating expenses), shareholders will also indirectly bear similar expenses of such trusts.
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may acquire illiquid securities (no more than 15% of net assets). The Portfolio will not invest more than 10% of its total assets in restricted securities (other than securities eligible for resale under Rule 144A of the Securities Act of 1933). For a discussion of illiquid and restricted securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Lending of Portfolio Securities. As a fundamental policy, for the purpose of realizing additional income, the Portfolio may lend securities with a value of up to 33 1/3% of its total assets to broker-dealers, institutional investors, or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the security loaned. For an additional discussion of the Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with a well-established securities dealer or a bank which is a member of the Federal Reserve System. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
T. Rowe Price Natural Resources Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek long-term growth of capital through investment primarily in common stocks of companies which own or develop natural resources and other basic commodities. Current income is not a factor in the selection of stocks for investment by the Portfolio. Total return will consist primarily of capital appreciation (or depreciation).
Investment Policies:
The Portfolio will invest primarily (at least 65% of its total assets) in common stocks of companies which own or develop natural resources and other basic commodities. However, it may also purchase other types of securities, such as selected, non-resource growth companies, foreign securities, convertible securities and warrants, when considered consistent with the Portfolio's investment objective and policies. The Portfolio may also engage in a variety of investment management practices, such as buying and selling futures and options.
Some of the most important factors evaluated by the Sub-advisor in selecting natural resource companies are the capability for expanded production, superior exploration programs and production facilities, and the potential to accumulate new resources. The Portfolio expects to invest in those natural resource companies which own or develop energy sources (such as oil, gas, coal and uranium), precious metals, forest products, real estate, nonferrous metals, diversified resources, and other basic commodities which, in the opinion of the Sub-advisor, can be produced and marketed profitably during periods of rising labor costs and prices. However, the percentage of the Portfolio's assets invested in natural resource and related businesses versus the percentage invested in non-resource companies may vary greatly depending upon economic monetary conditions and the outlook for inflation. The earnings of natural resource companies may be expected to follow irregular patterns, because these companies are particularly influenced by the forces of nature and international politics. Companies which own or develop real estate might also be subject to irregular fluctuations of earnings, because these companies are affected by changes in the availability of money, interest rates, and other factors.
In the opinion of the Sub-advisor, inflation represents one of the major economic problems investors will face over the long term. From the early 1970's through the late 1980's, the inflation rate was considerably above the average historic levels. Although inflation has slowed in recent years, the Sub-advisor believes the strenuous efforts required on the part of government, business, labor, and consumers to control inflation are difficult to maintain for extended periods - particularly during recessions. Political pressure to counteract these economic slowdowns often leads to governmental policies which in turn renew inflationary forces. The investment policies of the Portfolio have been developed in light of these considerations.
The Portfolio invests in a diversified group of companies whose earnings and/or value of tangible assets the Sub-advisor expects to grow faster than the rate of inflation over the long term. The Sub-advisor believes the most attractive opportunities which satisfy the Portfolio's objective are in companies which own or develop natural resources and in companies where management has the flexibility to adjust prices or the ability to control operating costs.
Common and Preferred Stocks. Stocks represent shares of ownership in a company. Generally preferred stock has a specified dividend and ranks after bonds and before common stocks in its claim on income for dividend payments and on assets should the company be liquidated. After other claims are satisfied, common stockholders participate in company profits on a pro rata basis; profits may be paid out in dividends or reinvested in the company to help it grow. Increases and decreases in earnings are usually reflected in a company's stock price, so common stocks generally have the greatest appreciation and depreciation potential of all corporate securities. While most preferred stocks pay a dividend, the Portfolio may purchase preferred stock where the issuer has omitted, or is in danger of omitting, payment of its dividend. Such investments would be made primarily for their capital appreciation potential.
Convertible Securities and Warrants. The Portfolio may invest in debt or preferred equity securities convertible into or exchangeable for equity securities. For a discussion of these instruments, see this Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 50% of its total assets in foreign securities. These include non-dollar denominated securities traded outside of the U.S. and dollar denominated securities traded in the U.S. (such as ADRs). Some of the countries in which the Portfolio may invest may be considered to be developing and may involve special risks. For a discussion of these risks as well as the risks involved in investing in foreign securities in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will normally conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. The Portfolio will generally not enter into a forward contract with a term of greater than one year.
The Portfolio will generally enter into forward foreign currency exchange contracts only under two circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell or buy the former foreign currency (or another currency which acts as a proxy for that currency) approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Under certain circumstances, the Portfolio may commit a substantial portion or the entire value of its portfolio to the consummation of these contracts. The Sub-advisor will consider the effect such a commitment of its portfolio to forward contracts would have on the investment program of the Portfolio and the flexibility of the Portfolio to purchase additional securities. For a discussion of foreign currency contracts, the risks involved therein, and the risks of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Portfolio may invest in debt securities of any type without regard to quality or rating. Such securities would be purchased in companies which meet the investment criteria for the Portfolio. The price of a bond fluctuates with changes in interest rates, rising when interest fall and falling when interest rise.
Stripped Mortgage Securities. Stripped mortgage securities are created by separating the interest and principal payments generated by a pool of mortgage-backed bonds to create two classes of securities. Generally, one class receives interest only payments (IO's) and the other class receives principal only payments (PO's). The Portfolio will treat IOs and POs, other than government-issued IOs or POs backed by fixed rate mortgages, as illiquid securities and, accordingly, limit its investments in such securities, together with all other illiquid securities, to 15% of the Portfolio's net assets.
IO's and PO's are acutely sensitive to interest rate changes and to the rate of principal prepayments. They are very volatile in price and may have lower liquidity than most mortgage-backed securities. Certain CMO's may also exhibit these qualities, especially those which pay variable rates of interest which adjust inversely with and more rapidly than short-term interest rates. There is no guarantee the Portfolio's investment in CMO's, IO's or PO's will be successful, and the Portfolio's total return could be adversely affected as a result. For an additional discussion of stripped mortgage securities and the risks involved therein, see this Trust's Prospectus under "Certain Risk Factors and Investment Methods."
High-Yield/High-Risk Investing. The Portfolio will not purchase a non-investment grade debt security (or junk bond) if immediately after such purchase the Portfolio would have more than 10% of its total assets invested in such securities. The total return and yield of lower quality (high-yield/high risk) bonds, commonly referred to as "junk bonds," can be expected to fluctuate more than the total return and yield of higher quality, shorter-term bonds, but not as much as common stocks. Junk bonds are regarded as predominantly speculative and high risk with respect to the issuer's continuing ability to meet principal and interest payments. See this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" for a discussion of the risks involved in investing in high-yield lower-rated debt securities.
Hybrid Instruments. The Portfolio may invest up to 10% of its total assets in hybrid instruments. As part of its investment program and to maintain greater flexibility, the Portfolio may invest in these instruments, which have the characteristics of futures, options and securities. Such instruments may take a variety of forms, such as debt instruments with interest or principal payments determined by reference to the value of a currency, security index or commodity at a future point in time. The risks of such investments would reflect both the risks of investing in futures, options, currencies, and securities, including volatility and illiquidity. Under certain conditions, the redemption value of a hybrid instrument could be zero. For a discussion of hybrid investments, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may acquire illiquid securities (no more than 15% of net assets). For a discussion of illiquid securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Private Placements (Restricted Securities). These securities are sold directly to a small number of investors, usually institutions. Unlike public offerings, such securities are not registered with the SEC. Although certain of these securities may be readily sold, for example under Rule 144A, the sale of others may involve substantial delays and additional costs. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio will not invest more than 15% of its net assets in illiquid securities, but not more than 10% of its total assets in restricted securities (other than Rule 144A securities). For a discussion of illiquid and restricted securities and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Cash Position. The Portfolio will hold a certain portion of its assets in U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. For temporary, defensive purposes, the Portfolio may invest without limitation in such securities. This reserve position provides flexibility in meeting redemptions and expenses, and in the timing of new investments, and serves as a short-term defense during periods of unusual market volatility.
Borrowing. The Portfolio can borrow money from banks as a temporary measure for emergency purposes, to facilitate redemption requests, or for other purposes consistent with the Portfolio's investment objectives and policies. Such borrowings may be collateralized with Portfolio assets, subject to restrictions. For a discussion of limitations on borrowing by the Portfolio and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Futures and Options. The Portfolio may buy and sell futures contracts (and options on such contracts) to manage its exposure to certain markets. The Portfolio may purchase, sell or write call and put options on securities, financial indices, and foreign currencies. The Portfolio may enter into stock index or currency futures contracts (or options thereon) to hedge a portion of the portfolio, to provide an efficient means of regulating the Portfolio's exposure to the equity markets, or as a hedge against changes in prevailing levels of currency exchange rates. The Portfolio will not use futures contracts for leveraging purposes. Such contracts may be traded on U.S. or foreign exchanges. The Portfolio may write covered call options and purchase put and call options on foreign currencies, securities, and stock indices. The total market value of the Portfolio's currencies or portfolio securities covering call or put options will not exceed 25% of the Portfolio's total assets. The Portfolio will not commit more than 5% of its total assets to premiums when purchasing call or put options. For an additional discussion of futures contracts and options and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending of Portfolio Securities. As a fundamental policy, for the purpose of realizing additional income, the Portfolio may lend securities with a value of up to 33 1/3% of its total assets to broker-dealers, institutional investors, or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the security loaned. For an additional discussion of the Portfolio's limitations on lending and certain risks of lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Restrictions."
T. Rowe Price International Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide high current income and capital appreciation by investing in high-quality, non dollar-denominated government and corporate bonds outside the United States. This is a fundamental objective of the Portfolio.
Special Risk Considerations. The Portfolio is intended for long-term investors who can accept the risks associated with investing in international bonds. Total return consists of income after expenses, bond price gains (or losses) in terms of the local currency and currency gains (or losses). The value of the Portfolio will fluctuate in response to various economic factors, the most important of which are fluctuations in foreign currency exchange rates and interest rates.
Because the Portfolio's investments are primarily denominated in foreign currencies, exchange rates are likely to have a significant impact on total Portfolio performance. For example, a fall in the U.S. dollar's value relative to the Japanese yen will increase the U.S. dollar value of a Japanese bond held in the Portfolio, even though the price of that bond in yen terms remains unchanged. Conversely, if the U.S. dollar rises in value relative to the yen, the U.S. dollar value of a Japanese bond will fall. Investors should be aware that exchange rate movements can be significant and endure for long periods of time.
The Sub-advisor's techniques include management of currency, bond market and maturity exposure and security selection which will vary based on available yields and the Sub-advisor's outlook for the interest rate cycle in various countries and changes in foreign currency exchange rates. In any of the markets in which the Portfolio invests, longer maturity bonds tend to fluctuate more in price as interest rates change than shorter-term instruments -- again providing both opportunity and risk.
Because of the Portfolio's long-term investment objectives, investors should not rely on an investment in the Portfolio for their short-term financial needs and should not view the Portfolio as a vehicle for playing short-term swings in the international bond and foreign exchange markets. Shares of the Portfolio alone should not be regarded as a complete investment program. Also, investors should be aware that investing in international bonds may involve a higher degree of risk than investing in U.S. bonds.
Investments in foreign securities involve special considerations. For a discussion of the risks involved in investing in foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Investment Policies:
To achieve its objectives, the Portfolio will invest at least 65% of its assets in high-quality, non dollar-denominated government and corporate bonds outside the United States. The Portfolio also seeks to moderate price fluctuation by actively managing its maturity structure and currency exposure. The Sub-advisor bases its investment decisions on fundamental market factors, currency trends, and credit quality. The Portfolio generally invests in countries where the combination of fixed-income returns and currency exchange rates appears attractive, or, if the currency trend is unfavorable, where the currency risk can be minimized through hedging.
Although the Portfolio expects to maintain an intermediate to long weighted average maturity, it has no maturity restrictions on the overall portfolio or on individual securities. Normally, the Portfolio does not hedge its foreign currency exposure back to the dollar, nor involve more than 50% of total assets in cross hedging transactions. Therefore, changes in foreign interest rates and currency exchange rates are likely to have a significant impact on total return and the market value of portfolio securities. Such changes provide greater opportunities for capital gains and greater risks of capital loss. The Sub-advisor attempts to reduce these risks through diversification among foreign securities and active management of maturities and currency exposures.
The Portfolio may also invest up to 20% of its assets in below investment-grade, high-risk bonds, including bonds in default or those with the lowest rating. Defaulted bonds are acquired only if the Sub-advisor foresees the potential for significant capital appreciation. Securities rated below investment-grade are commonly referred to as "junk bonds" and involve greater price volatility and higher degrees of speculation with respect to the payment of principal and interest than higher quality fixed-income securities. The market prices of such lower-rated debt securities may decline significantly in periods of general economic difficulty. In addition, the trading market for these securities is generally less liquid than for higher rated securities and the Portfolio may have difficulty disposing of these securities at the time it wishes to do so. The lack of a liquid secondary market for certain securities may also make it more difficult for the Portfolio to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value. For a discussion of the risks involved in lower-rated debt securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
The Portfolio's investments may also include: debt securities issued or guaranteed by a foreign national government, its agencies, instrumentalities or political subdivisions; debt securities issued or guaranteed by supranational organizations (e.g., European Investment Bank, InterAmerican Development Bank or the World Bank); bank or bank holding company debt securities; debt securities convertible into common stock.
The Portfolio may invest in zero coupon securities which pay no cash income and are sold at substantial discounts from their value at maturity. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. Zero coupon securities are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable maturities which make current cash distribution of interest. For a discussion of zero coupon securities, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
The Portfolio may purchase securities which are not publicly offered. If such securities are purchased, they may be subject to restrictions applicable to restricted securities. The Portfolio may invest up to 15% of its net assets in illiquid securities. For a discussion of the risks involved with illiquid and restricted securities, see this Prospectus under "Certain Risk Factors and Investment Methods."
The Portfolio intends to select its investments from a number of country and market sectors. It may substantially invest in the issuers in one or more countries and intends to have investments in securities of issuers from a minimum of three different countries. For temporary defensive or emergency purposes, however, the Portfolio may invest without limit in U.S. debt securities, including short-term money market securities. It is impossible to predict for how long such alternative strategies will be utilized.
Short-Term Investments. To protect against adverse movements of interest rates and for liquidity, the Portfolio may also purchase short-term obligations denominated in U.S. and foreign currencies (including the ECU) such as, but not limited to, bank deposits, bankers' acceptances, certificates of deposit, commercial paper, short-term government, government agency, supranational agency and corporate obligations, and repurchase agreements.
Nondiversified Investment Company. The Portfolio may invest more than 5% of its assets in the fixed-income securities of individual foreign governments. The Portfolio generally will not invest more than 5% of its assets in any individual corporate issuer, provided that (1) the Portfolio may place assets in bank deposits or other short-term bank instruments with a maturity of up to 30 days provided that (i) the bank has a short-term credit rating of A1+ (or, if unrated, the equivalent as determined by the Sub-advisor) and (ii) the Portfolio may not maintain more than 10% of its total assets with any single bank; and (2) the Portfolio may maintain more than 5% of its total assets, including cash and currencies, in custodial accounts or deposits of the Trust's custodian or sub-custodians. In addition, the Portfolio intends to qualify as a regulated investment company for purposes of the Internal Revenue Code. Such qualification requires the Portfolio to limit its investments so that, at the end of each calendar quarter, with respect to at least 50% of its total assets, not more than 5% of such assets are invested in the securities of a single issuer, and with respect to the remaining 50%, no more than 25% is invested in a single issuer. Since, as a nondiversified investment company, the Portfolio is permitted to invest a greater proportion of its assets in the securities of a smaller number of issuers, the Portfolio may be subject to greater credit risk with respect to its portfolio securities than an investment company that is more broadly diversified.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady bonds, named after former U.S. Secretary of the Treasury Nicholas Brady, are used as a means of restructuring the external debt burden of a government in certain emerging markets. A Brady bond is created when an outstanding commercial bank loan to a government or private entity is exchanged for a new bond in connection with a debt restructuring plan. Brady bonds may be collateralized or uncollateralized and issued in various currencies (although typically in the U.S. dollar). They are often fully collateralized as to principal in U.S. Treasury zero coupon bonds. However, even with this collateralization feature, Brady Bonds are often considered speculative, below investment grade investments because the timely payment of interest is the responsibility of the issuing party (for example, a Latin American country) and the value of the bonds can fluctuate significantly based on the issuer's ability or perceived ability to make these payments. Finally, some Brady Bonds may be structured with floating rate or low fixed rate coupons. The Portfolio does not expect to have more than 10% of its total assets invested in Brady Bonds.
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with well-established securities dealers or a bank that is a member of the Federal Reserve System. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued or Delayed Delivery Securities. The Portfolio may purchase securities on a when-issued or forward delivery basis, for payment and delivery at a later date. The price and yield are generally fixed on the date of commitment to purchase. During the period between purchase and settlement, no interest accrues to the Portfolio. At the time of settlement, the market value of the security may be more or less than the purchase price. For an additional discussion of when-issued securities and the risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Passive Foreign Investment Companies. The Portfolio may purchase the securities of certain foreign investment funds or trusts called passive foreign investment companies. Such trusts have been the only or primary way to invest in certain countries. In addition to bearing their proportionate share of the trusts' expenses (management fees and operating expenses) shareholders will also indirectly bear similar expenses of such trusts.
Hybrid Instruments. The Portfolio may invest up to 10% of its total assets in hybrid instruments. As part of its investment program and to maintain greater flexibility, the Portfolio may invest in these instruments, which have the characteristics of futures, options and securities. Such instruments may take a variety of forms, such as debt instruments with interest or principal payments determined by reference to the value of a currency, securities index or commodity at a future point in time. The risks of such investments would reflect both the risks of investing in futures, options and securities, including volatility and illiquidity. Under certain conditions, the redemption value of a hybrid instrument could be zero. For a discussion of hybrid securities and the risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in foreign currency transactions either on a spot (cash) basis at the rate prevailing in the currency exchange market at the time or through forward currency contracts ("forwards") with terms generally of less than one year. Forwards will be used primarily to adjust the foreign exchange exposure of the Portfolio with a view to protecting the Portfolio from adverse currency movements, based on the Sub-advisor's outlook, and the Portfolio might be expected to enter into such contracts under the following circumstances:
Lock In. When management desires to lock in the U.S. dollar price on the purchase or sale of a security denominated in a foreign currency.
Cross Hedge. If a particular currency is expected to decrease against another currency, the Portfolio may sell the currency expected to decrease and purchase a currency which is expected to increase against the currency sold in an amount approximately equal to some or all of the Portfolio's holdings denominated in the currency sold.
Proxy Hedge. The Sub-advisor might choose to use a proxy hedge, where the Portfolio, having purchased a bond, will sell a currency whose value is believed to be closely linked to the currency in which the bond is denominated. Interest rates prevailing in the country whose currency was sold would be expected to be closer to those in the U.S. and lower than those of bonds denominated in the currency of the original holding. This type of hedging entails greater risk than a direct hedge because it is dependent on a stable relationship between the two currencies paired as proxies and the relationships can be very unstable at times.
For an additional discussion of foreign currency exchange contracts and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Costs of Hedging. When the Portfolio purchases a foreign bond with a higher interest rate than is available on U.S. bonds of a similar maturity, the additional yield on the foreign bond could be substantially lost if the Portfolio were to enter into a direct hedge by selling the foreign currency and purchasing the U.S. dollar. This is what is known as the "cost" of hedging. Proxy hedging attempts to reduce this cost through an indirect hedge back to the U.S. dollar. It is important to note that hedging costs are treated as capital transactions and are not, therefore, deducted from the Portfolio's dividend distribution and are not reflected in its yield. Instead such costs will, over time, be reflected in the Portfolio's net asset value per share.
Futures and Options. The Portfolio may buy and sell futures and options contracts for any number of reasons including: to manage their exposure to changes in interest rates, securities prices and foreign currencies; as an efficient means of adjusting overall exposure to certain markets; to enhance income; to protect the value of portfolio securities; and to adjust the portfolio's duration. The Portfolio may purchase, sell, or write call and put options on securities, financial indices, and foreign currencies. The total market value of securities against which the Portfolio has written call or put options may not exceed 25% of its total assets. The Portfolio will not commit more than 5% of its total assets to premiums when purchasing call or put options. For an additional discussion of futures and options and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the limitations on borrowing by the Portfolio and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Portfolio Turnover. The Portfolio may have higher portfolio turnover than other mutual funds with similar investment objectives. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
T. Rowe Price Small Company Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide long-term capital appreciation by investing primarily in small-capitalization stocks that appear to be undervalued. This is a fundamental objective of the Portfolio.
Investment Policies:
Reflecting a value approach to investing, the Portfolio will seek the stocks of companies whose current stock prices do not appear to adequately reflect their underlying value as measured by assets, earnings, cash flow, or business franchises. The Portfolio will invest at least 65% of its total assets in companies with a market capitalization of $1 billion or less that appear undervalued by various measures, such as price/earnings or price/book value ratios.
Although the Portfolio will invest primarily in U.S. common stocks, it may also purchase other types of securities, for example, foreign securities, convertible stocks and bonds, and warrants when considered consistent with the Portfolio's investment objective and policies. The Portfolio may also engage in a variety of investment management practices, such as buying and selling futures and options.
In managing the Portfolio, the Sub-advisor will apply a value investment approach. Value investors seek to buy a stock (or other security) when its price is low relative to its perceived worth. They hope to identify companies whose stocks are currently out of favor or are not followed closely by stock analysts. Often these stocks have above-average yields and offer the potential for capital appreciation as other investors recognize their intrinsic value and drive up their prices. Some of the principal measures used to identify such stocks are:
(i) Price/Earnings Ratio. Dividing a stock's price by its earnings per share generates a price/earnings or P/E ratio. A stock with a P/E that is significantly below that of its peers, the market as a whole, or its own historical norm may represent an attractive opportunity.
(ii) Price/Book Value Ratio. This ratio, calculated by dividing a stock's price by its book value per share, indicates how a stock is priced relative to the accounting (i.e., book) value of the company's assets. A ratio below the market, that of its competitors, or its own historic norm could indicate an undervalued situation.
(iii) Dividend Yield. Value investors look for undervalued assets. A stock's dividend yield is found by dividing its annual dividend by its share price. A yield significantly above a stock's own historic norm or that of its peers may suggest an investment opportunity.
(iv) Price/Cash Flow. Dividing a stock's price by the company's cash flow per share, rather than its earnings or book value, provides a more useful measure of value in some cases. A ratio below that of the market or of its peers suggests the market may be incorrectly valuing the company's cash flow for reasons that may be temporary.
(v) Undervalued Assets. This analysis compares a company's stock price with its underlying asset values, its projected value in the private (as opposed to public) market, or its expected value if the company or parts of it were sold or liquidated.
(vi) Restructuring Opportunities. The market can react favorably to the announcement or the successful implementation of a corporate restructuring, financial reengineering, or asset redeployment. Such events can result in an increase in a company's stock price. A value investor may try to anticipate these actions and invest before the market places an appropriate value on any actual or expected changes.
Risks of a Value Approach to Small-Cap Investing. Small companies--those with a capitalization (market value) of $1 billion or less--may offer greater potential for capital appreciation since they are often overlooked or undervalued by investors. Small-capitalization stocks are less actively followed by stock analysts than are larger-capitalization stocks, and less information is available to evaluate small-cap stock prices. As a result, compared with larger-capitalization stocks, there may be greater variations between the current stock price and the estimated underlying value, which could represent greater opportunity for appreciation.
Investing in small companies involves greater risk as well as greater opportunity than is customarily associated with more established companies. Stocks of small companies may be subject to more abrupt or erratic price movements than larger company securities. Small companies often have limited product lines, markets, or financial resources, and their management may lack depth and experience. In addition, a value approach to investing includes the risks that 1) the market will not recognize a security's intrinsic value for an unexpectedly long time, and 2) a stock that is judged to be undervalued is actually appropriately priced due to intractable or fundamental problems that are not yet apparent.
Common and Preferred Stocks. Stocks represent shares of ownership in a company. Generally, preferred stock has a specified dividend and ranks after bonds and before common stocks in its claim on income for dividend payments and on assets should the company be liquidated. After other claims are satisfied, common stockholders participate in company profits on a pro rata basis; profits may be paid out in dividends or reinvested in the company to help it grow. Increases and decreases in earnings are usually reflected in a company's stock price, so common stocks generally have the greatest appreciation and depreciation potential of all corporate securities. While most preferred stocks pay a dividend, the Portfolio may purchase preferred stock where the issuer has omitted, or is in danger of omitting, payment of its dividend. Such investments would be made primarily for their capital appreciation potential.
Convertible Securities and Warrants. The Portfolio may invest in debt or preferred equity securities convertible into or exchangeable for equity securities. Traditionally, convertible securities have paid dividends or interest at rates higher than common stocks but lower than nonconvertible securities. They generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree. In recent years, convertibles have been developed which combine higher or lower current income with options and other features. Warrants are options to buy a stated number of shares of common stock at a specified price anytime during the life of the warrants (generally, two or more years).
Foreign Securities. The Portfolio may invest up to 20% of its total assets (excluding reserves) in foreign securities. These include nondollar-denominated securities traded outside of the U.S. and dollar-denominated securities of foreign issuers traded in the U.S. (such as ADRs). Some of the countries in which the Portfolio may invest may be considered to be developing and may involve special risks. For a discussion of these risks as well as the risks involved in investing in foreign securities in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. Investors in foreign securities may "hedge" their exposure to potentially unfavorable currency changes by purchasing a contract to exchange one currency for another on some future date at a specified exchange rate. In certain circumstances, a "proxy currency" may be substituted for the currency in which the investment is denominated, a strategy known as "proxy hedging." For a discussion of foreign currency contracts, certain risks involved therein, and the risks of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risks Factors and Investment Methods."
Fixed Income Securities. The Portfolio may invest in debt securities of any type without regard to quality or rating. Such securities would be purchased in companies that meet the investment criteria for the Portfolio. The price of a bond fluctuates with changes in interest rates, rising when interest rates fall and falling when interest rates rise.
High-Yield/High-Risk Investing. The Portfolio will not purchase a noninvestment-grade debt security (or junk bond) if immediately after such purchase the Portfolio would have more than 5% of its total assets invested in such securities. For a discussion of the risks involved in investing in high-yield lower-rated debt securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 10% of its total assets in hybrid instruments. Hybrids can have volatile prices and limited liquidity and their use by the Portfolio may not be successful. These instruments (a type of potentially high-risk derivative) can combine the characteristics of securities, futures, and options. For example, the principal amount, redemption, or conversion terms of a security could be related to the market price of some commodity, currency, or securities index. Such securities may bear interest or pay dividends at below market (or even relatively nominal) rates. Under certain conditions, the redemption value of such an investment could be zero. For a discussion of hybrid investments, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may acquire illiquid securities (no more than 15% of net assets). For a discussion of illiquid securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Private Placements (Restricted Securities). These securities are sold directly to a small number of investors usually institutions. Unlike public offerings, such securities are not registered with the SEC. Although certain of these securities may be readily sold, for example under Rule 144A, the sale of others may involve substantial delays and additional costs. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio will not invest more than 15% of its net assets in illiquid securities, but not more than 10% of its total assets in restricted securities (other than Rule 144A securities). For a discussion of illiquid and restricted securities and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Cash Position. The Portfolio will hold a certain portion of its assets in U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. For temporary, defensive purposes, the Portfolio may invest without limitation in such securities. This reserve position provides flexibility in meeting redemptions, expenses, and the timing of new investments and serves as a short-term defense during periods of unusual market volatility.
Borrowing. The Portfolio can borrow money from banks as a temporary measure for emergency purposes, to facilitate redemption requests, or for other purposes consistent with the Portfolio's investment objective and program. Such borrowings may be collateralized with Portfolio assets, subject to restrictions. For an additional discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Futures and Options. The Portfolio may enter into futures contracts (or options thereon) to hedge all or a portion of its portfolio, as a hedge against changes in prevailing levels of interest rates or currency exchange rates, or as an efficient means of adjusting its exposure to the bond, stock, and currency markets. The Portfolio will not use futures contracts for leveraging purposes. The Portfolio may also write call and put options and purchase put and call options on securities, financial indices, and currencies. The aggregate market value of the Portfolio's securities or currencies covering call or put options will not exceed 25% of the Portfolio's net assets. For an additional discussion of futures contracts and options and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Lending of Portfolio Securities. As a fundamental policy, for the purpose of realizing additional income, the Portfolio may lend securities with a value of up to 33 1/3% of its total assets to broker-dealers, institutional investors, or other persons. Any such loan will be continuously secured by collateral at least equal to the value of the security loaned. For an additional discussion of the Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Restrictions."
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Portfolio is capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
To achieve its objective, the Portfolio normally will invest at least 65% of its total assets in common stocks of U.S. companies with market capitalizations or annual revenues of $1.5 billion or less. Market capitalization is a measure of the size of a company and is based upon the total market value of a company's outstanding equity securities. Ordinarily, the common stocks of the U.S. companies selected for this Portfolio will not be listed on a national securities exchange but will be traded in the over-the-counter market.
Risks of Investments in Small and Medium-Sized Companies. The Portfolio normally will invest a significant proportion of its assets in the securities of small and medium-sized companies. As used with respect to this Portfolio, small and medium-sized companies are those which are still in the developing stages of their life cycles and are attempting to achieve rapid growth in both sales and earnings. Capable management and fertile operating areas are two of the most important characteristics of such companies. In addition, these companies should employ sound financial and accounting policies; demonstrate effective research and successful product development and marketing; provide efficient service; and possess pricing flexibility. The Portfolio tries to avoid investing in companies where operating results may be affected adversely by excessive competition, severe governmental regulation, or unsatisfactory productivity.
Investments in small and medium-sized companies involve greater risk than is customarily associated with more established companies. These companies often have sales and earnings growth rates which exceed those of large companies. Such growth rates may in turn be reflected in more rapid share price appreciation. However, smaller companies often have limited operating histories, product lines, markets, or financial resources, and they may be dependent upon one-person management. These companies may be subject to intense competition from larger entities, and the securities of such companies may have limited marketability and may be subject to more abrupt or erratic movements in price than securities of larger companies or the market averages in general. Therefore, the net asset value of the Portfolio's shares may fluctuate more widely than the popular market averages.
Fixed Income Securities. The Portfolio may invest in convertible securities, preferred stocks, bonds, debentures, and other corporate obligations when the Sub-advisor believes that these investments offer opportunities for capital appreciation. Current income will not be a substantial factor in the selection of these securities. Bonds, debentures, and corporate obligations (other than convertible securities and preferred stock) purchased by the Portfolio will be rated investment grade at the time of purchase (Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by Standard & Poor's ("S&P")). Bonds in the lowest investment grade category (Baa or BBB) may have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Convertible securities and preferred stocks purchased by the Portfolio may be rated in medium and lower categories by Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P), but will not be rated lower than B. The Portfolio may also invest in unrated convertible securities and preferred stocks in instances in which the Sub-advisor believes that the financial condition of the issuer or the protection afforded by the terms of the securities limits risk to a level similar to that of securities eligible for purchase by the Portfolio rated in categories no lower than B. Securities rated B are referred to as "high risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. At no time will the Portfolio have more than 5% of its assets invested in any fixed-income securities (not including convertible securities and preferred stock) which are rated below investment grade as a result of a reduction in rating after purchase or are unrated. For a description of securities ratings, see the Appendix to the Trust's SAI. For a discussion of the special risks involved in lower-rated debt securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. Credit risk relates to the ability of the issuer to meet interest or principal payments, or both, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, also will increase the credit risk to which those assets are subject. Market risk relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wider fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of straight debt securities whose ratings are downgraded below Baa or BBB subsequent to the Portfolio's purchase of the securities, unless such a disposition is necessary to reduce the Portfolio's holdings of such securities to less than 5% of its total assets. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which it invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the investments of the Portfolio through diversification and consideration of relevant factors affecting the value of securities. No assurance can be given, however, regarding the degree of success that will be achieved in this regard or in the Portfolio achieving its investment objective.
Foreign Securities. The Portfolio may invest in dollar-denominated American Depositary Receipts ("ADRs") which are traded on exchanges or over-the-counter in the United States without limit, and in foreign securities. The term "foreign securities" refers to securities of issuers, wherever organized, which, in the judgment of the Sub-advisor, have their principal business activities outside of the United States. The determination of whether an issuer's principal activities are outside of the United States will be based on the location of the issuer's assets, personnel, sales, and earnings, and specifically on whether more than 50% of the issuer's assets are located, or more than 50% of the issuer's gross income is earned, outside of the United States, or on whether the issuer's sole or principal stock exchange listing is outside of the United States. Foreign securities typically will be traded on the applicable country's principal stock exchange but may also be traded on regional exchanges or over-the-counter. For a discussion of ADRs, see this Prospectus under "Certain Risk Factors and Investment Methods."
Foreign investments of the Portfolio may include securities issued by companies located in countries not considered to be major industrialized nations. Such countries are subject to more economic, political and business risk than major industrialized nations, and the securities they issue are expected to be more volatile and more uncertain as to payment of interest and principal. The secondary market for such securities is expected to be less liquid than for securities of major industrialized nations. Such countries include (but are not limited to): Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland, Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela, Vietnam and the countries of the former Soviet Union. Investments may include securities created through the Brady Plan, a program under which heavily indebted countries have restructured their bank debt into bonds. Since the Portfolio will pay dividends in dollars, it may incur currency conversion costs. The Portfolio will not invest more than 25% of its total assets in any one foreign country.
Investments in foreign securities involve certain risks which are not typically associated with U.S. investments. For a discussion of the special risks involved in investing in developing countries and certain risks involved in investing in foreign securities, in general, including the risk of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Portfolio is permitted to use forward foreign currency contracts in connection with the purchase or sale of a specific security. The Portfolio may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange currency market, or on a forward basis to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in the underlying transactions, the Portfolio attempts to protect itself against possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold and the date on which such payments are made or received.
In addition, the Portfolio may enter into forward contracts for hedging purposes. When the Sub-advisor believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar (or sometimes against another currency), the Portfolio may enter into forward contracts to sell, for a fixed dollar or other currency amount, foreign currency approximating the value of some or all of the Portfolio's securities denominated in that currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible. The future value of such securities in foreign currencies changes as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it expires.
The Portfolio generally will not enter into forward contracts with a term greater than one year. In addition, the Portfolio generally will not enter into forward contracts or maintain a net exposure to such contracts where the fulfillment of the contracts would require the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. Under normal circumstances, consideration of the possibility of changes in currency exchange rates will be incorporated into the Portfolio's long-term investment strategies. In the event that forward contracts are considered to be illiquid, the securities would be subject to the Portfolio's limitation on investing in illiquid securities. For an additional discussion of foreign currency contracts and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of the market value of its net assets, measured at the time of purchase, in securities that are not readily marketable, including repurchase agreements maturing in more than seven days. Securities that are not readily marketable are those that, for whatever reason, cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Portfolio has valued the investment.
The Portfolio may invest in Rule 144A securities (securities issued in offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule 144A securities may be resold to qualified institutional buyers as defined under Rule 144A, and may or may not be deemed to be readily marketable. Factors considered in evaluating whether such a security is readily marketable include eligibility for trading, trading activity, dealer interest, purchase interest and ownership transfer requirements. The Sub-advisor is required to monitor the readily marketable nature of each Rule 144A security no less frequently than quarterly. For an additional discussion of Rule 144A securities and illiquid and restricted securities, and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Options and Policies."
Borrowing. The Portfolio may borrow money from banks for extraordinary or emergency purposes in amounts up to 10% of its net assets. While any borrowings are outstanding, no purchases of securities will be made. For a discussion of certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into futures contracts (or options thereon) for hedging purposes. The acquisition or sale of a futures contract could occur, for example, if the Portfolio held or considered purchasing equity securities and sought to protect itself from fluctuations in prices without buying or selling those securities. The Portfolio may also enter into interest rate and foreign currency futures contracts. Interest rate futures contracts currently are traded on a variety of fixed-income securities. Foreign currency futures contracts currently are traded on the British pound, Canadian dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price within a limited period of time. The Portfolio may write ("sell") covered call options on any or all of its portfolio securities from time to time as the Sub-advisor shall deem appropriate. The extent of the Portfolio's option writing activities will vary from time to time depending upon the Sub-advisor's evaluation of market, economic and monetary conditions.
The Portfolio may purchase options on securities and stock indices. Options on stock indices are similar to options on securities. However, because options on stock indices do not involve the delivery of an underlying security, the option represents the holder's right to obtain from the writer in cash a fixed multiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the exercise date. The purpose of these transactions is not to generate gain, but to "hedge" against possible loss. Therefore, successful hedging activity will not produce net gain to the Portfolio. The Portfolio may also purchase put and call options on futures contracts. An option on a futures contract provides the holder with the right to enter into a "long" position in the underlying futures contract, in the case of a call option, or a "short" position in the underlying futures contract, in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, a contract market clearing house establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
The Portfolio will not, as to any positions, whether long, short or a combination thereof, enter into futures and options thereon for which the aggregate initial margins and premiums exceed 5% of the fair market value of its total assets after taking into account unrealized profits and losses on options entered into. The Portfolio may buy and sell options on foreign currencies for hedging purposes in a manner similar to that in which futures on foreign currencies would be utilized. For an additional discussion of futures contracts and options and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Temporary Investments. Up to 100% of the assets of the Portfolio may be invested temporarily in U.S. government obligations, commercial paper, bank obligations, repurchase agreements, negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depository institutions, U.S. branches of foreign depository institutions, and foreign depository institutions, cash, or in other cash equivalents, if the Sub-advisor determines it to be appropriate for purposes of enhancing liquidity or preserving capital in light of prevailing market or economic conditions. While the Portfolio is in a defensive position, the opportunity to achieve capital growth will be limited, and, to the extent that this assessment of market conditions is incorrect, the Portfolio will be foregoing the opportunity to benefit from capital growth resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds, and issues of United States agencies, authorities and instrumentalities. Some government obligations, such as Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the United States Treasury. Other obligations, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the United States Treasury; and others, such as bonds issued by Federal National Mortgage Association (a private corporation), are supported only by the credit of the agency, authority or instrumentality. The Portfolio also may invest in obligations issued by the International Bank for Reconstruction and Development (IBRD or "World Bank").
The Portfolio may also acquire certificates of deposit and bankers' acceptances of banks which meet criteria established by the Trustees of the Trust, if any. A certificate of deposit is a short-term obligation of a bank. A bankers' acceptance is a time draft drawn by a borrower on a bank, usually relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions may be general obligations of the parent depository institution in addition to being an obligation of the issuing branch. These obligations, and those of foreign depository institutions, may be limited by the terms of the specific obligation and by governmental regulation. The payment of these obligations, both interest and principal, also may be affected by governmental action in the country of domicile of the institution or branch, such as imposition of currency controls and interest limitations. In connection with these investments, the Portfolio will be subject to the risks associated with the holding of portfolio securities overseas, such as possible changes in investment or exchange control regulations, expropriation, confiscatory taxation, or political or financial instability.
Obligations of U.S. branches of foreign depository institutions may be general obligations of the parent depository institution in addition to being an obligation of the issuing branch, or may be limited by the terms of a specific foreign regulation applicable to the depository institutions and by government regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with banks or well-established securities dealers. All repurchase agreements entered into by the Portfolio will be fully collateralized and marked to market daily. The Portfolio has not adopted any limits on the amount of its total assets that may be invested in repurchase agreements which mature in less than seven days. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio reserves the right to sell its securities, regardless of the length of time that they have been held, when it is determined by the Sub-advisor that those securities have attained or are unable to meet the investment objective of the Portfolio. The Portfolio may engage in short-term trading and therefore normally will have annual portfolio turnover rates which are considered to be high and may be greater than those of other investment companies seeking capital appreciation. Portfolio turnover rates may also increase as a result of the need for the Portfolio to effect significant amounts of purchases or redemptions of portfolio securities due to economic, market, or other factors that are not within the Sub-advisor's control. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Founders Passport Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
To achieve its objective, the Portfolio normally invests primarily in securities issued by foreign companies which have market capitalizations or annual revenues of $1 billion or less. These securities may represent companies in both established and emerging economies throughout the world.
At least 65% of the Portfolio's total assets normally will be invested in foreign securities representing a minimum of three countries. The Portfolio may invest in larger foreign companies or in U.S.-based companies if, in the Sub-advisor's opinion, they represent better prospects for capital appreciation.
Risks of Investments in Small and Medium-Sized Companies. The Portfolio normally will invest a significant proportion of its assets in the securities of small and medium-sized companies. As used with respect to this Portfolio, small and medium-sized companies are those which are still in the developing stages of their life cycles and are attempting to achieve rapid growth in both sales and earnings. Capable management and fertile operating areas are two of the most important characteristics of such companies. In addition, these companies should employ sound financial and accounting policies; demonstrate effective research and successful product development and marketing; provide efficient service; and possess pricing flexibility.
Investments in small and medium-sized companies involve greater risk than is customarily associated with more established companies. These companies often have sales and earnings growth rates which exceed those of large companies. Such growth rates may in turn be reflected in more rapid share price appreciation. However, smaller companies often have limited operating histories, product lines, markets, or financial resources, and they may be dependent upon one-person management. These companies may be subject to intense competition from larger entities, and the securities of such companies may have limited marketability and may be subject to more abrupt or erratic movements in price than securities of larger companies or the market averages in general. Therefore, the net asset value of the Portfolio's shares may fluctuate more widely than the popular market averages.
Foreign Securities. The Portfolio may invest without limit in American Depositary Receipts ("ADRs") and foreign securities. The term "foreign securities" refers to securities of issuers, wherever organized, which, in the judgment of the Sub-advisor, have their principal business activities outside of the United States. The determination of whether an issuer's principal activities are outside of the United States will be based on the location of the issuer's assets, personnel, sales, and earnings, and specifically on whether more than 50% of the issuer's assets are located, or more than 50% of the issuer's gross income is earned, outside of the United States, or on whether the issuer's sole or principal stock exchange listing is outside of the United States. Foreign securities typically will be traded on the applicable country's principal stock exchange but may also be traded on regional exchanges or over-the-counter. For a discussion of ADRs, see this Prospectus under "Certain Risk Factors and Investment Methods."
Foreign investments of the Portfolio may include securities issued by companies located in countries not considered to be major industrialized nations. Such countries are subject to more economic, political and business risk than major industrialized nations, and the securities they issue are expected to be more volatile and more uncertain as to payment of interest and principal. The secondary market for such securities is expected to be less liquid than for securities of major industrialized nations. Such countries may include (but are not limited to): Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland, Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela, Vietnam and the countries of the former Soviet Union. Investments may include securities created through the Brady Plan, a program under which heavily indebted countries have restructured their bank debt into bonds.
Investments in foreign securities involve certain risks which are not typically associated with U.S. investments. For a discussion of the special risks involved in investing in developing countries and certain risks involved in investing in foreign securities, in general, including the risk of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Portfolio is permitted to use forward foreign currency contracts in connection with the purchase or sale of a specific security. The Portfolio may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange currency market, or on a forward basis to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in the underlying transactions, the Portfolio attempts to protect itself against possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold and the date on which such payments are made or received.
In addition, the Portfolio may enter into forward contracts for hedging purposes. When the Sub-advisor believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar (or sometimes against another currency), the Portfolio may enter into forward contracts to sell, for a fixed-dollar or other currency amount, foreign currency approximating the value of some or all of the Portfolio's securities denominated in that currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible. The future value of such securities in foreign currencies changes as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it expires.
The Portfolio generally will not enter into forward contracts with a term greater than one year. In addition, the Portfolio generally will not enter into forward contracts or maintain a net exposure to such contracts where the fulfillment of the contracts would require the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. Under normal circumstances, consideration of the possibility of changes in currency exchange rates will be incorporated into the Portfolio's long-term investment strategies. In the event that forward contracts are considered to be illiquid, the securities would be subject to the Portfolio's limitation on investing in illiquid securities. For an additional discussion of foreign currency contracts and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Fixed-Income Securities. The Portfolio may invest in convertible securities, preferred stocks, bonds, debentures and other corporate obligations when the Sub-advisor believes that these investments offer opportunities for capital appreciation. Current income will not be a substantial factor in the selection of these securities.
The Portfolio will only invest in bonds, debentures, and corporate obligations (other than convertible securities and preferred stock) rated investment grade (BBB or higher) at the time of purchase. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Convertible securities and preferred stocks purchased by the Portfolio may be rated in medium and lower categories by Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P), but will not be rated lower than B. The Portfolio may also invest in unrated convertible securities and preferred stocks in instances in which the Sub-advisor believes that the financial condition of the issuer or the protection afforded by the terms of the securities limits risk to a level similar to that of securities eligible for purchase by the Portfolio rated in categories no lower than B. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities (not including convertible securities and preferred stock) which are rated below investment grade as a result of a reduction in rating after purchase or are unrated. For a description of securities ratings, see the Appendix to the Trust's SAI. For a discussion of the special risks involved in investing in lower-rated debt securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. Credit risk relates to the ability of the issuer to meet interest or principal payments, or both, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, also will increase the credit risk to which those assets are subject. Market risk relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wider fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of straight debt securities whose ratings are downgraded below Baa or BBB subsequent to the Portfolio's purchase of the securities, unless such a disposition is necessary to reduce the Portfolio's holdings of such securities to less than 5% of its total assets. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which it invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the investments of the Portfolio through diversification and consideration of relevant factors affecting the value of securities. No assurance can be given, however, regarding the degree of success that will be achieved in this regard or in the Portfolio achieving its investment objective.
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of the market value of its net assets, measured at the time of purchase, in securities that are not readily marketable, including repurchase agreements maturing in more than seven days. Securities that are not readily marketable are those that, for whatever reason, cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Portfolio has valued the investment.
The Portfolio may invest in Rule 144A securities (securities issued in offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule 144A securities may be resold to qualified institutional buyers as defined under Rule 144A and may or may not be deemed to be readily marketable. Factors considered in evaluating whether such a security is readily marketable include eligibility for trading, trading activity, dealer interest, purchase interest, and ownership transfer requirements. The Sub-advisor is required to monitor the readily marketable nature of each Rule 144A security no less frequently than quarterly. For an additional discussion of Rule 144A securities and illiquid and restricted securities, and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Borrowing. The Portfolio may borrow money from banks in amounts up to 33 1/3% of the Portfolio's total assets. If the Portfolio borrows money, its share price may be subject to greater fluctuation until the borrowing is repaid. The Portfolio will attempt to minimize such fluctuations by not purchasing securities when borrowings are greater than 5% of the value of the Portfolio's total assets. For an additional discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Futures Contracts and Options. The Portfolio may enter into futures contracts (or options thereon) for hedging purposes. The acquisition or sale of a futures contract could occur, for example, if the Portfolio held or considered purchasing equity securities and sought to protect itself from fluctuations in prices without buying or selling those securities. The Portfolio may also enter into interest rate and foreign currency futures contracts. Interest rate futures contracts currently are traded on a variety of fixed-income securities. Foreign currency futures contracts currently are traded on the British pound, Canadian dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price within a limited period of time. The Portfolio may write ("sell") covered call options on any or all of its portfolio securities from time to time as the Sub-advisor shall deem appropriate. The extent of the Portfolio's option writing activities will vary from time to time depending upon the Sub-advisor's evaluation of market, economic and monetary conditions.
The Portfolio may purchase options on securities and stock indices. Options on stock indices are similar to options on securities. However, because options on stock indices do not involve the delivery of an underlying security, the option represents the holder's right to obtain from the writer in cash a fixed multiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the exercise date. The purpose of these transactions is not to generate gain, but to "hedge" against possible loss. Therefore, successful hedging activity will not produce net gain to the Portfolio. The Portfolio may also purchase put and call options on futures contracts. An option on a futures contract provides the holder with the right to enter into a "long" position in the underlying futures contract, in the case of a call option, or a "short" position in the underlying futures contract, in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, a contract market clearing house establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
The Portfolio will not, as to any positions, whether long, short or a combination thereof, enter into futures and options thereon for which the aggregate initial margins and premiums exceed 5% of the fair market value of its total assets after taking into account unrealized profits and losses on options entered into. The Portfolio may buy and sell options on foreign currencies for hedging purposes in a manner similar to that in which futures on foreign currencies would be utilized. For an additional discussion of futures contracts and options and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. Up to 100% of the assets of the Portfolio may be invested temporarily in U.S. government obligations, commercial paper, bank obligations, repurchase agreements, negotiable U.S. dollar-denominated obligations of domestic and foreign branches of U.S. depository institutions, U.S. branches of foreign depository institutions, and foreign depository institutions, in cash, or in other cash equivalents, if the Sub-advisor determines it to be appropriate for purposes of enhancing liquidity or preserving capital in light of prevailing market or economic conditions. While the Portfolio is in a defensive position, the opportunity to achieve capital growth will be limited, and, to the extent that this assessment of market conditions is incorrect, the Portfolio will be foregoing the opportunity to benefit from capital growth resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds, and issues of United States agencies, authorities and instrumentalities. Some government obligations, such as Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the United States Treasury. Other obligations, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the United States Treasury; and others, such as bonds issued by Federal National Mortgage Association (a private corporation), are supported only by the credit of the agency, authority or instrumentality. The Portfolio also may invest in obligations issued by the International Bank for Reconstruction and Development (IBRD or "World Bank").
The Portfolio may also acquire certificates of deposit and bankers' acceptances of banks which meet criteria established by the Board of Trustees of the Trust, if any. A certificate of deposit is a short-term obligation of a bank. A bankers' acceptance is a time draft drawn by a borrower on a bank, usually relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions may be general obligations of the parent depository institution in addition to being an obligation of the issuing branch. These obligations, and those of foreign depository institutions, may be limited by the terms of the specific obligation and by governmental regulation. The payment of these obligations, both interest and principal, also may be affected by governmental action in the country of domicile of the institution or branch, such as imposition of currency controls and interest limitations. In connection with these investments, the Portfolio will be subject to the risks associated with the holding of portfolio securities overseas, such as possible changes in investment or exchange control regulations, expropriation, confiscatory taxation, or political or financial instability.
Obligations of U.S. branches of foreign depository institutions may be general obligations of the parent depository institution in addition to being an obligation of the issuing branch, or may be limited by the terms of a specific foreign regulation applicable to the depository institutions and by government regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with banks or well-established securities dealers. All repurchase agreements entered into by the Portfolio will be fully collateralized and marked to market daily. The Portfolio has not adopted any limits on the amount of its total assets that may be invested in repurchase agreements which mature in less than seven days. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio reserves the right to sell its securities, regardless of the length of time that they have been held, when it is determined by the Sub-advisor that those securities have attained or are unable to meet the investment objective of the Portfolio. The Portfolio may engage in short-term trading and therefore normally will have annual portfolio turnover rates which are considered to be high and may be greater than those of other investment companies seeking capital appreciation. Portfolio turnover rates may also increase as a result of the need for the Portfolio to effect significant amounts of purchases or redemptions of portfolio securities due to economic, market, or other factors that are not within the Sub-advisor's control. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high current income while following sound investment practices. This is a fundamental objective of the Portfolio. Capital growth potential is an additional, but secondary, consideration in the selection of portfolio securities.
Investment Policies:
The Portfolio seeks to achieve its objective by investing in securities which will provide a relatively high yield and stable return and which, over a period of years, may also provide capital appreciation. The Portfolio normally will invest at least 65% of its assets in dividend-paying, marketable common stocks of domestic and foreign issuers. Up to 10% of the Portfolio's assets may be invested in equity securities that do not pay regular dividends. The Portfolio also will invest in convertible bonds, preferred stocks and debt securities. In periods of uncertain market and economic conditions, as determined by the Board of Trustees, the Portfolio may depart from the basic investment objective and assume a defensive position with up to 100% of its assets temporarily invested in high quality corporate bonds, or notes and government issues, or held in cash.
The Portfolio's investments in common stocks may, of course, decline in value. To minimize the risk this presents, the Sub-advisor only invests in common stocks and equity securities of domestic and foreign issuers which are marketable; and will not invest more than 5% of the Portfolio's assets in the securities of any one company or more than 25% of the Portfolio's assets in any one industry.
Debt Securities. The Portfolio's investments in debt securities will generally be subject to both credit risk and market risk. Credit risk relates to the ability of the issuer to meet interest or principal payments, or both, as they come due. Market risk relates to the fact that the market values of debt securities in which the Portfolio invests generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of debt securities, whereas a decline in interest rates will tend to increase their values. Although the Sub-advisor will limit the Portfolio's debt security investments to securities it believes are not highly speculative, both kinds of risk are increased by investing in debt securities rated below the top four grades by Standard & Poor's Corporation ("Standard & Poor's) or Moody's Investors Services, Inc. ("Moody's") and unrated debt securities, other than Government National Mortgage Association modified pass-through certificates.
In order to decrease its risk in investing in debt securities, the Portfolio will invest no more than 15% of its assets in debt securities rated below AAA, AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's, and in no event will the Portfolio ever invest in a debt security rated below Caa by Moody's or CCC by Standard & Poor's. Lower rated bonds by Moody's (categories Ba, B, Caa) are of poorer quality and may have speculative characteristics. Bonds rated Caa may be in default or there may be present elements of danger with respect to principal or interest. Lower rated bonds by Standard & Poor's (categories BB, B, CCC) include those which are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with their terms; BB indicates the lowest degree of speculation and CCC a high degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. For a description of securities ratings, see the Appendix to the Trust's SAI.
While the Sub-advisor will monitor all of the debt securities in the Portfolio for the issuers' ability to make required principal and interest payments and other quality factors, the Sub-advisor may retain in the Portfolio a debt security whose rating is changed to one below the minimum rating required for purchase of such a security. For a discussion of the special risks involved in lower-rated bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. There are no fixed limitations regarding portfolio turnover. The rate of portfolio turnover may fluctuate as a result of constantly changing economic conditions and market circumstances. Securities initially satisfying the Portfolio's basic objectives and policies may be disposed of when they are no longer suitable. As a result, the Portfolio's annual portfolio turnover rate may be higher than that of other investment companies seeking current income with capital growth as a secondary consideration. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with respect to debt instruments eligible for investment by the Portfolio. These agreements are entered into with member banks of the Federal Reserve System, registered broker-dealers, and registered government securities dealers which are deemed creditworthy. A repurchase agreement is a means of investing moneys for a short period. In a repurchase agreement, the Portfolio acquires a debt instrument (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance or a certificate of deposit) subject to resale to the seller at an agreed upon price and date (normally, the next business day). In the event that the original seller defaults on its obligation to repurchase the security, the Portfolio could incur costs or delays in seeking to sell such security. To minimize risk, the securities underlying each repurchase agreement will be maintained with the Portfolio's custodian in an amount at least equal to the repurchase price under the agreement (including accrued interest), and such agreements will be effected only with parties that meet certain creditworthiness standards established by the Trust's Board of Trustees. The Portfolio will not enter into a repurchase agreement maturing in more than seven days if as a result more than 15% of the Portfolio's net assets would be invested in such repurchase agreements and other illiquid securities. The Portfolio has not adopted any limit on the amount of its total assets that may be invested in repurchase agreements maturing in seven days or less.
Lending Portfolio Securities. The Portfolio also may lend its securities to qualified brokers, dealers, banks, or other financial institutions. This practice permits the Portfolio to earn income, which, in turn, can be invested in additional securities to pursue the Portfolio's investment objective. 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, equal to at least 100% of the current market value of the loaned securities, determined on a daily basis. Lending securities involves certain risks, the most significant of which is the risk that a borrower may fail to return a portfolio security. The Sub-advisor monitors the creditworthiness of borrowers in order to minimize such risks. The Portfolio will not lend any security if, as a result of such loan, the aggregate value of securities then on loan would exceed 33-1/3% of the Portfolio's total net assets (taken at market value). For an additional discussion of the Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Foreign Securities. The Portfolio may invest up to 25% of its total assets in foreign securities. Investments in securities of foreign companies and in foreign markets involve certain additional risks not associated with investments in domestic companies and markets. The Portfolio may invest in countries considered to be developing which may involve special risks. For a discussion of these risks and the risks of investing in foreign securities in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market. The Board of Trustees, or the Investment Manager or the Sub-advisor acting pursuant to authority delegated by the Board of Trustees, may determine that a readily available market exists for securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or any successor to that rule, and therefore that such securities are not subject to the foregoing limitation. For a discussion of restricted securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek to maximize total return, consistent with preservation of capital. The Sub-advisor will seek to employ prudent investment management techniques, especially in light of the broad range of investment instruments in which the Portfolio may invest.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor will utilize economic forecasting, interest rate anticipation, credit and call risk analysis, foreign currency exchange rate forecasting, and other security selection techniques. The proportion of the Portfolio's assets committed to investment in securities with particular characteristics (such as maturity, type and coupon rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign economies, the financial markets and other factors. The Portfolio will invest at least 65% of its assets in the following types of securities which may be issued by domestic or foreign entities and denominated in U.S. dollars or foreign currencies: securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities; corporate debt securities, including convertible securities and commercial paper; mortgage and other asset-backed securities; inflation-indexed bonds issued by both governments and corporations; structured notes, including hybrid or "indexed" securities, and loan participations; variable and floating rate debt securities; bank certificates of deposit, fixed time deposits and bankers' acceptances; repurchase agreements and reverse repurchase agreements; obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies or supranational entities; and foreign currency exchange-related securities, including foreign currency warrants.
The Portfolio will invest in a diversified portfolio of fixed-income securities of varying maturities. The average portfolio duration of the Portfolio normally will vary within a three- to six-year time frame based on the Sub-advisor's forecast for interest rates. The Portfolio may invest up to 10% of its assets in fixed income securities that are rated below investment grade but rated B or higher by Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") (or, if unrated, determined by the Sub-advisor to be of comparable quality). The Portfolio will maintain an overall dollar-weighted average quality of at least A (as rated by Moody's or S&P). In the event that ratings services assign different ratings to the same security, the Sub-advisor will determine which rating it believes best reflects the security's quality and risk at that time, which may be the higher of the several assigned ratings. Securities rated B are judged to be predominantly speculative with respect to their capacity to pay interest and repay principal in accordance with the terms of the obligations. The Sub-advisor will seek to reduce the risks associated with investing in such securities by limiting the Portfolio's holdings in such securities and by the depth of its own credit analysis. For a discussion of the risks involved in lower-rated high-yield bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." See the Appendix to the Trust's SAI for a description of Moody's and S&P's ratings applicable to fixed income securities.
The Portfolio may invest up to 20% of its assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. Portfolio holdings will be concentrated in areas of the bond market (based on quality, sector, coupon or maturity) which the Sub-advisor believes to be relatively undervalued.
The Portfolio may buy or sell interest rate futures contracts, options on interest rate futures contracts and options on debt securities for the purpose of hedging against changes in the value of securities which the Portfolio owns or anticipates purchasing due to anticipated changes in interest rates. The Portfolio may engage in foreign currency transactions. Foreign currency exchange transactions may be entered into the purpose of hedging against foreign currency exchange risk arising from the Portfolio's investment or anticipated investment in securities denominated in foreign currencies.
The Portfolio may enter into swap agreements for the purposes of attempting to obtain a particular investment return at a lower cost to the Portfolio than if the Portfolio had invested directly in an instrument that provided that desired return. In addition, the Portfolio may purchase and sell securities on a when-issued and delayed delivery basis and enter into forward commitments to purchase securities; lend its securities to brokers, dealers and other financial institutions to earn income; and borrow money for investment purposes.
The "total return" sought by the Portfolio will consist of interest and dividends from underlying securities, capital appreciation reflected in unrealized increases in value of portfolio securities or realized from the purchase and sale of securities, and use of futures and options or gains from favorable changes in foreign currency exchange rates. Generally, over the long term, the total return obtained by a portfolio investing primarily in fixed income securities is not expected to be as great as that obtained by a portfolio investing in equity securities. At the same time, the market risk and volatility of a fixed income portfolio is expected to be less than that of an equity portfolio, so that a fixed income portfolio is generally considered to be a more conservative investment. The change in the market value of fixed income securities (and therefore their capital appreciation or depreciation) is largely a function of changes in the current level of interest rates. When interest rates are falling, a portfolio with a shorter duration generally will not generate as high a level of total return as a portfolio with a longer duration. Conversely, when interest rates are rising, a portfolio with a shorter duration will generally outperform longer duration portfolios. When interest rates are flat, shorter duration portfolios generally will not achieve as high a level of return as longer duration portfolios (assuming that long-term interest rates are higher than short-term interest rates, which is commonly the case). With respect to the composition of any fixed income portfolio, the longer the duration of the portfolio, the greater the potential for total return, with, however, greater attendant market risk and price volatility than for a portfolio with a shorter duration. The market value of securities denominated in currencies other than U.S. dollars also may be affected by movements in foreign currency exchange rates.
Unless otherwise indicated, all limitations applicable to Portfolio investments (as stated in this Prospectus and in the Trust's SAI) apply only at the time a transaction is entered into. Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed to be of comparable quality), or change in the percentage of Portfolio assets invested in certain securities or other instruments, or change in the average duration of the Portfolio's investment portfolio, resulting from market fluctuations or other changes in the Portfolio's total assets will not require the Portfolio to dispose of an investment until the Sub-advisor determines that it is practicable to sell or close out the investment without undue market consequences to the Portfolio.
The Portfolio's investments include, but are not limited to, the following:
U.S. Government Securities. 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, and securities guaranteed by the Government National Mortgage Association ("GNMA"), 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 U.S. Treasury; others, such as those of the Federal National Mortgage Association ("FNMA"), are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities. Debt securities may be acquired with warrants attached. Corporate income-producing securities may also include forms of preferred or preference stock. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies. Investment in corporate debt securities that are below investment grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative" both by Moody's and S&P. For a description of the special risks involved with lower-rated high-yield bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." For a description of securities ratings, see the Appendix to the Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible securities, which may offer higher income than the common stocks into which they are convertible. Typically, convertible securities are callable by the issuing company, which may, in effect, force conversion before the holder would otherwise choose.
The convertible securities in which the Portfolio may invest consist of bonds, notes, debentures and preferred stocks which may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. The Portfolio may be required to permit the issuer of a convertible security to redeem the security, convert it into the underlying common stock, or sell it to a third party. Thus, the Portfolio may not be able to control whether the issuer of a convertible security chooses to convert that security. If the issuer chooses to do so, this action could have an adverse effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable investments, pure fixed income opportunities may be unattractive or limited due to insufficient supply, legal or technical restrictions. In such cases, the Portfolio may consider equity securities or convertible bonds to gain exposure to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed- and floating-rate loans arranged through private negotiations between an issuer of debt instruments and one or more financial institutions ("lenders"). Generally, the Portfolio's investments in loans are expected to take the form of loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated among several lenders, usually banks. The Portfolio may participate in such syndicates, or can buy part of a loan, becoming a direct lender. Participations and assignments involve special types of risk, including limited marketability and the risks of being a lender. See "Illiquid Securities" below for a discussion of the limits on the Portfolio's investments in loan participations and assignments with limited marketability. If the Portfolio purchases a participation, it may only be able to enforce its rights through the lender, and may assume the credit risk of the lender in addition to the borrower. In assignments, the Portfolio's rights against the borrower may be more limited than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.
The Portfolio may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide the Portfolio with a certain degree of protection against rises in interest rates, the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality. The Portfolio will not invest more than 5% of its net assets in any combination of inverse floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on these bonds is generally fixed at issuance at a rate lower than typical bonds. Over the life of an inflation-indexed bond, however, interest will be paid based on a principal value which is adjusted for inflation. For example, if the Portfolio purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates (which are nominal interest rates adjusted for inflation). If inflation were to rise at a faster rate than nominal interest rates, real interest rates would decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates would rise, leading to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds. As such, there is no trading history of these securities, and there can be no assurance that a liquid market in these instruments will develop, although one is expected. There also can be no assurance that the U.S. Treasury will issue any particular amount of inflation-indexed bonds. Certain foreign governments, such as the United Kingdom, Canada and Australia, have a longer history of issuing inflation-indexed bonds, and there may be a more liquid market in certain of these countries for these securities.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may invest all of its assets in mortgage-related and other asset-backed securities, including mortgage pass-through securities and collateralized mortgage obligations. The value of some mortgage- or asset-backed securities in which the Portfolio invests may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Portfolio, the ability of the Portfolio to successfully utilize these instruments may depend in part upon the ability of the Sub-advisor to forecast interest rates and other economic factors correctly. For a description of these securities and the special risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Repurchase Agreements. For the purpose of achieving income, the Portfolio may enter into repurchase agreements, subject to guidelines promulgated by the Board of Trustees of the Trust. The Portfolio will not invest more than 15% of its net assets (taken at current market value) in repurchase agreements maturing in more than seven days. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A reverse repurchase agreement involves the sale of a security by the Portfolio and its agreement to repurchase the instrument at a specified time and price, and for some purposes may be considered a borrowing. The Portfolio may also enter into dollar rolls, in which the Portfolio sells mortgage-backed or other securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities on a specified future date. In the case of dollar rolls involving mortgage-backed securities, the mortgage-backed securities that are purchased will be of the same type and will have the same interest rate as those sold, but will be supported by different pools of mortgages. The Portfolio foregoes principal and interest paid during the roll period on the securities sold in a dollar roll, but the Portfolio is compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the securities sold. The Portfolio also could be compensated through the receipt of fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset value of any increase or decrease in the value of the Portfolio and may cause the Portfolio to liquidate portfolio positions when it would not be advantageous to do so. The Portfolio will maintain a segregated account consisting of cash or other liquid assets to cover its obligations under reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls will be subject to the Portfolio's limitations on borrowing as discussed in the Trust's SAI under "Investment Restrictions." Apart from transactions involving reverse repurchase agreements and dollar rolls, the Portfolio will not borrow money, except for temporary administrative purposes. For an additional discussion of the risks of borrowing and of reverse repurchase agreements and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. For the purpose of achieving income, the Portfolio may lend its portfolio securities, provided (1) the loan is secured continuously by collateral consisting of U.S. Government securities or cash or cash equivalents (cash, U.S. Government securities, negotiable certificates of deposit, bankers' acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal to the current market value of the securities loaned, (2) the Portfolio may at any time call the loan and obtain the return of securities loaned, (3) the Portfolio will receive any interest or dividends received on the loaned securities, and (4) the aggregate value of the securities loaned will not at any time exceed one-third of the total assets of the Portfolio. For an additional discussion of the Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The Portfolio may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. These transactions involve a commitment by the Portfolio to purchase or sell securities for a predetermined price or yield, with payment and delivery taking place more than seven days in the future, or after a period longer than the customary settlement period for that type of security. When such purchases are outstanding, the Portfolio will set aside and maintain until the settlement date, in a segregated account, cash or other liquid assets in an amount sufficient to meet the purchase price. Typically, no income accrues on securities the Portfolio has committed to purchase prior to the time delivery of the securities is made, although the Portfolio may earn income on securities it has deposited in a segregated account. When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, the Portfolio assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. Because the Portfolio is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Portfolio's other investments. If the Portfolio remains substantially fully invested at a time when when-issued, delayed delivery, or forward commitment purchases are outstanding, the purchases may result in a form of leverage. When the Portfolio has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Portfolio does not participate in future gains or losses with respect to the security. If the other party to a transaction fails to deliver or pay for the securities, the Portfolio could miss a favorable price or yield opportunity or could suffer a loss. The Portfolio may dispose of or renegotiate a transaction after it is entered into, and may sell when-issued or forward commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage limitation on the extent to which the Portfolio may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis.
Short Sales. The Portfolio may from time to time effect short sales as part of its overall portfolio management strategies, including the use of derivative instruments, or to offset potential declines in value of long positions in similar securities as those sold short. A short sale (other than a short sale "against the box") is a transaction in which the Portfolio sells a security it does not own at the time of the sale in anticipation that the market price of that security will decline. To the extent that the Portfolio engages in short sales, it must (except in the case of short sales against the box) maintain asset coverage in the form of cash or other liquid assets in a segregated account. A short sale is "against the box" to the extent that the Portfolio contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in fixed income securities of non-U.S. issuers. The Portfolio will concentrate its foreign investments to securities of issuers based in developed countries. The Portfolio may invest up to 10% of its assets in securities of issuers based in countries with emerging securities markets. The Sub-advisor has broad discretion to identify and invest in countries that it considers to qualify as emerging securities markets. Investing in the securities of issuers in any foreign country involves special risks and considerations not typically associated with investing in U.S. companies. For a discussion of the risks involved in investing in foreign securities, in general, and the special risks of investing in developing countries, as well as the risks of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for that reason do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (but primarily the U.S. dollar), and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government Securities. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities in countries issuing Brady Bonds, investments in Brady Bonds may be viewed as speculative. There can be no assurance that Brady Bonds acquired by the Portfolio will not be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolio to suffer a loss of interest or principal on any of its holdings.
Foreign Currency Transactions. The Portfolio may buy and sell foreign currency futures contracts and options on foreign currencies and foreign currency futures contracts, enter into forward foreign currency exchange contracts to reduce the risks of adverse changes in foreign exchange rates. The Portfolio may enter into these contracts for the purpose of hedging against foreign exchange risk arising from the Portfolio's investment or anticipated investment in securities denominated in foreign currencies. For a discussion of foreign currency transactions and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Options on Securities, Securities Indexes and Currencies. The Portfolio may purchase and write call and put options on securities, securities indexes and on foreign currencies, and enter into futures contracts and use options on futures contracts as further described below. The Portfolio may also enter into swap agreements with respect to foreign currencies, interest rates and securities indexes. The Portfolio may use these techniques to hedge against changes in interest rates, foreign currency, exchange rates or securities prices or as part of its overall investment strategy.
The Portfolio may purchase options on securities to protect holdings in an underlying or related security against a substantial decline in market value. A Portfolio may purchase call options on securities to protect against substantial increases in prices of securities the Portfolio intends to purchase pending its ability to invest in such securities in an orderly manner. The Portfolio may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. The Portfolio may write a call or put option only if it is "covered" by the Portfolio holding a position in the underlying securities or by other means which would permit immediate satisfaction of the Portfolio's obligation as writer of the option. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series.
The Portfolio may also invest in foreign-denominated securities and may buy or sell put and call options on foreign currencies. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Portfolio to reduce foreign currency risk using such options. For a discussion of options and the risks involved therein, as well as the risks involved in investing in foreign currency, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and currency exchange rate swap agreements for the purposes of attempting to obtain a particular desired return at a lower cost to the Portfolio than if the Portfolio had invested directly in an instrument that yielded the desired return. Swap agreements are two-party contracts entered into primarily by 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. Commonly used swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate or "cap"; interest floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of a swap agreement is only a fictive basis on which to calculate the obligations which the parties to a swap agreement have agreed to exchange. Most swap agreements entered into by the Portfolio would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the 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 ("net amount"). The Portfolio's obligations under a swap agreement will be accrued daily (offset against amounts owed to the Portfolio) and any accrued unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash or other liquid assets to avoid any potential leveraging of the Portfolio. The Portfolio will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Portfolio's total assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be successful in furthering its investment objective will depend on the Portfolio's ability to predict correctly whether certain types of investment are likely to produce greater returns than other investments. Because they are two-party contracts and because they have terms of longer than seven days, swap agreements may be considered illiquid. Moreover, the Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of a default or bankruptcy of a swap agreement counterparty. The Sub-advisor will cause the Portfolio to 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 Portfolio by the Internal Revenue Code may limit the Portfolio's ability to use swap agreements. The swaps market is relatively new and is largely unregulated. It is possible that developments in the swaps market, including potential governmental regulation, could adversely affect the Portfolio's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may invest in interest rate futures contracts, stock index futures contracts and foreign currency futures contracts and options thereon that are traded on a U.S. or foreign exchange or board of trade. The Portfolio will only enter into futures contracts or futures options which are standardized and traded on a U.S. or foreign exchange or board of trade, or similar entity, or quoted on an automated quotation system. The Portfolio will use financial futures contracts and related options only for "bona fide" hedging purposes, as such term is defined in the applicable regulations of the CFTC, or, with respect to positions in financial futures and related options that do not qualify as "bona fide hedging" positions, will enter such non-hedging positions only to the extent that aggregate initial margin deposit plus premiums paid by it for the open futures options position, less the amount by which any such positions are "in-the-money," would not exceed 5% of the Portfolio's total assets. For an additional discussion of futures contracts and related options, and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in hybrid instruments. A hybrid instrument can combine the characteristics of securities, futures, and options. Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. For an additional discussion of hybrid instruments and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid securities. Certain illiquid securities may require pricing at fair value as determined in good faith under the supervision of the Board of Trustees. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Portfolio has valued the securities. Illiquid securities are considered to include, among other things, written over-the-counter options, securities or other liquid assets being used as cover for such options, repurchase agreements with maturities in excess of seven days, certain loan participation interests, fixed time deposits which are not subject to prepayment or provide for withdrawal penalties upon prepayment (other than overnight deposits), securities that are subject to legal or contractual restrictions on resale and other securities whose disposition is restricted under the federal securities laws (other than securities issued pursuant to Rule 144A under the Securities Act of 1933 that the Sub-advisor has determined to be liquid under procedures approved by the Board of Trustees). Illiquid securities may include privately placed securities, which are sold directly to a small number of investors, usually institutions. Unlike public offerings, such securities are not registered under the federal securities laws. Although certain of these securities may be readily sold, for example, under Rule 144A, others may be illiquid, and their sale may involve substantial delays and additional costs.
Portfolio Turnover. The Portfolio may have higher portfolio turnover than other mutual funds with similar investment objectives. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek to maximize total return, consistent with preservation of capital and prudent investment management. This is a fundamental objective of the Portfolio.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor utilizes economic forecasting, interest rate anticipation, credit and call risk analysis, foreign currency exchange rate forecasting, and other security selection techniques. The proportion of each Portfolio's assets committed to investment in securities with particular characteristics (such as maturity, type and coupon rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign economies, the financial markets, and other factors.
The Portfolio will invest at least 65% of its total assets in the following types of securities, which may be issued by domestic or foreign entities and denominated in U.S. dollars or foreign currencies: securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S. Government securities"); corporate debt securities, including convertible securities and commercial paper; mortgage and other asset-backed securities; inflation-indexed bonds issued by both governments and corporations; structured notes, including hybrid or "indexed" securities, and loan participations; variable and floating rate debt securities; bank certificates of deposit, fixed time deposits and bankers' acceptances; repurchase agreements and reverse repurchase agreements; obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies or supranational entities; and foreign currency exchange-related securities, including foreign currency warrants.
The Portfolio may hold different percentages of its assets in these various types of securities, and may invest all of its assets in derivative instruments or in mortgage- or asset-backed securities. There are special risks involved in these instruments.
The Portfolio will invest in a diversified portfolio of fixed income securities of varying maturities. The average portfolio duration of the Portfolio generally will vary within a one- to three-year time frame based on the Sub-advisor's forecast for interest rates. The Portfolio may invest up to 10% of its assets in corporate debt securities that are rated below investment grade but rated B or higher by Moody's or S&P (or, if unrated, determined by the Sub-advisor to be of comparable quality). The Portfolio may also invest up to 20% of its assets in securities denominated in foreign currencies. The Portfolio will make use of use of average portfolio credit quality standards to assist institutional investors whose own investment guidelines limit its investments accordingly. In determining the Portfolio's overall dollar-weighted average quality, unrated securities are treated as if rated, based on the Sub-advisor's view of their comparability to rated securities. In the event that ratings services assign different ratings to the same security, the Sub-advisor will determine which rating it believes best reflects the security's quality and risk at that time, which may be the higher of the several assigned ratings. The Portfolio's investments may range in quality from securities rated in the lowest category in which the Portfolio is permitted to invest to securities rated in the highest category (as rated by Moody's or S&P or, if unrated, determined by the Sub-advisor to be of comparable quality). The percentage of a the Portfolio's assets invested in securities in a particular rating category will vary. See the Appendix to the Trust's SAI for a description of Moody's and S&P ratings applicable to fixed income securities.
The Portfolio may invest up to 20% of its assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers.
The Portfolio may buy or sell interest rate futures contracts, options on interest rate futures contracts and options on debt securities for the purpose of hedging against changes in the value of securities which the Portfolio owns or anticipates purchasing due to anticipated changes in interest rates. The Portfolio may invest in securities denominated in foreign currencies, and also may engage in foreign currency exchange transactions by means of buying or selling foreign currencies on a spot basis, entering into foreign currency forward contracts, and buying and selling foreign currency options, foreign currency futures, and options on foreign currency futures. Foreign currency exchange transactions may be entered into for the purpose of hedging against foreign currency exchange risk arising from the Portfolio's investment or anticipated investment in securities denominated in foreign currencies. The Portfolio also may enter into foreign currency forward contracts and buy or sell foreign currencies or foreign currency options for purposes of increasing exposure to a particular foreign currency or to shift exposure to foreign currency fluctuations from one country to another.
The Portfolio may enter into swap agreements for purposes of attempting to obtain a particular investment return at a lower cost to the Portfolio than if the Portfolio had invested directly in an instrument that provided that desired return. In addition, the Portfolio may purchase and sell securities on a when-issued or delayed-delivery basis, sell securities short, and enter into forward commitments to purchase securities; lend their securities to brokers, dealers and other financial institutions to earn income; and borrow money for investment purposes.
The "total return" sought by the Portfolio will consist of interest and dividends from underlying securities, capital appreciation reflected in unrealized increases in value of portfolio securities (realized by the shareholder only upon selling shares) or realized from the purchase and sale of securities, and use of futures and options, or gains from favorable changes in foreign currency exchange rates. Generally, over the long term, the total return obtained by a portfolio investing primarily in fixed income securities is not expected to be as great as that obtained by a portfolio that invests primarily in equity securities. At the same time, the market risk and price volatility of a fixed income portfolio is expected to be less than that of an equity portfolio, so that a fixed income portfolio is generally considered to be a more conservative investment. The change in market value of fixed income securities (and therefore their capital appreciation or depreciation) is largely a function of changes in the current level of interest rates. When interest rates are falling, a portfolio with a shorter duration generally will not generate as high a level of total return as a portfolio with a longer duration. Conversely, when interest rates are rising, a portfolio with a shorter duration will generally outperform longer duration portfolios. When interest rates are flat, shorter duration portfolios generally will not generate as high a level of total return as longer duration portfolios (assuming that long-term interest rates are higher than short-term rates, which is commonly the case). With respect to the composition of any fixed income portfolio, the longer the duration of the portfolio, the greater the anticipated potential for total return, with, however, greater attendant market risk and price volatility than for a portfolio with a shorter duration. The market value of securities denominated in currencies other than the U.S. dollar also may be affected by movements in foreign currency exchange rates.
Unless otherwise indicated, all limitations applicable to Portfolio investments (as stated in this Prospectus and in the Trust's SAI) apply only at the time a transaction is entered into. Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed to be of comparable quality), or change in the percentage of Portfolio assets invested in certain securities or other instruments, or change in the average duration of the Portfolio's investment portfolio, resulting from market fluctuations or other changes in the Portfolio's total assets will not require the Portfolio to dispose of an investment until the Sub-advisor determines that it is practicable to sell or close out the investment without undue market consequences to the Portfolio.
The Portfolio's investments include, but are not limited to, the following:
U.S. Government Securities. 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, and securities guaranteed by the Government National Mortgage Association ("GNMA"), 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 U.S. Treasury; others, such as those of the Federal National Mortgage Association ("FNMA"), 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.
Corporate Debt Securities. Corporate debt securities include corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities. Debt securities may be acquired with warrants attached. Corporate income-producing securities may also include forms of preferred or preference stock. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies. Investments in corporate debt securities that are below investment grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative" both by Moody's and S&P. For a description of the special risks involved with lower-rated high-yield bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." For a description of securities ratings, see the Appendix to the Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible securities, which may offer higher income than the common stocks into which they are convertible. Typically, convertible securities are callable by the issuing company, which may, in effect, force conversion before the holder would otherwise choose.
The convertible securities in which the Portfolio may invest consist of bonds, notes, debentures and preferred stocks which may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. The Portfolio may be required to permit the issuer of a convertible security to redeem the security, convert it into the underlying common stock, or sell it to a third party. Thus, the Portfolio may not be able to control whether the issuer of a convertible security chooses to convert that security. If the issuer chooses to do so, this action could have an adverse effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable investments, pure fixed income opportunities may be unattractive or limited due to insufficient supply, legal or technical restrictions. In such cases, the Portfolio may consider equity securities or convertible bonds to gain exposure to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed- and floating-rate loans arranged through private negotiations between an issuer of debt instruments and one or more financial institutions ("lenders"). Generally, the Portfolio's investments in loans are expected to take the form of loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated among several lenders, usually banks. The Portfolio may participate in such syndicates, or can buy part of a loan, becoming a direct lender. Participations and assignments involve special types of risk, including limited marketability and the risks of being a lender. See "Illiquid Securities" below for a discussion of the limits on the Portfolio's investments in loan participations and assignments with limited marketability. If the Portfolio purchases a participation, it may only be able to enforce its rights through the lender, and may assume the credit risk of the lender in addition to the borrower. In assignments, the Portfolio's rights against the borrower may be more limited than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.
The Portfolio may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide the Portfolio with a certain degree of protection against rises in interest rates, the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality. The Portfolio will not invest more than 5% of its net assets in any combination of inverse floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on these bonds is generally fixed at issuance at a rate lower than typical bonds. Over the life of an inflation-indexed bond, however, interest will be paid based on a principal value which is adjusted for inflation. For example, if the Portfolio purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates (which are nominal interest rates adjusted for inflation). If inflation were to rise at a faster rate than nominal interest rates, real interest rates would decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates would rise, leading to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds. As such, there is no trading history of these securities, and there can be no assurance that a liquid market in these instruments will develop, although one is expected. There also can be no assurance that the U.S. Treasury will issue any particular amount of inflation-indexed bonds. Certain foreign governments, such as the United Kingdom, Canada and Australia, have a longer history of issuing inflation-indexed bonds, and there may be a more liquid market in certain of these countries for these securities.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may invest all of its assets in mortgage- or asset-backed securities. The value of some mortgage- or asset-backed securities in which the Portfolio invests may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Portfolio, the ability of the Portfolio to successfully utilize these instruments may depend in part upon the ability of the Sub-advisor to forecast interest rates and other economic factors correctly.
Mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, such as CMO residuals or stripped mortgage-backed securities ("SMBS"), and may be structured in classes with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Portfolio's yield to maturity from these securities. In addition, the Portfolio may invest in other asset-backed securities that have been offered to investors. For an additional discussion of mortgage-related and other asset-backed securities and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, for the purpose of achieving income, the Portfolio may enter into repurchase agreements, which entail the purchase of a portfolio eligible security from a bank or broker-dealer that agrees to repurchase the security at the Portfolio's cost plus interest within a specified time (normally one day). The Portfolio will not invest more than 15% of its net assets (taken at current market value) in repurchase agreements maturing in more than seven days. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A reverse repurchase agreement involves the sale of a security by the Portfolio and its agreement to repurchase the instrument at a specified time and price, and for some purposes may be considered a borrowing. The Portfolio may also enter into dollar rolls, in which the Portfolio sells mortgage-backed or other securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities on a specified future date. In the case of dollar rolls involving mortgage-backed securities, the mortgage-backed securities that are purchased will be of the same type and will have the same interest rate as those sold, but will be supported by different pools of mortgages. The Portfolio foregoes principal and interest paid during the roll period on the securities sold in a dollar roll, but the Portfolio is compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the securities sold. The Portfolio also could be compensated through the receipt of fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset value of any increase or decrease in the value of the Portfolio's portfolio and may cause the Portfolio to liquidate portfolio positions when it would not be advantageous to do so. The Portfolio will maintain a segregated account consisting of cash or other liquid assets to cover its obligations under reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls will be subject to the Portfolio's limitations on borrowings as discussed in the Trust's SAI under "Investment Restrictions." Apart from transactions involving reverse repurchase agreements and dollar rolls, the Portfolio will not borrow money, except for temporary administrative purposes. For an additional discussion of the risks of borrowing, and of reverse repurchase agreements and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. For the purpose of achieving income, the Portfolio may lend its portfolio securities, provided: (i) the loan is secured continuously by collateral consisting of U.S. Government securities or cash or cash equivalents (cash, U.S. Government securities, negotiable certificates of deposit, bankers' acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal to the current market value of the securities loaned; (ii) the Portfolio may at any time call the loan and obtain the return of the securities loaned; (iii) the Portfolio will receive any interest or dividends paid on the loaned securities; and (iv) the aggregate market value of securities loaned will not at any time exceed one-third of the total assets of the Portfolio. For an additional discussion of certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The Portfolio may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. These transactions involve a commitment by the Portfolio to purchase or sell securities for a predetermined price or yield, with payment and delivery taking place more than seven days in the future, or after a period longer than the customary settlement period for that type of security. When such purchases are outstanding, the Portfolio will set aside and maintain until the settlement date, in a segregated account, cash or other liquid assets in an amount sufficient to meet the purchase price. Typically, no income accrues on securities the Portfolio has committed to purchase prior to the time delivery of the securities is made, although the Portfolio may earn income on securities it has deposited in a segregated account. When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, the Portfolio assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. Because the Portfolio is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Portfolio's other investments. If the Portfolio remains substantially fully invested at a time when when-issued, delayed delivery, or forward commitment purchases are outstanding, the purchases may result in a form of leverage. When the Portfolio has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Portfolio does not participate in future gains or losses with respect to the security. If the other party to a transaction fails to deliver or pay for the securities, the Portfolio could miss a favorable price or yield opportunity or could suffer a loss. The Portfolio may dispose of or renegotiate a transaction after it is entered into, and may sell when-issued or forward commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage limitation on the extent to which the Portfolio may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis.
Short Sales. The Portfolio may from time to time effect short sales as part of its overall portfolio management strategies, including the use of derivative instruments, or to offset potential declines in value of long positions in similar securities as those sold short. A short sale (other than a short sale "against the box") is a transaction in which the Portfolio sells a security it does not own at the time of the sale in anticipation that the market price of that security will decline. To the extent that the Portfolio engages in short sales, it must (except in the case of short sales against the box) maintain asset coverage in the form of cash or other liquid assets in a segregated account. A short sale is "against the box" to the extent that the Portfolio contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in fixed income securities of non-U.S. issuers. The Portfolio will concentrate its foreign investments to securities of issuers based in developed countries. The Portfolio may invest up to 5% of its assets in securities of issuers based in countries with emerging securities markets. The Sub-advisor has broad discretion to identify and invest in countries that it considers to qualify as emerging securities markets. Investing in the securities of issuers in any foreign country involves special risks and considerations not typically associated with investing in U.S. companies. For a discussion of the risks involved in investing in foreign securities, in general, and the special risks of investing in developing countries, as well as the risks of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for that reason do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (but primarily the U.S. dollar), and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government Securities. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities in countries issuing Brady Bonds, investments in Brady Bonds may be viewed as speculative. There can be no assurance that Brady Bonds acquired by the Portfolio will not be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolio to suffer a loss of interest or principal on any of its holdings.
Foreign Currency Transactions. The Portfolio may buy and sell foreign currency futures contracts and options on foreign currencies and foreign currency futures contracts, enter into forward foreign currency exchange contracts to reduce the risks of adverse changes in foreign exchange rates. The Portfolio may enter into these contracts for the purpose of hedging against foreign exchange risk arising from the Portfolio's investment or anticipated investment in securities denominated in foreign currencies. For a discussion of foreign currency transactions and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Options on Securities, Securities Indexes, and Currencies. The Portfolio may purchase put options on securities. One purpose of purchasing put options is to protect holdings in an underlying or related security against a substantial decline in market value. The Portfolio may also purchase call options on securities. One purpose of purchasing call options is to protect against substantial increases in prices of securities the Portfolio intends to purchase pending its ability to invest in such securities in an orderly manner. The Portfolio may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. The Portfolio may write a call or put option only if the option is "covered" by the Portfolio holding a position in the underlying securities or by other means which would permit immediate satisfaction of the Portfolio's obligation as writer of the option. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series.
The Portfolio may buy or sell put and call options on foreign currencies. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Portfolio to reduce foreign currency risk using such options. For a discussion of options and the risks involved therein, as well as the risks involved in investing in foreign currency, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and currency exchange rate swap agreements for purposes of attempting to obtain a particular desired return at a lower cost to the Portfolio than if the Portfolio had invested directly in an instrument that yielded that desired return. Swap agreements are two-party contracts entered into primarily by 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. Commonly used swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
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. Most swap agreements entered into by the Portfolio would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the 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"). The Portfolio's obligations under a swap agreement will be accrued daily (offset against amounts owed to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of segregated assets consisting of cash or other liquid assets to avoid any potential leveraging of the Portfolio. A Portfolio will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in furthering its investment objective will depend on the Sub-advisor's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the 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. The Sub-advisor will cause the Portfolio to 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 Portfolio by the Internal Revenue Code may limit the Portfolio's 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 the Portfolio's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may invest in interest rate futures contracts, stock index futures contracts and foreign currency futures contracts and options thereon ("futures options") that are traded on a U.S. or foreign exchange or board of trade. The Portfolio will only enter into futures contracts or futures options which are standardized and traded on a U.S. or foreign exchange or board of trade, or similar entity, or quoted on an automated quotation system. Each Portfolio will use financial futures contracts and related options only for "bona fide hedging" purposes, as such term is defined in applicable regulations of the CFTC, or, with respect to positions in financial futures and related options that do not qualify as "bona fide hedging" positions, will enter such non-hedging positions only to the extent that aggregate initial margin deposits plus premiums paid by it for open futures option positions, less the amount by which any such positions are "in-the-money," would not exceed 5% of the Portfolio's total net assets. For an additional discussion of futures contracts and related options, and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in hybrid instruments. A hybrid instrument can combine the characteristics of securities, futures, and options. Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. For an additional discussion of hybrid instruments and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid securities. Certain illiquid securities may require pricing at fair value as determined in good faith under the supervision of the Board of Trustees. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Portfolio has valued the securities. Illiquid securities are considered to include, among other things, written over-the-counter options, securities or other liquid assets being used as cover for such options, repurchase agreements with maturities in excess of seven days, certain loan participation interests, fixed time deposits which are not subject to prepayment or provide for withdrawal penalties upon prepayment (other than overnight deposits), securities that are subject to legal or contractual restrictions on resale and other securities whose disposition is restricted under the federal securities laws (other than securities issued pursuant to Rule 144A under the Securities Act of 1933 that the Sub-advisor has determined to be liquid under procedures approved by the Board of Trustees). Illiquid securities may include privately placed securities, which are sold directly to a small number of investors, usually institutions. Unlike public offerings, such securities are not registered under the federal securities laws. Although certain of these securities may be readily sold, for example, under Rule 144A, others may be illiquid, and their sale may involve substantial delays and additional costs.
Portfolio Turnover. The Portfolio may have portfolio turnover higher than other mutual funds with similar investment objectives. For an additional discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will invest primarily in growth companies believed by the Sub-advisor to have favorable relationships between price/earnings ratios and growth rates in sectors offering the potential for above-average returns.
In selecting investments for the Portfolio, the Sub-advisor's primary emphasis is typically on evaluating a company's management, growth prospects, business operations, revenues, earnings, cash flows, and balance sheet in relationship to its share price. The Sub-advisor may select stocks which it believes are undervalued relative to the current stock price. Undervaluation of a stock can result from a variety of factors, such as a lack of investor recognition of (1) the value of a business franchise and continuing growth potential, (2) a new, improved or upgraded product, service or business operation, (3) a positive change in either the economic or business condition for a company, (4) expanding or changing markets that provide a company with either new earnings direction or acceleration, or (5) a catalyst, such as an impending or potential asset sale or change in management, that could draw increased investor attention to a company. The Sub-advisor also may use similar factors to identify stocks which it believes to be overvalued, and may engage in short sales of such securities.
The Portfolio may also engage in the following investment practices, each of which involves certain special risks.
Investments in Smaller Companies. The Portfolio may invest a substantial portion of its assets in securities issued by small companies. Such companies may offer greater opportunities for capital appreciation than larger companies, but investments in such companies may involve certain special risks. Such companies may have limited product lines, markets, or financial resources and may be dependent on a limited management group. While the markets in securities of such companies have grown rapidly in recent years, such securities may trade less frequently and in smaller volume than more widely held securities. The values of these securities may fluctuate more sharply than those of other securities, and the Portfolio may experience some difficulty in establishing or closing out positions in these securities at prevailing market prices. There may be less publicly available information about the issuers of these securities or less market interest in such securities than in the case of larger companies, and it may take a longer period of time for the prices of such securities to reflect the full value of their issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or may otherwise be highly illiquid. The ability of the Portfolio to dispose of such securities may be greatly limited, and the Portfolio may have to continue to hold such securities during periods when the Sub-advisor would otherwise have sold the security. It is possible that the Sub-advisor or its affiliates or clients may hold securities issued by the same issuers, and may in some cases have acquired the securities at different times, on more favorable terms, or at more favorable prices, than the Portfolio. The Portfolio will not invest, in the aggregate, more than 15% of its net assets in illiquid securities. Securities eligible for resale under Rule 144A of the Securities Act of 1933 could be deemed "liquid" when saleable in a readily available market. For a discussion of illiquid and restricted securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Short Sales. When the Sub-advisor anticipates that the price of a security will decline, it may sell the security short and borrow the same security from a broker or other institution to complete the sale. The Portfolio may make a profit or incur a loss depending upon whether the market price of the security decreases or increases between the date of the short sale and the date on which the Portfolio must replace the borrowed security. All short sales must be fully collateralized, and the Portfolio will not sell securities short if, immediately after and as a result of the sale, the value of all securities sold short by the Portfolio exceeds 25% of its total assets. The Portfolio limits short sales of any one issuer's securities to 2% of the Portfolio's total assets and to 2% of any one class of the issuer's securities.
Foreign Securities. The Portfolio may invest up to 35% of its net assets in securities principally traded in foreign markets. The Portfolio may buy or sell foreign currencies and options and futures contracts on foreign currencies for hedging purposes in connection with its foreign investments.
The Portfolio may also at times invest a substantial portion of its assets in securities of issuers in developing countries. Although many of the securities in which the Portfolio may invest are traded on securities exchanges, the Portfolio may trade in limited volume, and the exchanges may not provide all of the conveniences or protections provided by securities exchanges in more developed markets. The Portfolio may also invest a substantial portion of its assets in securities traded in the over-the-counter markets in such countries and not on any exchange, which may affect the liquidity of the investment and expose the Portfolio to the credit risk of their counterparties in trading those investments. For a discussion of the risks involved in investing in developing countries and investing in foreign securities in general, including the risk of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Debt Securities. The Portfolio may invest in debt securities from time to time, if the Sub-advisor believes that such investments might help achieve the Portfolio's investment objective. The Sub-advisor expects that under normal circumstances the Portfolio will not likely invest a substantial portion of its assets in debt securities.
The Portfolio will invest only in securities rated "investment grade" or considered by the Sub-advisor to be of comparable quality. Investment grade securities are rated Baa or higher by Moody's Investors Service, Inc. ("Moody's) or BBB or higher by Standard & Poor's Corporation ("S&P"). Securities rated Baa or BBB lack outstanding investment characteristics, have speculative characteristics, and are subject to greater credit and market risks than higher-rated securities. For a description of Moody's and S&P's rating categories, see the Appendix to the Trust's SAI.
The Portfolio will not necessarily dispose of a security when its debt rating is reduced below its rating at the time of purchase, although the Sub-advisor will monitor the investment to determine whether continued investment in the security will assist in meeting the Portfolio's investment objective.
Zero-Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may also invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation in response to changes in market interest rates than bonds which pay interest currently, and may involve greater credit risk than such bonds.
Options and Futures. The Portfolio may buy and sell call and put options to hedge against changes in net asset value or to attempt to realize a greater current return. In addition, through the purchase and sale of futures contracts and related options, the Portfolio may at times seek to hedge against fluctuations in net asset value and to attempt to increase its investment return.
The Portfolio's ability to engage in options and futures strategies will depend on the availability of liquid markets in such instruments. It is impossible to predict the amount of trading interest that may exist in various types of options or futures contracts. Therefore, there is no assurance that the Portfolio will be able to utilize these instruments effectively for the purposes stated above.
The Portfolio expects that its options and futures transactions generally will be conducted on recognized exchanges. The Portfolio may in certain instances purchase and sell options in the over-the-counter markets. The Portfolio's ability to terminate options in the over-the-counter markets may be more limited than for exchange-traded options, and such transactions also involve the risk that securities dealers participating in such transactions would be unable to meet their obligations to the Portfolio. The Portfolio will, however, engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of the Sub-advisor, the pricing mechanism and liquidity of the over-the-counter markets are satisfactory and the participants are responsible parties likely to meet their obligations.
The Portfolio will not purchase futures or options on futures or sell futures if, as a result, the sum of the initial margin deposits on the Portfolio's existing futures positions and premiums paid for outstanding options on futures contracts would exceed 5% of the Portfolio's assets. (For options that are "in-the-money" at the time of purchase, the amount by which the option is "in-the-money" is excluded from this calculation.)
Index Futures and Options. The Portfolio may buy and sell index futures contracts ("index futures") and options on index futures and on indices for hedging purposes (or may purchase warrants whose value is based on the value from time to time of one or more foreign securities indices). An index future is a contract to buy or sell units of a particular bond or stock index at an agreed price on a specified future date. Depending on the change in value of the index between the time when the Portfolio enters into and terminates an index futures or option transaction, the Portfolio realizes a gain or loss. The Portfolio may also buy and sell index futures and options to increase its investment return.
LEAPs and BOUNDs. The Portfolio may purchase long-term exchange-traded equity options called Long-Term Equity Anticipation Securities ("LEAPs") and Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the opportunity to participate in the underlying securities' appreciation in excess of a fixed dollar amount, and BOUNDs provide a holder the opportunity to retain dividends on the underlying securities while potentially participating in the underlying securities' capital appreciation up to a fixed dollar amount. The Portfolio will not purchase these options with respect to more than 25% of the value of its net assets.
For a discussion of options and futures and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Sector Concentration. At times, the Portfolio may invest more than 25% of its assets in securities of issuers in one or more market sectors such as, for example, the technology sector. A market sector may be made up of companies in a number of related industries. The Portfolio would only concentrate its investments in a particular market sector if the Sub-advisor were to believe the investment return available from concentration in that sector justifies any additional risk associated with concentration in that sector. When the Portfolio concentrates its investments in a market sector, financial, economic, business, and other developments affecting issuers in that sector will have a greater effect on the Portfolio than if it had not concentrated its assets in that sector.
Lending Portfolio Securities. The Portfolio may lend it securities to broker-dealers. These transactions must be fully collateralized at all times, but involve some risk to the Portfolio if the other party should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral. For an additional discussion of Portfolio's limitations on lending and certain risks involved in lending, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. These transactions must be fully collateralized at all times, but involve some risk to the Portfolio if the other party should default on its obligations and the Portfolio is delayed or prevented from recovering the collateral. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Defensive Strategies. At times, the Sub-advisor may judge that market conditions make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times, the Sub-advisor may temporarily use alternative strategies, primarily designed to reduce fluctuations in the values of the Portfolio's assets. In implementing these "defensive" strategies, the Portfolio may invest in U.S. Government securities, other high-quality debt instruments, and other securities the Sub-advisor believes to be consistent with the Portfolio's best interests.
Portfolio Turnover. The Portfolio may have higher portfolio turnover than other mutual funds with similar objectives. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Twentieth Century International Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will seek to achieve its investment objective by investing primarily in securities of foreign issuers that meet certain fundamental and technical standards of selection (relating primarily to acceleration of earnings and revenues) and have, in the opinion of the Sub-advisor, potential for appreciation. The Portfolio will invest primarily in issuers in developed markets. The Portfolio will invest primarily in equity securities (defined to include equity equivalents) of such issuers. The Portfolio will attempt to stay fully invested in such securities, regardless of the movement of stock prices generally.
Although the primary investment of the Portfolio will be equity securities, the Portfolio may also invest in other types of securities consistent with the accomplishment of the Portfolio's objectives. When the Sub-advisor believes that the total return potential of other securities equals or exceeds the potential return of equity securities, the Portfolio may invest up to 35% in such other securities.
The other securities the Portfolio may invest in are bonds, notes and debt securities of companies and obligations of domestic or foreign governments and their agencies. The Portfolio will limit its purchases of debt securities to investment grade obligations. For long-term debt obligations this includes securities that are rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P"), or that are not rated but considered by the Sub-advisor to be of equivalent quality. According to Moody's, bonds rated Baa are medium-grade and possess some speculative characteristics. A BBB rating by S&P indicates S&P's belief that a security exhibits a satisfactory degree of safety and capacity for repayment, but is more vulnerable to adverse economic conditions or changing circumstances than is the case with higher quality debt securities. The rating services' descriptions of securities in the various rating categories, including the speculative characteristics of securities in the lower rating categories, are set forth in the Appendix to the Trust's SAI. For an additional discussion of lower-rated securities and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
The Portfolio may make foreign investments either directly in foreign securities, or indirectly by purchasing depositary receipts or depositary shares or similar instruments ("DRs") for foreign securities. DRs are securities that are listed on exchanges or quoted in over-the-counter markets in one country but represent shares of issuers domiciled in another country. The Portfolio may also purchase securities of such issuers in foreign markets, either on foreign securities exchanges or in the over-the-counter markets.
The Portfolio may also invest in other equity securities and equity equivalents. Other equity securities and equity equivalents include securities that permit the Portfolio to receive an equity interest in an issuer, the opportunity to acquire an equity interest in an issuer, or the opportunity to receive a return on its investment that permits the Portfolio to benefit from the growth over time in the equity of an issuer. Examples of other equity securities and equity equivalents are preferred stock, convertible preferred stock and convertible debt securities. Equity equivalents may also include securities whose value or return is derived from the value or return of a different security. An example of one type of derivative security in which the Portfolio might invest is a depositary receipt.
In addition to other factors that will affect their value, the value of the Portfolio's investments in fixed income securities will change as prevailing interest rates change. In general, the prices of such securities vary inversely with interest rates. As prevailing interest rates fall, the prices of bonds and other securities that trade on a yield basis rise. When prevailing interest rates rise, bond prices generally fall. These changes in value may, depending upon the particular amount and type of fixed income securities holdings of the Portfolio, impact the net asset value of the Portfolio's shares.
Under normal conditions, the Portfolio will invest at least 65% of its assets in equity and equity equivalent securities of issuers from at least three countries outside of the United States. While securities of U.S. issuers may be included in the Portfolio from time to time, it is the primary intent of the Sub-advisor to diversify investments across a broad range of foreign issuers. The Sub-advisor defines "foreign issuer" as an issuer of securities that is domiciled outside the United States, derives at least 50% of its total revenue from production or sales outside the United States, and/or whose principal trading market is outside the United States.
In order to achieve maximum investment flexibility, the Portfolio has
not established geographic limits on asset distribution, on either a
country-by-country or region-by-region basis. The Sub-advisor expects to invest
both in issuers in developed markets (such as Germany, the United Kingdom and
Japan) and in issuers in emerging market countries. The Sub-advisor considers
"emerging market countries" to include all countries that are generally
considered to be developing or emerging countries by the International Bank for
Reconstruction and Development (commonly referred to as the World Bank) and the
International Finance Corporation (IFC), as well as countries that are
classified by the United Nations as developing. Currently, the countries not
included in this category are the United States, Canada, Japan, the United
Kingdom, Germany, Austria, France, Italy, Ireland, Spain, Belgium, the
Netherlands, Switzerland, Sweden, Finland, Norway, Denmark, Australia, and New
Zealand. In addition, as used with respect to this Portfolio, "securities of
issuers in emerging market countries" means (i) securities of issuers the
principal securities trading market for which is an emerging market country,
(ii) securities, regardless of where traded, of issuers that derive 50% or more
of their total revenue from either goods or services produced in emerging market
countries or sales made in emerging market countries, or (iii) securities of
issuers having their principal place of business or principal office in emerging
market countries.
The principal criteria for inclusion of a security in the Portfolio is its ability to meet the fundamental and technical standards of selection and, in the opinion of the Sub-advisor, to achieve better-than-average appreciation. If, in the opinion of the Sub-advisor, a particular security satisfies these principal criteria, the security may be included in the Portfolio, regardless of the location of the issuer or the percentage of the Portfolio's investments in the issuer's country or region. At the same time, however, the Sub-advisor recognizes that both the selection of the Portfolio's individual securities and the allocation of the Portfolio's assets across different countries and regions are important factors in managing an international portfolio. For this reason, the Sub-advisor will also consider a number of other factors in making investment selections including: the prospects for relative economic growth among countries or regions, economic and political conditions, expected inflation rates, currency exchange fluctuations and tax considerations.
Investing in securities of foreign issuers generally involves greater risks than investing in the securities of domestic companies. As with any investment in securities, the value of an investment in the Portfolio can decrease as well as increase, depending upon a variety of factors which may affect the values and income generated by the portfolio securities. Foreign securities markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in clearance and settlement could result in temporary periods when assets of the Portfolio are uninvested and no return is earned thereon. The inability of the Portfolio to make intended security purchases due to clearance and settlement problems could cause the Portfolio to miss attractive investment opportunities. Inability to dispose of portfolio securities due to clearance and settlement problems could result either in losses to the Portfolio due to subsequent declines in value of the portfolio security or, if the Portfolio has entered into a contract to sell the security, liability to the purchaser.
Investments in the Portfolio should not be considered a complete investment program and may not be appropriate for an individual with limited investment resources or who is unable to tolerate fluctuations in the value of the investment. For a discussion of certain risks involved in investing in foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Emerging Markets. The Portfolio may invest in securities of issuers in emerging market countries. Investing in emerging market countries involves exposure to significantly higher risk than investing in countries with developed markets. Emerging market countries may have economic structures that are generally less diverse and mature and political systems that can be expected to be less stable than those of developed countries.
The economies of emerging market countries may be predominantly based on only a few industries or dependent on revenues from particular commodities or on international aid or development assistance, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. In addition, securities markets in emerging market countries may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially resulting in a lack of liquidity and greater volatility in the price of securities traded on those markets. For an additional discussion of the special risks involved in investing in developing countries or "emerging markets," see this Prospectus under "Certain Risk Factors and Investment Methods."
Forward Currency Exchange Contracts. Some of the securities held by the Portfolio will be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars, but have a value that is dependent upon the performance of a foreign security, as valued in the currency of its home country. As a result, the value of the Portfolio will be affected by changes in the exchange rates between foreign currencies and the dollar, as well as by changes in the market values of the securities themselves. The performance of foreign currencies relative to the dollar may be an important factor in the overall performance of the Portfolio.
To protect against adverse movements in exchange rates between currencies, the Portfolio may, for hedging purposes only, enter into forward currency exchange contracts. A forward currency exchange contract obligates the Portfolio to purchase or sell a specific currency at a future date at a specific price. The Portfolio may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the Portfolio's positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the Portfolio can "lock in" an exchange rate between the trade and settlement dates for that purchase or sale. This practice is sometimes referred to as "transaction hedging." The Portfolio may enter into transaction hedging contracts with respect to all or a substantial portion of its trades.
When the Sub-advisor believes that a particular currency may decline in value compared to the dollar, the Portfolio may enter into a foreign currency exchange contract to sell an amount of foreign currency equal to the value of some or all of the portfolio securities either denominated in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." The Portfolio may not enter into a portfolio hedging transaction where the Portfolio would be obligated to deliver an amount of foreign currency in excess of the aggregate value of its portfolio securities or other assets denominated in, or whose value is tied to, that currency. The Portfolio will make use of portfolio hedging to the extent deemed appropriate by the Sub-advisor. However, it is anticipated that the Portfolio will enter into portfolio hedges much less frequently than transaction hedges.
If the Portfolio enters into a forward contract, the Portfolio, when required, will instruct its custodian bank to segregate cash or other liquid assets in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional cash or securities will be added so that the value of the account is not less than the amount of the Portfolio's commitment. At any given time, no more than 10% of the Portfolio's assets will be committed to a segregated account in connection with portfolio hedging transactions.
Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to reduce the risk of adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts tends to limit the potential gains that might result from a positive change in the relationship between the foreign currency and the U.S. dollar. For an additional discussion of foreign currency exchange contracts, certain risks involved therein and the risks of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Indirect Foreign Investments. Subject to certain restrictions contained in the Investment Company Act, the Portfolio may invest up to 10% of its assets in certain foreign countries indirectly through investment funds and registered investment companies authorized to invest in those countries. If the Portfolio invests in investment companies, the Portfolio will bear its proportionate shares of the costs incurred by such companies, including investment advisory fees, if any.
Sovereign Debt Obligations. The Portfolio may purchase sovereign debt instruments issued or guaranteed by foreign governments or their agencies, including debt of emerging market countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of emerging market countries may involve a high degree of risk and may present a risk of default or renegotiation or rescheduling of debt payments.
Portfolio Turnover. Investment decisions to purchase and sell securities are based on the anticipated contribution of the security in question to the Portfolio's objectives. The rate of portfolio turnover is irrelevant when the Sub-advisor believes a change is in order to achieve those objectives and accordingly, the annual portfolio turnover rate cannot be anticipated. The portfolio turnover may be higher than other mutual funds with similar investment objectives. For an additional discussion of portfolio turnover, see this Prospectus under "Portfolio Turnover" and the Trust's SAI under "Investment Objectives and Policies."
Temporary Investments. Notwithstanding the Portfolio's investment objective of capital growth, under exceptional market or economic conditions, the Portfolio may temporarily invest all or a substantial portion of its assets in cash or investment-grade short-term securities (denominated in U.S. dollars or foreign currencies). To the extent the Portfolio assumes a defensive position, it will not be pursuing its investment objective of capital growth.
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the investment policies of the Portfolio.
The Portfolio will limit repurchase agreement transactions to securities issued by the U.S. government, its agencies and instrumentalities, and will enter into such transactions with those commercial banks and broker-dealers who are deemed creditworthy pursuant to criteria adopted by the Trust's Board of Trustees. The Portfolio will not invest more than 15% of its assets in repurchase agreements maturing in more than seven days. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued Transactions. The Portfolio may sometimes purchase new issues of securities on a when-issued basis without limit when, in the opinion of the Sub-advisor, such purchases will further the investment objectives of the Portfolio. For a discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of the short sale, the Portfolio owns or has the right to acquire an equal amount of the security being sold short at no additional cost. These transactions allow the Portfolio to hedge against price fluctuations by locking in a sale price for securities it does not wish to sell immediately.
Rule 144A Securities. The Portfolio may, from time to time, purchase Rule 144A securities when they present attractive investment opportunities that otherwise meet the Portfolio's criteria for selection. Rule 144A securities are securities that are privately placed with and traded among qualified institutional buyers rather than the general public. Although Rule 144A securities are considered "restricted securities," they are not necessarily illiquid.
With respect to securities eligible for resale under Rule 144A, the Staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of trustees to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the Board of Trustees of the Trust is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of Trustees has delegated the day-to-day function of determining the liquidity of Rule 144A securities to the Sub-advisor. The Board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted.
Since the secondary market for such securities is limited to certain qualified institutional investors, the liquidity of such securities may be limited accordingly and the Portfolio may, from time to time, hold a Rule 144A security that is illiquid. In such an event, the Sub-advisor will consider appropriate remedies to minimize the effect on the Portfolio's liquidity. The Portfolio may not invest more than 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of Portfolio shares). For an additional discussion of Rule 144A securities and illiquid and restricted securities, and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Twentieth Century Strategic Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth and current income. This is a fundamental objective of the Portfolio.
Investment Policies:
It is the Sub-advisor's intention to maintain approximately 60% of the Portfolio's assets in common stocks that are considered by the Sub-advisor to have better-than-average prospects for appreciation and the remainder in bonds and other fixed income securities.
Equity Investments. With the equity portion of the Portfolio, the Sub-advisor seeks capital growth by investing in securities, primarily common stocks, that meet certain fundamental and technical standards of selection (relating primarily to earnings and revenue acceleration) and have, in the opinion of the Sub-advisor, better-than-average potential for appreciation. So long as a sufficient number of such securities are available, the Sub-advisor intends to keep the equity portion of the Portfolio fully invested in these securities regardless of the movement of stock prices generally. The Portfolio may purchase securities only of companies that have a record of at least three years continuous operation.
The Sub-advisor selects, for the equity portion of the Portfolio, securities of companies whose earnings and revenue trends meet the Sub-advisor's standards of selection. The size of the companies in which the Portfolio invests tends to give it its own characteristics of volatility and risk. These differences come about because developments such as new or improved products or methods, which would be relatively insignificant to a large company, may have a substantial impact on the earnings and revenues of a small company and create a greater demand and a higher value for its shares. However, a new product failure which could readily be absorbed by a large company can cause a rapid decline in the value of the shares of a smaller company. Hence, it could be expected that the volatility of the Portfolio will be impacted by the size of companies in which it invests.
Fixed Income Investments. The Sub-advisor intends to maintain approximately 40% of the Portfolio's assets in fixed income securities, approximately 80% of which will be invested in domestic fixed income securities and approximately 20% of which will be invested in foreign fixed income securities. This percentage will fluctuate from time to time and may be higher or lower depending on the mix the Sub-advisor believes will provide the most favorable outlook for achieving the Portfolio's objectives. A minimum of 25% of the Portfolio's assets will be invested in fixed income senior securities.
The fixed income portion of the Portfolio will include U.S. Treasury securities, securities issued or guaranteed by the U.S. government or a foreign government, or an agency or instrumentality of the U.S. or a foreign government, and non-convertible debt obligations issued by U.S. or foreign corporations. The Portfolio may also invest in mortgage-related and other asset-backed securities. As with the equity portion of the Portfolio, the bond portion of the Portfolio will be diversified among the various types of fixed income investment categories described above. The Sub-advisor's strategy is to actively manage the Portfolio by investing the Portfolio's assets in sectors it believes are undervalued (relative to the other sectors) and which represent better relative long-term investment opportunities.
The value of fixed income securities fluctuates based on changes in interest rates, currency values and the credit quality of the issuer. The Sub-advisor will actively manage the Portfolio, adjusting the weighted average portfolio maturity as necessary in response to expected changes in interest rates. During periods of rising interest rates, the weighted average maturity of the Portfolio may be moved to the shorter end of its maturity range in order to reduce the effect of bond price declines on the Portfolio's net asset value. When interest rates are falling and bond prices are rising, the weighted average portfolio maturity may be moved toward the longer end of its maturity range.
Debt securities that comprise part of the Portfolio's fixed income portfolio will primarily be limited to "investment grade" obligations. However, the Portfolio may invest up to 10% of its fixed income assets in "high yield" securities. "Investment grade" means that at the time of purchase, such obligations are rated within the four highest categories by a nationally recognized statistical rating organization for example, at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P"), or, if not rated, are of equivalent investment quality as determined by the Sub-advisor. According to Moody's, bonds rated Baa are medium-grade and possess some speculative characteristics. A BBB rating by S&P indicates S&P's belief that a security exhibits a satisfactory degree of safety and capacity for repayment, but is more vulnerable to adverse economic conditions and changing circumstances. "High yield" securities, sometimes referred to as "junk bonds," are higher risk, non-convertible debt obligations that are rated below investment grade securities, or are unrated, but with similar credit quality. The rating services' descriptions of securities in the various rating categories, including the speculative characteristics of securities in the lower rating categories, are set forth in the Appendix to the Trust's SAI.
There are no credit or maturity restrictions on the fixed income securities in which the high yield portion of the Portfolio may be invested. Debt securities rated lower than Baa by Moody's or BBB by S&P or their equivalent are considered by many to be predominantly speculative. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments on such securities than is the case with higher quality debt securities. Regardless of rating levels, all debt securities considered for purchase by the Portfolio are analyzed by the Sub-advisor to determine, to the extent reasonably possible, that the planned investment is sound, given the investment objective of the Portfolio. For an additional discussion of lower-rated securities and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Under normal market conditions, the maturities of fixed-income securities in which the Portfolio invests will range from 2 to 30 years.
In determining the allocation of assets among U.S. and foreign capital markets, the Sub-advisor considers the condition and growth potential of the various economies; the relative valuations of the markets; and social, political, and economic factors that may affect the markets. In selecting securities in foreign currencies, the Sub-advisor considers, among other factors, the impact of foreign exchange rates relative to the U.S. dollar value of such securities. The Sub-advisor may seek to hedge all or a part of the Portfolio's foreign currency exposure through the use of forward foreign currency contracts or options thereon.
Foreign Securities. The Portfolio may invest up to 25% of its assets in the securities of foreign issuers, including debt securities of foreign governments and their agencies primarily from developed markets, when these securities meet its standards of selection. The Portfolio may make such investments either directly in foreign securities, or by purchasing depositary receipts ("DRs") for foreign securities. DRs are securities listed on exchanges or quoted in the over-the-counter market in one country but represent the shares of issuers domiciled in other countries. DRs may be sponsored or unsponsored. Direct investments in foreign securities may be made either on foreign securities exchanges or in the over-the-counter markets.
The Portfolio may invest in common stocks, convertible securities, preferred stocks, bonds, notes and other debt securities of foreign issuers, and debt securities of foreign governments and their agencies. The credit quality standards applicable to domestic securities purchased by the Portfolio are also applicable to its foreign securities investments. For a discussion of certain risks involved in investing in foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Forward Currency Exchange Contracts. Some of the foreign securities held by the Portfolio may be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars, but have a value that is dependent on the performance of a foreign security, as valued in the currency of its home country. As a result, the value of the Portfolio may be affected by changes in the exchange rates between foreign currencies and the U.S. dollar, as well as by changes in the market values of the securities themselves. The performance of foreign currencies relative to the U.S. dollar may be a factor in the overall performance of the Portfolio.
To protect against adverse movements in exchange rates between currencies, the Portfolio may, for hedging purposes only, enter into forward currency exchange contracts and buy put and call options relating to currency futures contracts. A forward currency exchange contract obligates the Portfolio to purchase or sell a specific currency at a future date at a specific price. An option is a contractual right to acquire a financial asset, such as a security, the securities of a market index, a foreign currency or a foreign currency exchange contract, at a specified price at the end of a specified term.
The Portfolio may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the Portfolio's positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the Portfolio can "lock in" an exchange rate between the trade and settlement dates for that purchase or sale. This practice is sometimes referred to as "transaction hedging." The Portfolio may enter into transaction hedging contracts with respect to all or a substantial portion of its foreign securities trades.
When the Sub-advisor believes that a particular currency may decline in value compared to the U.S. dollar, the Portfolio may enter into forward currency exchange contracts to sell the value of some or all of the Portfolio's securities either denominated in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." The Portfolio may not enter into a portfolio hedging transaction where it would be obligated to deliver an amount of foreign currency in excess of the aggregate value of its portfolio securities or other assets denominated in, or whose value is tied to, that currency. The Portfolio will make use of the portfolio hedging to the extent deemed appropriate by the Sub-advisor. However, it is anticipated that the Portfolio will enter into portfolio hedges much less frequently than transaction hedges.
If the Portfolio enters into a forward contract, the Portfolio, when required, will instruct its custodian bank to segregate cash or other liquid assets in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional cash or securities will be added so that the value of the account is not less than the amount of the Portfolio's commitment. At any given time, no more than 10% of the Portfolio's assets will be committed to a segregated account in connection with portfolio hedging transactions.
Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to protect the Portfolio against adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts tends to limit the potential gains that might result from a positive change in the relationships between the foreign currency and the U.S. dollar. For an additional discussion of foreign currency exchange contracts, certain risks involved therein and the risks of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may purchase mortgage-related and other asset-backed securities. Mortgage pass-through securities are securities representing interests in "pools" of mortgages in which payments of both interest and principal on the securities are generally made monthly, in effect "passing through" monthly payments made by the individual borrowers on the residential mortgage loans that underlie the securities (net of fees paid to the issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. government in the case of securities guaranteed by the Government National Mortgage Association (GNMA), or guaranteed by agencies or instrumentalities of the U.S. government in the case of securities guaranteed by the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC), which are supported only by the discretionary authority of the U.S. government to purchase the agency's obligations.
Mortgage pass-through securities created by nongovernmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers, or the mortgage poolers.
The Portfolio may also invest in collateralized mortgage obligations (CMOs). CMOs are mortgage-backed securities issued by government agencies; single-purpose, stand-alone financial subsidiaries; trusts established by financial institutions; or similar institutions. The Portfolio may buy CMOs that are: (i) collateralized by pools of mortgages in which payment of principal and interest of each mortgage is guaranteed by an agency or instrumentality of the U.S. government; (ii) collateralized by pools of mortgages in which payment of principal and interest are guaranteed by the issuer, and the guarantee is collateralized by U.S. government securities; or (iii) securities in which the proceeds of the issue are invested in mortgage securities and payments of principal and interest are supported by the credit of an agency or instrumentality of the U.S. government. For a discussion of certain risks involved in mortgage related and other asset-back securities, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. Investment decisions to purchase and sell securities are based on the anticipated contribution of the security in question to the Portfolio's objectives. The rate of portfolio turnover is irrelevant when the Sub-advisor believes a change is in order to achieve those objectives and accordingly, the annual portfolio turnover rate cannot be anticipated. The portfolio turnover of the Portfolio may be higher than other mutual funds with similar investment objectives. For an additional discussion of portfolio turnover, see this Prospectus under "Portfolio Turnover" and the Trust's SAI under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the investment policies of the Portfolio.
The Portfolio will limit repurchase agreement transactions to securities issued by the U.S. government, its agencies and instrumentalities, and will enter into such transactions with those banks and securities dealers who are deemed creditworthy pursuant to criteria adopted by the Trust's Board of Trustees. The Portfolio will invest no more than 15% of its assets in repurchase agreements maturing in more than seven days. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Derivative Securities. To the extent permitted by its investment objectives and policies, the Portfolio may invest in securities that are commonly referred to as "derivative" securities. Generally, a derivative is a financial arrangement the value of which is based on, or "derived" from, a traditional security, asset, or market index. Certain derivative securities are more accurately described as "index/structured" securities. Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as depositary receipts), currencies, interest rates, indices or other financial indicators ("reference indices").
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 many different types of derivatives and many different ways to use them. Futures and options are commonly used for traditional hedging purposes to attempt to protect a fund from exposure to changing interest rates, securities prices, or currency exchange rates and for cash management purposes as a low-cost method of gaining exposure to a particular securities market without investing directly in those securities.
The Portfolio may not invest in a derivative security unless the reference index or the instrument to which it relates is an eligible investment for the Portfolio. For example, a security whose underlying value is linked to the price of oil would not be a permissible investment since the Portfolio may not invest in oil and gas leases or futures. The return on a derivative security may increase or decrease, depending upon changes in the reference index or instrument to which it relates.
There are a range of risks associated with derivative investments, including: the risk that the underlying security, interest rate, market index or other financial asset will not move in the direction the Sub-advisor anticipates; the possibility that there may be no liquid secondary market, or the possibility that price fluctuation limits may be imposed by the exchange, either of which may make it difficult or impossible to close out a position when desired; the risk that adverse price movements in an instrument can result in a loss substantially greater than the Portfolio's initial investment; and the risk that the counterparty will fail to perform its obligations. For a discussion of certain risks involved in investing in derivative securities, including futures and options contracts, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Portfolio Securities Lending. In order to realize additional income, the Portfolio may lend its portfolio securities to persons not affiliated with it and who are deemed to be creditworthy. Such loans must be secured continuously by cash collateral maintained on a current basis in an amount at least equal to the market value of the securities loaned, or by irrevocable letters of credit. During the existence of the loan, the Portfolio must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral. The Portfolio must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the Portfolio to vote the securities. Such loans may not exceed one-third of the Portfolio's net assets taken at market. Interest on loaned securities may not exceed 10% of the annual gross income of the Portfolio (without offset for realized capital gains).
When-Issued Transactions. The Portfolio may sometimes purchase new issues of securities on a when-issued basis without limit when, in the opinion of the Sub-advisor, such purchases will further the investment objectives of the Portfolio. For a discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of the short sale, the Portfolio owns or has the right to acquire an equal amount of the security being sold short at no additional cost. These transactions allow the Portfolio to hedge against price fluctuations by locking in a sale price for securities it does not wish to sell immediately.
Rule 144A Securities. The Portfolio may, from time to time, purchase Rule 144A securities when they present attractive investment opportunities that otherwise meet the Portfolio's criteria for selection. Rule 144A securities are securities that are privately placed with and traded among qualified institutional buyers rather than the general public. Although Rule 144A securities are considered "restricted securities," they are not necessarily illiquid.
With respect to securities eligible for resale under Rule 144A, the Staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of trustees to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the Board of Trustees of the Trust is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of Trustees has delegated the day-to-day function of determining the liquidity of Rule 144A securities to the Sub-advisor. The Board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted.
Since the secondary market for such securities is limited to certain qualified institutional investors, the liquidity of such securities may be limited accordingly and the Portfolio may, from time to time, hold a Rule 144A security that is illiquid. In such an event, the Sub-advisor will consider appropriate remedies to minimize the effect on the Portfolio's liquidity. The Portfolio may not invest more than 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of Portfolio shares). For an additional discussion of Rule 144A securities and illiquid and restricted securities, and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
AST Putnam Value Growth & Income Portfolio:
Investment Objective: The primary investment objective of the Portfolio is to seek capital growth. Current income is a secondary investment objective. These are fundamental objectives of the Portfolio.
Investment Policies:
The Portfolio invests primarily in common stocks that offer potential for capital growth, and may, consistent with its investment objectives, invest in stocks that offer potential for current income. The Portfolio may also purchase corporate bonds, notes and debentures, preferred stocks, or convertible securities (both debt securities and preferred stocks) or U.S. government securities, if the Sub-advisor determines that their purchase would help further the Portfolio's investment objectives. The types of securities held by the Portfolio may vary from time to time in light of the Portfolio's investment objectives, changes in interest rates, and economic and other factors. When selecting securities for the Portfolio that have the potential for capital growth, the Sub-advisor will seek to identify securities that are significantly undervalued in relation to underlying asset values or earnings potential. The Portfolio may also hold a portion of its assets in cash or money market instruments.
Defensive Strategies. At times, the Sub-advisor may judge that conditions in the securities markets make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times, the Sub-advisor may temporarily use alternative strategies primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these defensive strategies, the Portfolio may invest without limit in debt securities or preferred stocks, or invest in any other securities the Sub-advisor considers consistent with such defensive strategies. It is impossible to predict when, or for how long, the Portfolio will use these alternative strategies.
Foreign Securities. The Portfolio may invest up to 20% of its assets in securities traded in foreign securities markets. The Portfolio may also purchase Eurodollar certificates of deposit, without regard to the 20% limit. The Portfolio may invest in securities principally traded in, or issued by issuers located in, underdeveloped and developing nations, which are sometimes referred to as "emerging markets." For a discussion of the special risks involved in investing in developing countries and certain risks involved in investing in foreign securities in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may buy or sell foreign currencies, foreign currency futures contracts and foreign currency forward contracts for hedging purposes in connection with its foreign investments. For a discussion of foreign currency transactions, certain risks involved therein and the risk of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lower-Rated Fixed-Income Securities. The Portfolio may invest a portion of its assets in fixed-income securities, including lower-rated fixed-income securities, which are commonly known as "junk bonds," without limitation as to credit rating. The values of fixed-income securities fluctuate in response to changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of such securities. Conversely, during periods of rising interest rates, the value of the Portfolio's assets will generally decline. The values of lower-rated securities generally fluctuate more than those of higher-rated securities. Securities in the lower rating categories may, depending on their rating, have large uncertainties or major exposure to adverse conditions, and may be of poor standing and predominantly speculative. Certain lower-rated securities may be in default. Securities rated Baa or BBB, while considered investment grade, are more vulnerable to adverse economic conditions than securities in the higher-rated categories and have speculative elements. The rating services' descriptions of securities in the various rating categories, including the speculative characteristics of securities in the lower rating categories, are set forth in the Appendix to the Trust's SAI. For an additional discussion of lower-rated securities and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Zero Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may invest in zero coupon bonds and payment-in-kind bonds. Zero coupon bonds are issued at a significant discount from their principal amount and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation in response to changes in market interest rates than bonds which pay interest in cash currently. Both zero coupon bonds and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently. Even though such bonds do not pay current interest in cash, the Portfolio is nonetheless required to accrue interest income on such investments and to distribute such amounts at least annually to shareholders. For an additional discussion of zero coupon bonds and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Stock Index Futures and Options. The Portfolio may buy and sell stock index futures contracts. An "index future" is a contract to buy or sell units of a particular stock index at an agreed price on a specified future date. Depending on the change in value of the index between the time when the Portfolio enters into and terminates an index futures transaction, the Portfolio realizes a gain or loss. The Portfolio may buy and sell call and put options on index futures or on stock indices in addition to or as an alternative to purchasing or selling index futures or, to the extent permitted by applicable law, to earn additional income. For an additional discussion of index futures and related options and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Options. The Portfolio may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest. The Portfolio receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit.
When the Portfolio writes a call option, it gives up the opportunity to profit from any increase in the price of a security above the exercise price of the option; when it writes a put option, the Portfolio takes the risk that it will be required to purchase a security from the option holder at a price above the current market price of the security. The Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written.
The Portfolio may also buy and sell put and call options for hedging purposes. From time to time, the Portfolio may also buy and sell combinations of put and call options on the same underlying security to earn additional income. The aggregate value of the securities underlying the options may not exceed 25% of Portfolio assets. The use of these strategies may be limited by applicable law. For an additional discussion of options transactions and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to broker-dealers. Such transactions must be fully collateralized at all times. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of securities lending and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. Such transactions must be fully collateralized at all times. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Forward Commitments. The Portfolio may purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of forward commitments and certain risks involved therein, see the Trust's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Portfolio and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
AST Putnam International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio seeks its objective by investing primarily in equity securities of companies located in countries other than the United States. The Portfolio's investments will normally include common stocks, preferred stocks, securities convertible into common or preferred stocks, and warrants to purchase common or preferred stocks. The Portfolio may also invest to a lesser extent in debt securities and other types of investments if the Sub-advisor believes purchasing them would help achieve the Portfolio's objective. The Portfolio will, under normal circumstances, invest at least 65% of its total assets in issuers located in at least three different countries other than the United States. The Portfolio may hold a portion of its assets in cash or money market instruments.
The Portfolio will consider an issuer of securities to be "located in a country other than the United States" if it is organized under the laws of a country other than the United States and has a principal office outside the United States, or if it derives 50% or more of its total revenues from business outside the United States. The Portfolio may invest in securities of issuers in emerging markets, as well as more developed markets. Investing in emerging markets generally involves more risks then in investing in developed markets. For a discussion of the special risks involved in investing in emerging markets and foreign securities in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investments Methods."
The Portfolio will not limit its investments to any particular type of company. The Portfolio may invest in companies, large or small, whose earnings are believed to be in a relatively strong growth trend, or in companies in which significant further growth is not anticipated but whose market value per share is thought to be undervalued. It may invest in small and relatively less well-known companies which meet these characteristics.
The Sub-advisor believes that the securities markets of many nations move relatively independently of one another, because business cycles and other economic or political events that influence one country's securities markets may have little effect on securities markets in other countries. By investing in a diversified portfolio of foreign securities, the Sub-advisor attempts to reduce the risks associated with being invested in the economy of only one country. The countries which the Sub-advisor believes offer attractive opportunities for investment may change from time to time.
The Portfolio may seek investment opportunities among securities of large, widely-traded companies as well as securities of smaller, less well known companies. Smaller companies may present greater opportunities for capital appreciation, but may also involve greater risks. They may have limited product lines, markets or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume. As a result, the prices of these securities may fluctuate more than prices of securities of larger, more established companies.
Defensive Strategies. At times, the Sub-advisor may judge that conditions in the international securities markets make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times, the Sub-advisor may temporarily use alternative strategies, primarily designed to reduce fluctuations in the value of portfolio assets. In implementing these defensive strategies, the Portfolio may invest without limit in cash and money market instruments, securities primarily traded in the U.S. markets, or in any other securities the Sub-advisor considers consistent with such defensive strategies. It is impossible to predict when or for how long the Portfolio will use these alternative strategies.
Options and Futures Transactions. The Portfolio may engage in a variety of transactions involving the use of options and futures contracts and in foreign currency exchange transactions for purposes of increasing its investment return or hedging against market changes. The Portfolio may seek to increase its current return by writing covered call options and covered put options on its portfolio securities or other securities in which it may invest. The Portfolio receives a premium from writing a call or put option, which increases the Portfolio's return if the option expires unexercised or is closed out at a net profit. The Portfolio may also buy and sell put and call options on such securities for hedging purposes. When the Portfolio writes a call option on a portfolio security, it gives up the opportunity to profit from any increase in the price of the security above the exercise price of the option; when it writes a put option, the Portfolio takes the risk that it will be required to purchase a security from the option holder at a price above the current market price of the security. The Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. The Portfolio may also from time to time buy and sell combinations of put and call options on the same underlying security to earn additional income.
The Portfolio may buy and sell index futures contracts for hedging purposes. An "index future" is a contract to buy or sell units of a particular index at an agreed price on a specified future date. Depending on the change in value of the index between the time when the Portfolio enters into and terminates an index future transaction, the Portfolio realizes a gain or loss. The Portfolio may also purchase and sell call and put options on index futures or on indices in addition or as an alternative to purchasing or selling index futures or, to the extent permitted by applicable law, to earn additional income. The Portfolio may also purchase warrants, issued by banks and other financial institutions, whose values are based on the values from time to time of one or more securities indices.
The Portfolio generally expects that its options and futures contract transactions will be conducted on recognized exchanges. In certain instances, however, the Portfolio may purchase and sell options in the over-the-counter markets. The Portfolio's ability to terminate options in over-the-counter markets may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions would be unable to meet their obligations to the Portfolio.
Because the markets for certain options and futures contracts in which the Portfolio will invest (including markets located in foreign countries) are relatively new and still developing and may be subject to regulatory restraints, the Portfolio's ability to engage in transactions using such investments may be limited. The Portfolio's ability to engage in hedging transactions may be limited by certain regulatory requirements and tax considerations. The Portfolio's hedging transactions may affect the character or amount of the Portfolio's distributions. For an additional discussion of options and futures transactions and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Exchange Transactions. The Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future exchange rates. The Sub-advisor may engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging") and to protect against changes in the value of specific portfolio positions ("position hedging").
The Portfolio may engage in transaction hedging to protect against a change in foreign currency exchange rates between the date on which the Portfolio contracts to purchase or sell a security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency.
If conditions warrant, for transaction hedging purposes the Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. In addition, for transaction hedging purposes the Portfolio may also purchase or sell exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in value of a currency in which securities the Portfolio intends to buy are denominated). For position hedging purposes, the Portfolio may purchase or sell foreign currency futures contacts, foreign currency forward contracts, and options on foreign currency futures contracts and on foreign currencies. In connection with position hedging, the Portfolio may also purchase or sell foreign currency on a spot basis.
The Portfolio's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. The Sub-advisor will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the Portfolio. Cross hedging transactions by the Portfolio involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge.
The decision as to whether and to what extent the Portfolio will engage in foreign currency exchange transactions will depend on a number of factors, including prevailing market conditions, the composition of the Portfolio's portfolio and the availability of suitable transactions. Accordingly, there can be no assurance that the Portfolio will engage in foreign currency exchange transactions at any given time or from time to time. For an additional discussion of foreign currency exchange transactions, certain risks involved therein, and the risk of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to broker-dealers. Such transactions must be fully collateralized at all times. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of securities lending and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. Such transactions must be fully collateralized at all times. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Forward Commitments. The Portfolio may purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of forward commitments and certain risks involved therein, see the Trust's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Portfolio and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
AST Putnam Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide a balanced investment composed of a well-diversified portfolio of stocks and bonds which will produce both capital growth and current income. This is a fundamental objective of the Portfolio.
Investment Policies:
In seeking its objective the Portfolio may invest in almost any type of security or negotiable instrument, including cash or money market instruments. The Portfolio's portfolio will include some securities selected primarily to provide for capital protection, others selected for dependable income and still others for growth in value. The portion of the Portfolio's assets invested in equity securities and fixed income securities will vary from time to time in light of the Portfolio's investment objective, changes in interest rates and economic and other factors. However, under normal market conditions, it is expected that at least 25% of the Portfolio's total assets will be invested in fixed income securities, which for this purpose includes debt securities, preferred stocks and that portion of the value of convertible securities attributable to the fixed income characteristics of those securities.
Defensive Strategies. At times, the Sub-advisor may judge that conditions in the securities markets make pursuing the Portfolio's basic investment strategy inconsistent with the best interests of its shareholders. At such times, the Sub-advisor may temporarily use alternative strategies primarily designed to reduce fluctuations in the value of the Portfolio's assets. In implementing these defensive strategies, the Portfolio may concentrate its investments in debt securities, preferred stocks, cash or money market instruments or invest in any other securities the Sub-advisor considers consistent with such defensive strategies. It is impossible to predict when, or for how long, the Portfolio will use these alternative strategies.
Foreign Securities. The Portfolio may invest up to 20% of its assets in securities traded in foreign securities markets. The Portfolio may also purchase Eurodollar certificates of deposit without regard to the 20% limit. The Portfolio may invest in securities principally traded in, or issued by issuers located in, underdeveloped and developing nations, which are sometimes referred to as "emerging markets." For a discussion of the special risks involved in investing in developing countries and certain risks involved in investing in foreign securities, in general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may buy or sell foreign currencies and foreign currency forward contracts for hedging purposes in connection with its foreign investments. For a discussion of foreign currency transactions, certain risks involved therein, and the risk of currency fluctuations generally, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Fixed-Income Securities. The Portfolio may invest in both higher-rated and lower-rated fixed-income securities. The values of fixed-income securities fluctuate in response to changes in interest rates. Thus, a decrease in interest rates will generally result in an increase in the value of the Portfolio's fixed-income securities. Conversely, during periods of rising interest rates, the value of the Portfolio's fixed-income securities will generally decline. In addition, the values of such securities are affected by changes in general economic conditions and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of any fixed-income security and in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from such securities, but will affect the Portfolio's net asset value. The values of lower-rated securities generally fluctuate more than those of higher-rated securities.
The Portfolio will not invest in securities rated at the time of purchase lower than B by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") and other nationally recognized rating organizations or in unrated securities which the Sub-advisor determines are of comparable quality. Securities rated B are predominantly speculative and have large uncertainties or major risk exposures to adverse conditions. Securities rated lower than Baa by Moody's or BBB by S&P and unrated securities of comparable quality are sometimes referred to as "junk bonds." The rating services' descriptions of securities in the various rating categories, including the speculative characteristics of securities in the lower rating categories, are set forth in the Appendix to the Trust's SAI. The Portfolio will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase, although the Sub-advisor will monitor the investment to determine whether continued investment in the security will assist in meeting the Portfolio's investment objective.
The Sub-advisor seeks to minimize the risks of investing in lower-rated securities through careful investment analysis. When the Portfolio invests in securities in the lower rating categories, the achievement of the Portfolio's goals is more dependent on the Sub-advisor's ability than would be the case if the Portfolio were investing in securities in the higher rating categories. For an additional discussion of lower-rated securities and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
At times, a substantial portion of portfolio assets may be invested in securities as to which the Portfolio, by itself or together with other funds and accounts managed by the Sub-advisor and its affiliates, holds all or a major portion. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the Portfolio could find it more difficult to sell these securities when the Sub-advisor believes it advisable to do so or may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the Portfolio's net asset value. In order to enforce its rights in the event of a default of these securities, the Portfolio may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on the securities. This could increase the Portfolio's operating expenses and adversely affect the Portfolio's net asset value.
Certain securities held by the Portfolio may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by the Portfolio during a time of declining interest rates, the Portfolio may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed.
Zero Coupon Bonds. The Portfolio may invest in so-called zero coupon bonds whose values are subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Zero coupon bonds are issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security. Zero coupon bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently. The Portfolio is required to accrue and distribute income from zero coupon bonds on a current basis, even though it does not receive that income currently in cash. Thus the Portfolio may have to sell other investments to obtain cash needed to make income distributions. For an additional discussion of zero coupon bonds and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Financial Futures, Index Futures and Options. The Portfolio may buy and sell financial futures contracts on stock indexes, U.S. government securities, fixed income securities and currencies. A futures contract is a contract to buy or sell units of a particular stock index, or a certain amount of a U.S. government security, foreign fixed income security or foreign currency, at an agreed price on a specified future date. Depending on the change in value of the index, security or currency between the time a fund enters into and terminates a futures contract, that fund realizes a gain or loss. The Portfolio may purchase and sell futures contracts for hedging purposes and for non-hedging purposes, such as to adjust its exposure to the relevant stock or bond markets. For example, when the Sub-advisor wants to increase the Portfolio's exposure to equity securities, it may do so by taking long positions in futures contracts on equity indices such as futures contracts on the Standard & Poor's 500 Composite Stock Price Index. Similarly, when the Sub-advisor wants to increase the Portfolio's exposure to fixed income securities, it may do so by taking long positions in futures contracts relating to fixed income securities such as futures contracts on U.S. Treasury securities.
The Portfolio may buy and sell call and put options on futures contracts or on stock indices in addition to or as an alternative to purchasing or selling futures contracts or to earn additional income.
Options on certain U.S. government securities are traded in significant volume on securities exchanges. However, other options which the Portfolio may purchase or sell are traded in the "over-the-counter" market rather than on an exchange. This means that the Portfolio will enter into such option contracts with particular securities dealers who make markets in these options. The Portfolio's ability to terminate options positions in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in such transactions might fail to meet their obligations to the Portfolio. For an additional discussion of options and futures transactions and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Options. The Portfolio may seek to increase its current return by writing covered call and put options on securities it owns or in which it may invest. The Portfolio receives a premium from writing a call or put option, which increases the return if the option expires unexercised or is closed out at a net profit.
When the Portfolio writes a call option, it gives up the opportunity to profit from any increase in the price of a security above the exercise price of the option; when it writes a put option, the Portfolio takes the risk that it will be required to purchase a security from the option holder at a price above the current market price of the security. The Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written.
The Portfolio may also buy and sell put and call options for hedging purposes. From time to time, the Portfolio may also buy and sell combinations of put and call options on the same underlying security to earn additional income. The aggregate value of the securities underlying the options may not exceed 25% of portfolio assets. The use of these strategies may be limited by applicable law. For an additional discussion of option transactions and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to broker-dealers. Such transactions must be fully collateralized at all times. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of securities lending and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies" and "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. Such transactions must be fully collateralized at all times. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Forward Commitments. The Portfolio may purchase securities for future delivery, which may increase its overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. These transactions involve some risk to the Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral or completing the transaction. For a discussion of forward commitments and certain risks involved therein, see the Trust's SAI under "Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Portfolio and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Portfolio Turnover. The length of time the Portfolio has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the Portfolio is known as "portfolio turnover." As a result of the Portfolio's investment policies, under certain market conditions the Portfolio's turnover rate may be higher than that of other mutual funds. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Cohen & Steers Realty Portfolio:
Investment Objective: The investment objective of the Portfolio is to maximize total return through investment in real estate securities. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio pursues its investment objective of maximizing total return by seeking, with approximately equal emphasis, capital appreciation (both realized and unrealized) and current income. There can be no assurance that the Portfolio's investment objective will be achieved.
Under normal circumstances, the Portfolio will invest substantially all of its assets in the equity securities of real estate companies. Such equity securities will consist of (i) common stocks (including shares in real estate investment trusts), (ii) rights or warrants to purchase common stocks, (iii) securities convertible into common stocks where the conversion feature represents, in the Sub-advisor's view, a significant element of the securities' value, and (iv) preferred stocks. For purposes of the Portfolio's investment policies, a "real estate company" is one that derives at least 50% of its revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate or that has at least 50% of its assets in such real estate. The Portfolio may invest up to 10% of its total assets in securities of foreign real estate companies. For a discussion of certain risks involved in investing in foreign securities in general, including the risks of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." When, in the judgment of the Portfolio's Sub-advisor, market or general economic conditions justify a temporary defensive position, the Portfolio will deviate from its investment objective and invest all or any portion of its assets in high-grade debt securities, including corporate debt securities, U.S. government securities, and short-term money market instruments, without regard to whether the issuer is a real estate company. The Portfolio may also at any time invest funds awaiting investment or funds held as reserves to satisfy redemption requests or to pay dividends and other distributions to shareholders in short-term money market instruments.
The Portfolio will not invest more than 15% of its net assets in illiquid securities. For this purpose illiquid securities include, among others, securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. Certain securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation. The Sub-advisor will monitor the liquidity of such restricted securities under the supervision of the Board of Trustees. For a discussion of illiquid securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Real Estate Investment Trusts. The Portfolio may invest without limit in shares of real estate investment trusts ("REITs"). REITs pool investors' funds for investment primarily in income producing real estate or real estate related loans or interests. A REIT is not taxed on amounts distributed to shareholders if it complies with several requirements relating to its organization, ownership, assets, and income and a requirement that it distribute to its shareholders at least 95% of its taxable income (other than net capital gains) for each taxable year. REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority of their assets directly in real property, derive their income primarily from rents. Equity REITs can also realize capital gains or losses by selling properties that have appreciated or depreciated in value. Mortgage REITs, which invest the majority of their assets in real estate mortgages, derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both Equity REITs and Mortgage REITs.
Risks of Investment in Real Estate Securities. The Portfolio will not invest in real estate directly, but only in securities issued by real estate companies. However, the Portfolio may be subject to risks similar to those associated with the direct ownership of real estate (in addition to securities markets risks) because of its policy of concentration in the securities of companies in the real estate industry. These include declines in the value of real estate, risks related to general and local economic conditions, dependency on management skill, heavy cash flow dependency, possible lack of availability of mortgage funds, overbuilding, extended vacancies of properties, increased competition, increases in property taxes and operating expenses, changes in zoning laws, losses due to costs resulting from the clean-up of environmental problems, liability to third parties for damages resulting from environmental problems, casualty or condemnation losses, limitations on rents, changes in neighborhood values, the appeal of properties to tenants and changes in interest rates.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon the skills of their managers and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code of 1986, as amended (the "Code"), or to maintain their exemptions from registration under the Investment Company Act of 1940 (the "1940 Act"). The factors noted in the previous paragraph may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
Investment Techniques. The Portfolio is authorized to use the following investment techniques, subject to the accompanying restrictions. Although these techniques or strategies are used regularly by some investment companies, the Sub-advisor expects that the Portfolio's use of these techniques will not be routine and will be limited to special situations.
Options on Securities and Stock Indices. The Portfolio may write (i.e., sell) covered put and call options and purchase put and call options on securities or stock indices that are listed on a national securities or commodities exchange. An option on a security is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security (in the case of a call option) or to sell a specified security (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a stock index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option.
The Portfolio may write a call or put option only if the option is "covered." This means that so long as the Portfolio is obligated as the writer of a call option, it will own the underlying securities subject to the call, or hold a call at the same or lower exercise price, for the same exercise period, and on the same securities as the written call. A put is covered if the Portfolio maintains collateral consisting of cash or other liquid assets with a value equal to the exercise price in a segregated account, or holds a put on the same underlying security at an equal or greater exercise price. The value of the underlying securities on which options may be written at any one time will not exceed 25% of the total assets of the Portfolio. The Portfolio will not purchase put or call options if the aggregate premiums paid for such options would exceed 5% of its total assets at the time of purchase.
Futures Contracts. The Portfolio may buy and sell financial futures contracts, stock and bond index futures contracts, foreign currency futures contracts and options on any of the foregoing. A financial futures contract is an agreement between two parties to buy or sell a specified debt security at a set price on a future date. An index futures contract is an agreement to take or make delivery of an amount of cash based on the difference between the value of the index at the beginning and at the end of the contract period. A futures contract on a foreign currency is an agreement to buy or sell a specified amount of a currency for a set price on a future date. For a discussion of the risks involved in investments in futures and related options, and certain limitations of such investments, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Forward Foreign Currency Contracts. The Portfolio may enter into forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Portfolio from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers.
The Portfolio will enter into forward contracts under the following circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security in relation to another currency by entering into a forward contract to buy the amount of foreign currency needed to settle the transaction. Second, when it is believed that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell or buy the amount of the former foreign currency (or another currency which acts as a proxy for that currency) approximating the value of some or all of the Portfolio's portfolio securities denominated in such foreign currency. The second investment practice is generally referred to as "cross-hedging." The Portfolio's forward transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times involve currencies in which no portfolio securities are denominated. The Portfolio will not enter into forward foreign currency contracts if, as a result, the Portfolio will have more than 15% of the value of its net assets committed to the consummation of such contracts. To the extent such contracts would be deemed to be illiquid, they will be included in the maximum limitation of 15% of net assets invested in illiquid securities.
For an additional discussion of foreign currency contracts and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may enter into short sales, provided the dollar amount of short sales at any one time would not exceed 25% of the net assets of the Portfolio, and the value of securities of any one issuer in which the Portfolio is short would not exceed the lesser of 2% of the value of the Portfolio's net assets or 2% of the securities of any class of any issuer. The Portfolio must maintain collateral in a segregated account consisting of cash or other liquid assets with a value equal to the current market value of the shorted securities, which are marked to market daily. If the Portfolio owns an equal amount of such securities or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issuer as, and equal in amount to, the securities sold short (which sales are commonly referred to as "short sales against the box"), the above requirements are not applicable.
Non-Diversified Status, Portfolio Turnover. The Portfolio is classified as a "non-diversified" investment company under the 1940 Act, which means the Portfolio is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. However, the Portfolio intends to conduct its operations so as to qualify as a regulated investment company for purposes of the Code, which generally will relieve the Portfolio of any liability for Federal income tax to the extent its earnings are distributed to shareholders. See this Prospectus under "Tax Matters." To so qualify, among other requirements, the Portfolio will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Portfolio's total assets will be invested in the securities of a single issuer, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Portfolio will not own more than 10% of the outstanding voting securities of a single issuer. The Portfolio's investments in securities issued by the U.S. Government, its agencies and instrumentalities are not subject to these limitations. Because the Portfolio, as a non-diversified investment company, may invest in a smaller number of issuers than a diversified investment company, an investment in the Portfolio may present greater risk to an investor than an investment in a diversified company.
The Portfolio may have higher portfolio turnover than other mutual funds with similar objectives. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Stein Roe Venture Portfolio:
Investment Objective: The investment objective of the Portfolio is long-term capital appreciation. The Portfolio emphasizes investments in financially strong small and medium-sized companies, based principally on management appraisal and stock valuation.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in a diversified portfolio of common stocks and other equity-type securities (such as preferred stocks, securities convertible or exchangeable for common stocks, and warrants or rights to purchase common stocks) of entrepreneurially managed companies that the Sub-advisor believes represent special opportunities. The Portfolio emphasizes investments in financially strong small and medium-sized companies, based principally on appraisal of their management and stock valuations. The Sub-advisor considers "small" and "medium-sized" companies to be those with market capitalizations of less than $1 billion and $1 to $3 billion, respectively.
In both its initial and ongoing appraisals of a company's management, the Sub-advisor seeks to know both the principal owners and senior management and to assess their business judgment and strategies through personal visits. The Sub-advisor favors companies whose management has an owner/operator, risk-averse orientation and a demonstrated ability to create wealth for investors. Attractive company characteristics include unit growth, favorable cost structures or competitive positions, and financial strength that enables management to execute business strategies under difficult conditions. A company is attractively valued when its stock can be purchased at a meaningful discount to the value of the underlying business.
Portfolio Investments and Strategies.
Debt Securities. In pursuing its investment objective, the Portfolio may invest in debt securities of corporate and governmental issuers. The Portfolio may invest up to 35% of its net assets in debt securities, but does not expect to invest more than 5% of its net assets in debt securities that are rated below investment grade (i.e., below the four highest grades assigned by a nationally recognized statistical rating organization). Securities in the fourth highest grade may possess speculative characteristics, and changes in economic conditions are more likely to affect the issuer's capacity to pay interest and repay principal.
The risks inherent in debt securities depend primarily on the term and quality of the obligation as well as on market conditions. A decline in the prevailing levels of interest rates generally increases the value of debt securities. Conversely, an increase in rates usually reduces the value of debt securities. Securities that are rated below investment grade are considered predominantly speculative with respect to the issuer's capacity to pay interest and repay principal according to the terms of the obligation, and therefore carry greater investment risk, including the possibility of issuer default and bankruptcy. When the Sub-advisor determines that adverse market or economic conditions exist and considers a temporary defensive position advisable, the Portfolio may invest without limitation in high-quality fixed income securities or hold assets in cash or cash equivalents.
Convertible Securities. By investing in convertible securities, the Portfolio obtains the right to benefit from the capital appreciation potential in the underlying stock upon exercise of the conversion right, while earning higher current income than would be available if the stock were purchased directly. In determining whether to purchase a convertible security, the Sub-advisor will consider substantially the same criteria that would be considered in purchasing the underlying stock.
Although convertible securities purchased by the Portfolio are frequently rated investment grade, the Portfolio also may purchase unrated securities or securities rated below investment grade if the securities meet the Sub-advisor's other investment criteria. Convertible securities rated below investment grade: (1) tend to be more sensitive to interest rate and economic changes; (2) may be obligations of issuers who are less creditworthy than issuers of higher quality convertible securities; and (3) may be more thinly traded due to the fact that such securities are less well known to investors than investment grade convertible securities, common stock or conventional debt securities. As a result, the Sub-advisor's own investment research and analysis tends to be more important than other factors in the purchase of such securities.
Foreign Securities. The Portfolio may invest in foreign securities. Other than American Depositary Receipts (ADRs), foreign debt securities denominated in U.S. dollars, and securities guaranteed by a U.S. person, the Portfolio is limited to investing no more than 25% of its total assets in foreign securities. The Portfolio may invest in sponsored or unsponsored ADRs. In addition to, or in lieu of, such direct investment, the Portfolio may construct a synthetic foreign debt position by (a) purchasing a debt instrument denominated in one currency, generally U.S. dollars; and (b) concurrently entering into a forward contract to deliver a corresponding amount of that currency in exchange for a different currency on a future date and at a specified rate of exchange. Because of the availability of a variety of highly liquid U.S. dollar debt instruments, a synthetic foreign debt position utilizing such U.S. dollar instruments may offer greater liquidity than direct investment in foreign currency debt instruments. In connection with the purchase of foreign securities, the Portfolio may contract to purchase an amount of foreign currency sufficient to pay the purchase price of the securities at the settlement date. Such a contract involves the risk that the value of the foreign currency may decline relative to the value of the dollar prior to the settlement date--this risk is in addition to the risk that the value of the foreign security purchased may decline. The Portfolio also may enter into foreign currency contracts as a hedging technique to limit or reduce exposure to currency fluctuations. In addition, the Portfolio may use options and futures contracts, as described below, to limit or reduce exposure to currency fluctuations. For a further discussion of the risks involved in investing in foreign securities, including the risk of currency fluctuations, see this prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Interfund Lending; When-Issued and Delayed-Delivery Securities. The Portfolio may participate in an interfund lending program, subject to certain restrictions described in the SAI. The Portfolio may invest in securities purchased on a when-issued or delayed-delivery basis. Although the payment terms of these securities are established at the time the Portfolio enters into the commitment, the securities may be delivered and paid for a month or more after the date of purchase, when their value may have changed. The Portfolio will make such commitments only with the intention of actually acquiring the securities, but may sell the securities before settlement date if it is deemed advisable for investment reasons.
Derivatives. Consistent with its objective, the Portfolio may invest in a broad array of financial instruments and securities, including conventional exchange-traded and non-exchange-traded options, futures contracts, futures options, swaps, caps, floors, collars, securities collateralized by underlying pools of mortgages or other receivables, floating rate instruments, and other instruments that securitize assets of various types ("Derivatives"). In each case, the value of the instrument or security is "derived" from the performance of an underlying asset or a "benchmark" such as a security index, an interest rate, or a currency. The Portfolio does not expect to invest more than 5% of its net assets in any type of Derivative except for options, futures contracts, and futures options.
Derivatives are most often used to manage investment risk or to create an investment position indirectly because they are more efficient or less costly than direct investment. They also may be used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Sub-advisor's ability to correctly predict changes in the levels and directions of movements in currency exchange rates, security prices, interest rates and other market factors affecting the Derivative itself or the value of the underlying asset or benchmark. In addition, correlations in the performance of an underlying asset to a Derivative may not be well established. Finally, privately negotiated and over-the-counter Derivatives may not be as well regulated and may be less marketable than exchange-traded Derivatives. For an additional discussion of certain risks involved in derivative securities, see this Prospectus under "Certain Risk Factors and Investment Methods."
In seeking to achieve its desired investment objective, provide additional revenue, or to hedge against changes in security prices, interest rates or currency fluctuation, the Portfolio may: (1) purchase and write both call options and put options on securities, indices and foreign currencies; (2) enter into interest rate, index and foreign currency futures contracts; (3) write options on such futures contracts; and (4) purchase other types of forward or investment contracts linked to individual securities, indices or other benchmarks. The Portfolio may write a call or put option only if the option is covered. As the writer of a covered call option, the Portfolio foregoes, during the option's life, the opportunity to profit from increases in market value of the security covering the call option above the sum of the premium and the exercise price of the call. Because futures positions may require low margin deposits, the use of futures contracts involves a high degree of leverage and may result in losses in excess of the amount of the margin deposit.
Short Sales Against the Box. The Portfolio may sell short securities it owns or has the right to acquire without further consideration, a technique called selling short "against the box." Short sales against the box may protect the Portfolio against the risk of losses in the value of its portfolio securities because any unrealized losses with respect to such securities should be wholly or partly offset by a corresponding gain in the short position. However, any potential gains in such securities should be wholly or partially offset by a corresponding loss in the short position. Short sales against the box may be used to lock in a profit on a security when, for tax reasons or otherwise, the Sub-advisor does not want to sell the security.
Risks and Investment Considerations.
All investments, including those in mutual funds, have risks. No investment is suitable for all investors. The Portfolio is designed for long-term investors who want greater return potential than is available from the stock market in general, and who are willing to tolerate the greater investment risk and market volatility associated with investments in small and medium-sized companies. Of course, there can be no guarantee that the Portfolio will achieve its objective.
The Portfolio's investment objective is not a fundamental policy and may be changed by the Board of Trustees without shareholder approval. However, shareholders of the Portfolio will receive at least 30 days written notice prior to any change in the Portfolio's investment objective. If there is a change in the Portfolio's investment objective, shareholders should consider whether the Portfolio remains an appropriate investment.
Securities of small and medium-sized companies may be subject to greater price volatility than securities of larger companies and tend to have a lower degree of market liquidity. They also may be more sensitive to changes in economic and business conditions, and may react differently than securities of larger companies. In addition, such companies are less well known to the investing public and may not be as widely followed by the investment community.
Although the Portfolio does not attempt to reduce or limit risk through wide industry diversification of investment, it usually allocates its investments among a number of different industries rather than concentrating in a particular industry or group of industries. The Portfolio will not invest more than 25% of the total value of its assets (at the time of investment) in the securities of companies in any one industry.
Bankers Trust Enhanced 500 Portfolio:
Investment Objective: The investment objective of the Portfolio is to outperform the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500(R)") through stock selection resulting in different weightings of common stocks relative to the index.
Investment Policies:
The Portfolio will include the common stock of companies included in 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"). The Sub-advisor 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 outperform the S&P 500, the Sub-advisor starts with a portfolio of stocks representative of the holdings of the index. It then uses a set of quantitative criteria that are designed to indicate whether a particular stock will predictably generate returns that will exceed or be less than the performance of the S&P 500. Based on these criteria, the Sub-advisor determines whether the Portfolio should overweight, underweight or hold a neutral position in the stock relative to the proportion of the S&P 500 that the stock represents. While the majority of the issues held by the Portfolio will have neutral weightings to the S&P 500, approximately 100 will be over or underweighted relative to the index. In addition, the Sub-advisor may determine based on the quantitative criteria that certain S&P 500 stocks should not be held by the Portfolio in any amount. The Sub-advisor believes that the various quantitative criteria used to determine which issues to over or underweight will balance each other so that the overall risk of the Portfolio will not be materially different than risk of the S&P 500 itself.
The Sub-advisor will not purchase the stock of its parent company, Bankers Trust New York Corporation, which is included in the S&P 500.
About the S&P 500. The S&P 500 is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all common stocks publicly traded in the United States, most of which are listed on the NYSE. Stocks in the S&P 500 are weighted according to their market capitalization (i.e., the number of shares outstanding multiplied by the stock's current price). 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. "Standard & Poor's(R)", "S&P 500(R)", "Standard & Poor's 500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Investment Manager and Sub-advisor.
The Portfolio is not sponsored, endorsed, sold or promoted by Standard &Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the shareholders of the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Portfolio particularly or the ability of the S&P 500 to track general stock market performance. S&P's only relationship to the Investment Manager or the Sub-advisor is the licensing of certain trademarks and trade names of S&P and of the S&P 500 which is determined, composed and calculated by S&P without regard to the Investment Manager, Sub-advisor, or Portfolio. S&P has no obligation to take the needs of the Investment Manager, Sub-advisor or the shareholders of the Portfolio into consideration in determining, composing or calculating the S&P 500. S&P is not responsible for and has not participated in the determination of the prices and amount of the Portfolio or the timing of the issuance or sale of the Portfolio, or in the determination or calculation of the Portfolio's net asset value. S&P has no obligation or liability in connection with the administration, marketing or trading of the Portfolio.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or any data included therein and shall have no liability for any errors, omissions, or interruptions therein. S&P makes no warranty, express or implied, as to the results to be obtained by the Portfolio, shareholders of 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 expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the S&P 500 or any data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability for any special, punitive, indirect or consequential damages (including lost profits), even if notified of the possibility of such damages.
For more information about the performance of the S&P 500, see the Trust's SAI under "Investment Objectives and Policies."
Investment Considerations. 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 utilizes a "quantitative" investment approach and attempts to outperform the S&P 500 through statistical procedures. Therefore, the Sub-advisor will not attempt to judge the merits of any particular stock as an investment.
The Portfolio may be appropriate for investors who are willing to endure stock market fluctuations in pursuit of potentially higher long-term returns. The Portfolio invests primarily for growth. The Portfolio is intended to be a long-term investment vehicle and is not designed to provide investors with a means of speculating on short-term market movements.
As a mutual fund investing primarily in common stocks, the 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. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline.
The Portfolio's investment objective is not a fundamental policy and may be changed upon notice to, but without the approval of, the Portfolio's shareholders. If there is a change in the Portfolio's investment objective, a shareholder should consider whether the Portfolio remains an appropriate investment. Shareholders of the Fund will receive 30 days prior written notice with respect to any change in the investment objective of the Fund.
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. In the unlikely event that the S&P 500 should concentrate to an extent greater than that amount, the Portfolio's ability to achieve its objective may be impaired. These are fundamental investment policies of the Portfolio which may not be changed without shareholder 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 with maturities of more than seven days). Additional information on the investment policies and restrictions of the Portfolio are contained in the Trust's SAI under Investment Objectives and Policies" and "Investment Restrictions."
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 S&P 500. Securities index futures contracts and related options, warrants and convertible securities may be used for several reasons: to simulate full investment in the S&P 500 while retaining a cash balance for fund management purposes, to facilitate trading, to reduce transaction costs or to seek higher investment returns when a futures contract, option, warrant or convertible security is priced more attractively than the underlying equity security or S&P 500. These instruments may be considered derivatives.
The following discussion contains more detailed information about types of instruments in which the Portfolio may invest and strategies the Sub-advisor may employ in pursuit of the Portfolio's investment objective.
Other Equity Securities. As part of one of the strategies used to outperform the S&P 500, the Portfolio may invest in the equity securities of companies that are not included in the S&P 500. These equity securities may include securities of companies that are the subject of publicly announced acquisitions or other major corporate transactions. Securities of some of these companies may perform much like cash or fixed income investments. In such cases, the Portfolio may enter into securities index futures contracts and/or related options as described in this Prospectus in order to maintain its exposure to the equity markets when investing in these companies. While this strategy is intended to generate additional gains for the Portfolio without materially increasing the risk to which the Portfolio is subject, there can be no assurance that the strategy will achieve its intended results. The Portfolio will not invest more than 15% of its total assets in equity securities of companies not included in the S&P 500.
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 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.
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 maintains with its custodian a segregated account containing cash or other liquid assets 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 "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 Portfolio will only use derivatives for hedging purposes. While derivatives can be used as leveraged investments, the Portfolio may not use them to leverage its net assets. Derivatives will not be used to increase portfolio risk above the level that would 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. The Portfolio will not invest in such instruments as part of a temporary defensive strategy (in anticipation of declining stock prices) to protect against potential market declines.
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.
Warrants. 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 bonds or preferred stocks that 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 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 and convertible securities. 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 Fund will not use futures contracts, options, warrants and convertible securities for speculative purposes or to leverage their net assets. Accordingly, the primary risks associated with the use of futures contracts, options, warrants and convertible securities 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 and convertible securities; 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 and convertible securities 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 futures and related options, as well as when-issued and delayed-delivery securities, are not used by the Portfolio 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 establishing a segregated account with the Portfolio's custodian containing cash or liquid portfolio securities in an amount at all times equal to or exceeding the Portfolio's commitment with respect to these instruments or contracts.
Marsico Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth. This is a fundamental objective of the Portfolio. Income realization is not an investment objective and any income realized on the Portfolio's investments, therefore, will be incidental to the Portfolio's objective.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in common stocks. Common stock investments will be in industries and companies that the Sub-advisor believes are experiencing favorable demand for their products and services, and which operate in a favorable competitive and regulatory environment. The Sub-advisor expects that the majority of the Portfolio's assets will be invested in the common stocks of larger, more established companies. Although the Sub-advisor expects to invest primarily in equity securities, the Sub-advisor may increase the Portfolio's cash position without limitation when the Sub-advisor is of the opinion that appropriate investment opportunities for capital growth with desirable risk/reward characteristics are unavailable. The Portfolio may also invest to a lesser degree in preferred stocks, convertible securities, warrants, and debt securities when the Portfolio perceives an opportunity for capital growth from such securities or so that the Portfolio may receive a return on its idle cash.
Although it is the general policy of the Portfolio to purchase and hold securities for capital growth, changes in the Portfolio will be made as the Sub-advisor deems advisable. For example, portfolio changes may result from liquidity needs, securities having reached a price objective, or by reason of developments not foreseen at the time of the original investment decision. Portfolio changes may be effected for other reasons. In such circumstances, investment income will increase and may constitute a large portion of the return on the Portfolio and the Portfolio will not participate in the market advances or declines to the extent that it would if it were fully invested.
The Portfolio may invest in "special situations" from time to time. A "special situation" arises when, in the opinion of the Sub-advisor, the securities of a particular company will be recognized and appreciate in value due to a specific development, such as a technological breakthrough, management change or new product at that company. Investment in "special situations" carries an additional risk of loss in the event that the anticipated development does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may also purchase securities of foreign issuers, including foreign equity and debt securities and depositary receipts. Foreign securities are selected on a stock-by-stock basis without regard to any defined allocation among countries or geographic regions. However, certain factors such as expected levels of inflation, government policies influencing business conditions, the outlook for currency relationships, and prospects for economic growth among countries, regions or geographic areas may warrant greater consideration in selecting foreign stocks. For a discussion of depositary receipts and the risks involved in investing in foreign securities, including the risk of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Debt Securities. Debt securities that the Portfolio may purchase include corporate bonds and debentures, government securities, mortgage- and asset-backed securities, zero-coupon bonds, index/structured notes, high-grade commercial paper, certificates of deposit and repurchase agreements. The Portfolio will not invest more than 5% of its total assets in bonds rated below investment grade. The Portfolio will not invest more than 25% of its total assets in mortgage- and asset-backed securities. For a discussion of mortgage- and asset-backed securities and their risks, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Zero coupon, Pay-in-kind, and Step Coupon Securities. The Portfolio may invest up to 10% of its total assets in zero coupon, pay-in-kind and step coupon securities in the aggregate. Zero coupon bonds are debt securities that do not pay periodic interest, but are issued at a discount from their face value. The discount approximates the total amount of interest the security will accrue from the date of issuance to maturity. Pay-in-kind bonds normally give the issuer the option to pay cash at a coupon payment date or give the holder of the security a similar bond with the same coupon rate and a face value equal to the amount of the coupon payment that would have been made. Step coupon bonds begin to pay coupon interest, or pay an increased rate of interest, at some time after they are issued. The discount at which step coupon bonds trade depends on the time remaining until cash payments begin, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. The market value of zero coupon, pay-in-kind and step coupon bonds generally will fluctuate more in response to changes in interest rates than will conventional interest-paying securities with comparable maturities.
Index/structured Securities. The Portfolio may invest without limit in index/structured securities, which are debt securities, typically with short to intermediate terms, whose value at maturity or interest rate is linked to currencies, interest rates, equity securities, indices, commodity prices or other financial indicators. Such securities may be positively or negatively indexed (i.e., their value may increase or decrease if the reference index or instrument appreciates). Index/structured securities may have return characteristics similar to direct investments in the underlying instruments, but may be more volatile than the underlying instruments. The Portfolio bears the market risk of an investment in the underlying instruments, as well as the credit risk of the issuer of the index/structured security.
Futures, Options and Other Derivative Instruments. The Portfolio may purchase and write options on securities, financial indices, and foreign currencies, and may invest in futures contracts on securities, financial indices, and foreign currencies ("futures contracts"), options on futures contracts, forward contracts and swaps and swap-related products. These instruments will be used primarily to hedge the Portfolio's positions against potential adverse movements in securities prices, foreign currency markets or interest rates. To a limited extent, the Portfolio may also use derivative instruments for non-hedging purposes such as increasing the Portfolio's income or otherwise enhancing return. The Portfolio will not use futures contracts and options for leveraging purposes. There can be no assurance, however, that the use of these instruments by the Portfolio will assist it in achieving its investment objective. The use of futures, options, forward contracts and swaps involves investment risks and transaction costs to which the Portfolio would not be subject absent the use of these strategies. The Sub-advisor may, from time to time, at its own expense, call upon the experience of experts to assist it in implementing these strategies. The Portfolio may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk with respect to investments exposed to foreign currency fluctuations. For an additional discussion of futures and options transactions and certain risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements, which involve the purchase of a security by the Portfolio and a simultaneous agreement (generally with a bank or dealer) to repurchase the security from the Portfolio at a specified date or upon demand. The Portfolio's repurchase agreements will at all times be fully collateralized. For a discussion of repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a security and agrees to repurchase it at a mutually agreed upon date and price. For a discussion of reverse repurchase agreements and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio may purchase securities on a when-issued or delayed delivery basis, which generally involves the purchase of a security with payment and delivery due at some time in the future. The Portfolio does not earn interest on such securities until settlement and bears the risk of market value fluctuations between the purchase and settlement dates. For an additional discussion of when-issued securities and certain risks involved therein, see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may also invest up to 15% of its net assets in securities that are considered illiquid because of the absence of a readily available market or due to legal or contractual restrictions. Securities eligible for resale under Rule 144A of the Securities Act of 1933, and commercial paper issued under Section 4(2) of the Securities Act of 1933, could be deemed "liquid" when saleable in a readily available market. For a discussion of illiquid securities and the risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods." Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5% of its net assets (at the time of investment) in lower-rated high-yield bonds. For a discussion of these instruments and the risks involved therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Borrowing. Subject to the Portfolio's restrictions on borrowing, the Portfolio may borrow money from banks. For a discussion of the Portfolio's limitations on borrowing and certain risks involved in borrowing, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Portfolio Turnover. Because investment changes usually will be made without reference to the length of time a security has been held, a significant number of short-term transactions may result. To a limited extent, the Portfolio may also purchase individual securities in anticipation of relatively short-term price gains, and the rate of portfolio turnover will not be a determining factor in the sale of such securities. For an additional discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Neuberger&Berman Mid-Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth.
Investment Policies:
The Portfolio seeks capital growth through an investment approach that is designed to increase capital with reasonable risk. The Portfolio invests principally in common stocks of medium to large capitalization established companies, using the value-oriented investment approach. A value-oriented portfolio manager buys stocks that are selling at a price that is lower than what the manager believes they are worth. These include stocks that are currently under-researched or are temporarily out of favor on Wall Street.
Portfolio managers identify value stocks in several ways. One of the most common identifiers is a low price-to-earnings ratio -- that is, stocks selling at multiples of earnings per share that are lower than that of the market as a whole. Other criteria are high dividend yield, a strong balance sheet and financial position, a recent company restructuring with the potential to realize hidden values, strong management, and low price-to-book value (net value of the company's assets). The Sub-advisor looks for securities believed to be undervalued based on strong fundamentals, including a low price-to-earnings ratio, consistent cash flow, and the company's track record through all parts of the market cycle.
The Sub-advisor believes that, over time, securities that are undervalued are more likely to appreciate in price and be subject to less risk of price decline than securities whose market prices have already reached their perceived economic value. This approach also contemplates selling portfolio securities when they are considered to have reached their potential.
The Sub-advisor considers additional factors when selecting securities for the Portfolio, including ownership by a company's management of the company's stock and the dominance of a company in its particular field.
In addition to investing in the stocks of medium capitalization companies ("mid-cap companies") and large capitalization companies ("large-cap companies"), investments may be made in smaller, less well-known companies ("small-cap companies"). Investments in small- and mid-cap company stocks may present greater opportunities for capital appreciation than investments in stocks of large-cap companies. However, small- and mid-cap company stocks may have higher risk and volatility. These stocks generally are not as broadly traded as large-cap company stocks and their prices may fluctuate more widely and abruptly. Any such movements in stocks held by the Portfolio would be reflected in the Portfolio's net asset value. Small- and mid-cap company stocks are also less researched than large-cap company stocks and are often overlooked in the market.
An investment in the Portfolio involves certain risks, depending upon the types of investments it makes. Although the Portfolio ordinarily invests primarily in common stocks, when market conditions warrant it may invest in preferred stocks, securities convertible into or exchangeable for common stocks, U.S. Government and agency securities, debt securities, or money market instruments, or may retain assets in cash or cash equivalents. The Portfolio may not necessarily buy any or all of the types of securities or use any or all of the techniques that are described below. As discussed in more detail below, special risk factors apply to certain investments that may be made by the Portfolio, including investments in foreign securities, options contracts, zero coupon bonds, and debt securities rated below investment grade. Up to 15% of the Portfolio's net assets, measured at the time of investment, may be invested in corporate debt securities that are below investment grade or in comparable unrated securities. The use of hedging or other techniques is discretionary and no representation is made that the risk of the Portfolio will be reduced by the techniques discussed below.
Short-Term Trading; Portfolio Turnover. While the Sub-advisor does not purchase securities with the intention of profiting from short-term trading, the Portfolio may sell portfolio securities when the Sub-advisor believes that such action is advisable. Therefore, the Portfolio may have higher portfolio turnover than other mutual funds with similar objectives. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Cash Investments. For temporary defensive purposes, the Portfolio may invest up to 100% of its assets in cash or cash equivalents, U.S. Government and agency securities, commercial paper and certain other money market instruments, as well as repurchase agreements collateralized by the foregoing. To the extent that the Portfolio is invested in these temporary defensive instruments, it will not be pursuing its investment objective.
Fixed Income Securities. The Portfolio may invest in fixed income or debt securities, the value of which are likely to decline in times of rising interest rates and rise in times of falling interest rates. In general, the longer the maturity of a fixed income security, the more pronounced is the effect of a change in interest rates on the value of the security.
High quality debt securities are securities that have received a rating from at least one nationally recognized statistical rating organization ("NRSRO"), such as Standard & Poor's Rating Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Services, or Duff & Phelps Credit Rating Co. in one of the two highest rating categories (the highest category in the case of commercial paper) or, if not rated by any NRSRO, such as U.S. Government and Agency securities, have been determined by the Sub-advisor to be of comparable quality. Investment grade debt securities are those receiving ratings from at least one NRSRO in one of the four highest rating categories or, if unrated by any NRSRO, deemed comparable by the Sub-advisor to such rated securities. Securities rated by Moody's in its fourth highest category (Baa) may have speculative characteristics; a change in economic factors could lead to a weakened capacity of the issuer to repay.
Lower-Rated Fixed Income Securities. Debt securities rated lower than Baa by Moddy's or BBB by S&P and comparable unrated securities are considered to be below investment grade. The Portfolio may invest up to 15% of its net assets, measured at the time of investment, in debt securities that are below investment grade or comparable unrated securities. Securities rated below investment grade ("junk bonds") are deemed by Moody's and S&P (or foreign statistical rating organizations) to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. While such securities may be considered predominantly speculative, as debt securities, they generally have priority over equity securities of the same issuer and are generally better secured.
Debt securities in the lowest rating categories may involve a substantial risk of default or may be in default. Changes in economic conditions or developments regarding the individual issuer are more likely to cause price volatility and weaken the capacity of the issuer of such securities to make principal and interest payments than is the case for higher-grade debt securities. An economic downturn affecting the issuer may result in an increased incidence of default. In the case of lower-rated securities structured as zero coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities that pay interest periodically and in cash. The Sub-advisor will invest in such securities only when it concludes that the anticipated return to the Portfolio on such an investment warrants exposure to the additional level of risk.
For an additional discussion of the risks involved in lower-rated bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." For an additional description of the ratings services' securities ratings, see the Appendix the Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock, or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. Many convertible securities are rated below investment grade, or are unrated.
Zero Coupon Securities. Zero coupon securities do not pay interest currently; instead, they are sold at a discount from their face value and are redeemed at face value when they mature. Because zero coupon bonds do not pay current income, their prices can be very volatile when interest rates change.
U.S. Government and Agency Securities. U.S. Government securities are obligations of the U.S. Treasury backed by the full faith and credit of the United States. U.S. Government agency securities are issued or guaranteed by U.S. Government agencies, instrumentalities, or other U.S. Government-sponsored enterprises, such as the Government National Mortgage Association (commonly known as "Ginnie Mae"), Fannie Mae, formerly Federal National Mortgage Association, Freddie Mac, formerly Federal Home Loan Mortgage Corporation, Student Loan Marketing Association (commonly known as "Sallie Mae"), and Tennessee Valley Authority. Agency securities may be backed by the full faith and credit of the United States, the issuer's ability to borrow from the U.S. Treasury, subject to the Treasury's discretion in certain cases, or only by the credit of the issuer. U.S. Government and agency securities include U.S. Government and agency mortgage-backed securities. The market prices of U.S. Government and agency securities are not guaranteed by the government and generally fluctuate inversely with changing interest rates.
Borrowings. As a non-fundamental policy, the Portfolio may not purchase portfolio securities if its outstanding borrowings, including reverse repurchase agreements, exceed 5% of its total assets. In addition, the Portfolio is subject to the fundamental restriction on borrowing described in the Trust's SAI under "Investment Restrictions."
Illiquid, Restricted and Rule 144A Securities. Subject to guidelines established by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid securities, which are securities that cannot be expected to be sold within seven days at approximately the price at which they are valued. These may include unregistered or other restricted securities and repurchase agreements maturing in greater than seven days. Illiquid securities may also include Rule 144A securities (restricted securities that may be traded freely among qualified institutional buyers pursuant to an exemption from the registration requirements of the securities laws); these securities are considered illiquid unless the Sub-advisor, acting pursuant to the guidelines established by the Board of Trustees, determines they are liquid. Generally, foreign securities freely tradable in their principal market are not considered restricted or illiquid. Illiquid securities may be difficult for a Portfolio to value or dispose of due to the absence of an active trading market. The sale of some illiquid securities by the Portfolio may be subject to legal restrictions which could be costly to the Portfolio.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated foreign securities. Foreign securities are those of issuers organized and doing business principally outside the U.S., including non-U.S. governments, their agencies, and instrumentalities. The Portfolio may invest in foreign securities denominated in or indexed to foreign currencies, which may also be affected by the fluctuation of the foreign currencies relative to the U.S. dollar, irrespective of the performance of the underlying investment. The Sub-advisor considers these factors in making investments for the Portfolio. The Portfolio may invest in U.S. dollar-denominated and non-U.S. dollar-denominated corporate and government debt securities of foreign issuers. In addition, the Portfolio may enter into forward foreign currency contracts or futures contracts (agreements to exchange one currency for another at a future date) and related options to manage currency risks and to facilitate transactions in foreign securities.
The Portfolio may only invest up to 10% of the value of its total assets, measured at the time of investment, in foreign securities. The 10% limitation does not apply with respect to foreign securities that are denominated in U.S. dollars.
The Portfolio may invest in ADRs, EDRs, GDRs, and IDRs. ADRs (sponsored or unsponsored) are receipts typically issued by a U.S. bank or trust company evidencing its ownership of the underlying foreign securities. Most ADRs are denominated in U.S. dollars and are traded on a U.S. stock exchange. Issuers of the securities underlying unsponsored ADRs are not contractually obligated to disclose material information in the U.S. and, therefore, there may not be a correlation between such information and the market value of the unsponsored ADR. EDRs and IDRs are receipts typically issued by a European bank or trust company evidencing its ownership of the underlying foreign securities. GDRs are receipts issued by either a U.S. or non-U.S. banking institution evidencing its ownership of the underlying foreign securities and are often denominated in U.S. dollars.
Investments in foreign securities could be affected by factors generally not thought to be present in the U.S. Such factors include, but are not limited to, varying custody, brokerage and settlement practices; difficulty in pricing some foreign securities; and potentially adverse local, political, economic, social, or diplomatic developments, the investment significance of which may be difficult to discern.
In addition, the risks of investing in securities of foreign companies and governments include changes in currency exchange rates and currency exchange control regulations or other foreign or U.S. laws or restrictions applicable to such investments or devaluations of foreign currencies. A decline in the exchange rate would reduce the value of certain portfolio securities irrespective of the performance of the underlying investment. Investments in depositary receipts (whether or not denominated in U.S. dollars) may be subject to exchange controls and changes in rates of exchange with the U.S. dollar because the underlying security is usually denominated in foreign currency. All of the foregoing risks may be intensified in emerging industrialized and less developed countries.
For an additional discussion of foreign securities and the risks involved therein, including the risks of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may enter into forward contracts in order to protect against adverse changes in foreign currency exchange rates, to facilitate transactions in foreign securities and to repatriate dividend or interest income received in foreign currencies. The Portfolio may enter into contracts to purchase foreign currencies to protect against an anticipated rise in the U.S. dollar price of securities it intends to purchase. The Portfolio may also enter into contracts to sell foreign currencies to protect against a decline in value of its foreign currency denominated portfolio securities due to a decline in the value of foreign currencies against the U.S. dollar.
If the Portfolio enters into a forward contract to sell foreign currency, it may be required to place cash, fixed income or equity securities in a segregated account in an amount equal to the value of the Portfolio's total assets committed to the consummation of the forward contract. Although these contracts can protect the Portfolio from adverse exchange rates, they involve risk of loss if the Sub-advisor fails to predict foreign currency values correctly. For an additional discussion of forward contracts and their risks, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Covered Call Options. The Portfolio may try to reduce the risk of securities price changes (hedge) or generate income by writing (selling) covered call options against securities held in its portfolio having a market value not exceeding 10% of its net assets and may purchase call options in related closing transactions. When the Portfolio writes a covered call option against a security, the Portfolio is obligated to sell that security to the purchaser of the option at a fixed price at any time during a specified period if the purchaser decides to exercise the option. The maximum price the seller may realize on the security during the option period is the fixed price. The seller continues to bear the risk of a decline in the security's price, although this risk is reduced, at least in part, by the premium received for writing the option.
The writing of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions including transactional expense, price volatility and a high degree of leverage. The writing of options could result in significant increases in the Portfolio's turnover rate. The writing of options also could result in the inability of the Portfolio to purchase or sell a security at a time that would otherwise be favorable for it to do so, or the need for the Portfolio to sell a security at a disadvantageous time, due to its need to maintain "cover" or to segregate securities in connection with its use of options. Options are considered derivatives. For an additional discussion of options and their risks, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
When-Issued Securities. In a when-issued transaction, the Portfolio commits to purchase securities in order to secure an advantageous price and yield at the time of the commitment and pays for the securities when they are delivered at a future date (generally within two months). If the seller fails to complete the sale, the Portfolio may lose the opportunity to obtain a favorable price and yield. When issued securities may decline or increase in value during the period from the Portfolio's investment commitment to the settlement of the purchase, which may magnify fluctuation in the Portfolio's net asset value.
Repurchase Agreements. Subject to guidelines established by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. In a repurchase agreement, the Portfolio buys a security from a Federal Reserve member bank, or a securities dealer and simultaneously agrees to sell it back at a higher price, at a specified date, usually less than a week later. The underlying securities must fall within the Portfolio's investment policies and limitations. Under the repurchase agreement guidelines, the Sub-advisor monitors the creditworthiness of repurchase agreement sellers. For an additional discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Portfolio sells securities to a bank or a securities dealer and at the same time agrees to repurchase the same securities at a higher price on a specific date. During the period before the repurchase, the Portfolio continues to receive principal and interest payments on the securities. The Portfolio is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop"), as well as by the interest earned on the cash proceeds of the initial sale. Reverse repurchase agreements may increase fluctuations in the Portfolio's net asset value and may be viewed as a form of leverage. The Sub-advisor monitors the creditworthiness of parties to reverse repurchase agreements. For an additional discussion of reverse repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Short Sales Against-the-Box. The Portfolio may make short sales against-the-box. To effect a short sale, the Portfolio will borrow a security from a brokerage firm to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed at a later date. A short sale is "against-the-box" when, at all times during which a short position is open, the Portfolio owns an equal amount of such securities, or owns securities giving it the right, without payment of future consideration, to obtain an equal amount of securities sold short. Short sales against-the-box allow the Portfolio to hedge against price fluctuations by locking in a sale price for securities it does not wish to sell immediately.
Neuberger&Berman Mid-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation.
Investment Policies:
The Portfolio invests in a diversified portfolio of common stocks believed to have the maximum potential for long-term above-average capital appreciation. Under normal conditions, the Portfolio primarily invests in the common stocks of medium capitalization companies ("mid-cap companies"). Companies with equity market capitalizations from $300 million to $10 billion at the time of investment are considered mid-cap companies. The Trust may revise this definition based on market conditions. Although the Portfolio will invest primarily in the common stocks of mid-cap companies, investments may be made in the securities of larger, widely traded companies ("large-cap companies") as well as smaller, less well-known companies ("small-cap companies"). At times, markets may favor the relative safety of larger capitalization securities and the greater growth potential of smaller capitalization securities over medium capitalization securities. The Portfolio does not seek to invest in securities that pay dividends or interest, and any such income is incidental.
Investments in small- and mid-cap company stocks may present greater opportunities for capital appreciation than investments in stocks of large-cap companies. However, small- and mid-cap company stocks may have higher risk and volatility. These stocks generally are not as broadly traded as large-cap company stocks and their prices may fluctuate more widely and abruptly. Any such movements in stocks held by the Portfolio would be reflected in the Portfolio's net asset value. Small- and mid-cap company stocks are also less researched than large-cap company stocks and are often overlooked in the market.
The Portfolio is normally managed using a growth-oriented investment approach. A growth approach seeks stocks of companies that the Sub-advisor projects will grow at above-average rates and faster than others expect. The Portfolio's growth investment program involves greater risks and share price volatility than programs that invest in more undervalued securities. When the Sub-advisor believes that particular securities have greater potential for long-term capital appreciation, the Portfolio may purchase such securities at prices with higher multiples to measures of economic value (such as earnings or cash flow) than an investor focusing primarily on current fundamental value. These multiples, however, tend to be reasonable relative to the Sub-advisor's expectation of the company's earnings growth rate.
In selecting equity securities for the Portfolio, the Sub-advisor will consider, among other factors, an issuer's financial strength, competitive position, projected future earnings, management strength and experience, reasonable valuations, and other investment criteria. The Portfolio diversifies its investments among companies and industries.
An investment in the Portfolio involves certain risks, depending upon the types of investments it makes. Although equity securities are normally the Portfolio's primary investment, when market conditions warrant it may invest in preferred stocks, securities convertible into or exchangeable for common stocks, U.S. Government and Agency Securities, investment grade and non-investment grade debt securities, or money market instruments, or may retain assets in cash or cash equivalents. The Portfolio may not necessarily buy any or all of the types of securities or use any or all of the investment techniques that are described below. As discussed in more detail below, special risk factors apply to certain investments that may be made by the Portfolio, including investments in foreign securities, options and futures contracts, zero coupon bonds and debt securities rated below investment grade. As part of its strategy to achieve long-term capital appreciation, the Portfolio may invest up to 20% of its net assets in securities of issuers organized and doing business principally outside the United States. Up to 10% of the Portfolio's net assets, measured at the time of investment, may be invested in corporate debt securities that are below investment grade, but rated at least C by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Rating Group ("S&P"), or comparable unrated securities. The use of hedging or other techniques is discretionary and no representation is made that the risk of the Portfolio will be reduced by the techniques discussed below.
Short-Term Trading; Portfolio Turnover. While the Sub-advisor does not purchase securities with the intention of profiting from short-term trading, the Portfolio may sell portfolio securities when the Sub-advisor believes that such action is advisable. Therefore, the Portfolio may have higher portfolio turnover than other mutual funds with similar objectives. For a discussion of portfolio turnover and its effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Cash Investments. For temporary defensive purposes, the Portfolio may invest up to 100% of its assets in cash or cash equivalents, U.S. Government and agency securities, commercial paper and certain other money market instruments, as well as repurchase agreements collateralized by the foregoing. To the extent that the Portfolio is invested in these temporary defensive instruments, it will not be pursuing its investment objective.
Fixed Income Securities. The Portfolio may invest in fixed income or debt securities, the value of which are likely to decline in times of rising interest rates and rise in times of falling interest rates. In general, the longer the maturity of a fixed income security, the more pronounced is the effect of a change in interest rates on the value of the security.
High quality debt securities are securities that have received a rating from at least one nationally recognized statistical rating organization ("NRSRO"), such as Standard & Poor's Rating Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Services, or Duff & Phelps Credit Rating Co. in one of the two highest rating categories (the highest category in the case of commercial paper) or, if not rated by any NRSRO, such as U.S. Government and Agency securities, have been determined by the Sub-advisor to be of comparable quality. Investment grade debt securities are those receiving ratings from at least one NRSRO in one of the four highest rating categories or, if unrated by any NRSRO, deemed comparable by the Sub-advisor to such rated securities. Securities rated by Moody's in its fourth highest category (Baa) may have speculative characteristics; a change in economic factors could lead to a weakened capacity of the issuer to repay.
Lower-Rated Fixed Income Securities. Debt securities rated lower than Baa by Moddy's or BBB by S&P and comparable unrated securities are considered to be below investment grade. The Portfolio may invest up to 10% of its net assets, measured at the time of investment, in debt securities that are below investment grade or comparable unrated securities, but may not invest in securities rated below C by Moody's or S&P at the time of investment. Securities rated below investment grade ("junk bonds") are deemed by Moody's and S&P (or foreign statistical rating organizations) to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. While such securities may be considered predominantly speculative, as debt securities, they generally have priority over equity securities of the same issuer and are generally better secured.
Debt securities in the lowest rating categories may involve a substantial risk of default or may be in default. Changes in economic conditions or developments regarding the individual issuer are more likely to cause price volatility and weaken the capacity of the issuer of such securities to make principal and interest payments than is the case for higher-grade debt securities. An economic downturn affecting the issuer may result in an increased incidence of default. In the case of lower-rated securities structured as zero coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities that pay interest periodically and in cash. The Sub-advisor will invest in such securities only when it concludes that the anticipated return to the Portfolio on such an investment warrants exposure to the additional level of risk
If the quality of any fixed income securities held by the Portfolio deteriorates so that they no longer are rated at least C by Moody's or S&P, or, if unrated, are determined by the Sub-advisor to no longer be of comparable quality, the Portfolio will engage in an orderly disposition of the securities to the extent necessary to ensure that the Portfolio's holdings of such securities will not exceed 5% of its net assets.
For an additional discussion of the risks involved in lower-rated bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods." For an additional description of the ratings services' securities ratings, see the Appendix the Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock, or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. Many convertible securities are rated below investment grade, or are unrated.
Zero Coupon Securities. Zero coupon securities do not pay interest currently; instead, they are sold at a discount from their face value and are redeemed at face value when they mature. Because zero coupon bonds do not pay current income, their prices can be very volatile when interest rates change.
U.S. Government and Agency Securities. U.S. Government securities are obligations of the U.S. Treasury backed by the full faith and credit of the United States. U.S. Government agency securities are issued or guaranteed by U.S. Government agencies, instrumentalities, or other U.S. Government-sponsored enterprises, such as the Government National Mortgage Association (commonly known as "Ginnie Mae"), Fannie Mae, formerly Federal National Mortgage Association, Freddie Mac, formerly Federal Home Loan Mortgage Corporation, Student Loan Marketing Association (commonly known as "Sallie Mae"), and Tennessee Valley Authority. Agency securities may be backed by the full faith and credit of the United States, the issuer's ability to borrow from the U.S. Treasury, subject to the Treasury's discretion in certain cases, or only by the credit of the issuer. U.S. Government and agency securities include U.S. Government and agency mortgage-backed securities. The market prices of U.S. Government and agency securities are not guaranteed by the government and generally fluctuate inversely with changing interest rates.
Borrowings. As a non-fundamental policy, the Portfolio may not purchase portfolio securities if its outstanding borrowings, including reverse repurchase agreements, exceed 5% of its total assets. In addition, the Portfolio is subject to the fundamental restriction on borrowing described in the Trust's SAI under "Investment Restrictions."
Illiquid, Restricted and Rule 144A Securities. Subject to guidelines established by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid securities, which are securities that cannot be expected to be sold within seven days at approximately the price at which they are valued. These may include unregistered or other restricted securities and repurchase agreements maturing in greater than seven days. Illiquid securities may also include Rule 144A securities (restricted securities that may be traded freely among qualified institutional buyers pursuant to an exemption from the registration requirements of the securities laws); these securities are considered illiquid unless the Sub-advisor, acting pursuant to the guidelines established by the Board of Trustees, determines they are liquid. Generally, foreign securities freely tradable in their principal market are not considered restricted or illiquid. Illiquid securities may be difficult for a Portfolio to value or dispose of due to the absence of an active trading market. The sale of some illiquid securities by the Portfolio may be subject to legal restrictions which could be costly to the Portfolio.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated foreign securities. Foreign securities are those of issuers organized and doing business principally outside the U.S., including non-U.S. governments, their agencies, and instrumentalities. The Portfolio may invest in foreign securities denominated in or indexed to foreign currencies, which may also be affected by the fluctuation of the foreign currencies relative to the U.S. dollar, irrespective of the performance of the underlying investment. The Sub-advisor considers these factors in making investments for the Portfolio. The Portfolio may invest in U.S. dollar-denominated and non-U.S. dollar-denominated corporate and government debt securities of foreign issuers. In addition, the Portfolio may enter into forward foreign currency contracts or futures contracts (agreements to exchange one currency for another at a future date) and related options to manage currency risks and to facilitate transactions in foreign securities.
The Portfolio may only invest up to 20% of the value of its total
assets, measured at the time of investment, in foreign securities. The 20%
limitation does not apply with respect to foreign securities that are
denominated in U.S.
dollars.
The Portfolio may invest in ADRs, EDRs, GDRs, and IDRs. ADRs (sponsored or unsponsored) are receipts typically issued by a U.S. bank or trust company evidencing its ownership of the underlying foreign securities. Most ADRs are denominated in U.S. dollars and are traded on a U.S. stock exchange. Issuers of the securities underlying unsponsored ADRs are not contractually obligated to disclose material information in the U.S. and, therefore, there may not be a correlation between such information and the market value of the unsponsored ADR. EDRs and IDRs are receipts typically issued by a European bank or trust company evidencing its ownership of the underlying foreign securities. GDRs are receipts issued by either a U.S. or non-U.S. banking institution evidencing its ownership of the underlying foreign securities and are often denominated in U.S. dollars.
Investments in foreign securities could be affected by factors generally not thought to be present in the U.S. Such factors include, but are not limited to, varying custody, brokerage and settlement practices; difficulty in pricing some foreign securities; and potentially adverse local, political, economic, social, or diplomatic developments, the investment significance of which may be difficult to discern.
In addition, the risks of investing in securities of foreign companies and governments include changes in currency exchange rates and currency exchange control regulations or other foreign or U.S. laws or restrictions applicable to such investments or devaluations of foreign currencies. A decline in the exchange rate would reduce the value of certain portfolio securities irrespective of the performance of the underlying investment. Investments in depositary receipts (whether or not denominated in U.S. dollars) may be subject to exchange controls and changes in rates of exchange with the U.S. dollar because the underlying security is usually denominated in foreign currency. All of the foregoing risks may be intensified in emerging industrialized and less developed countries.
For an additional discussion of foreign securities and the risks involved therein, including the risks of currency fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may enter into forward contracts in order to protect against adverse changes in foreign currency exchange rates, to facilitate transactions in foreign securities and to repatriate dividend or interest income received in foreign currencies. The Portfolio may enter into contracts to purchase foreign currencies to protect against an anticipated rise in the U.S. dollar price of securities it intends to purchase. The Portfolio may also enter into contracts to sell foreign currencies to protect against a decline in value of its foreign currency denominated portfolio securities due to a decline in the value of foreign currencies against the U.S. dollar.
If the Portfolio enters into a forward contract to sell foreign currency, it may be required to place cash, fixed income or equity securities in a segregated account in an amount equal to the value of the Portfolio's total assets committed to the consummation of the forward contract. Although these contracts can protect the Portfolio from adverse exchange rates, they involve risk of loss if the Sub-advisor fails to predict foreign currency values correctly. For an additional discussion of forward contracts and their risks, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Put and Call Options, Futures Contracts, Options on Futures Contracts. The Portfolio may try to reduce the risk of securities price or exchange rate changes (hedge) or generate income by writing (selling) covered call options against securities held in its portfolio, may purchase call options in related closing transactions, and may also purchase put options on portfolio securities or foreign currencies. The Portfolio will not write covered call options or purchase put options with respect to securities or currencies having a market value exceeding 25% of its net assets. When the Portfolio writes a covered call option against a security, the Portfolio is obligated to sell that security to the purchaser of the option at a fixed price at any time during a specified period if the purchaser decides to exercise the option. The maximum price the seller may realize on the security during the option period is the fixed price. The seller continues to bear the risk of a decline in the security's price, although this risk is reduced, at least in part, by the premium received for writing the option.
The Portfolio may enter into futures contracts on debt securities, interest rates, and securities indices, and may purchase and sell options on such contracts on both the U.S. and foreign exchanges for hedging and non-hedging purposes.
The Portfolio may purchase and write put and call options on foreign currencies to protect against declines in the dollar value of foreign portfolio securities and against increases in the U.S. dollar cost of foreign securities to be acquired. The Portfolio may also use options on foreign currencies to cross-hedge. In addition, the Portfolio may purchase call or put options on currencies for non-hedging purposes when the Sub-advisor expects that a currency will appreciate or depreciate in value, but the securities denominated in that currency do not present attractive investment opportunities and are not held by the Portfolio. Options on foreign currencies may be traded on U.S. or foreign exchanges or over-the-counter. Options on foreign currencies that are traded in the over-the-counter market may be considered to be illiquid securities and subject to the Portfolio's restrictions on illiquid securities.
The Portfolio may write call and put options on any securities in which it may invest or options on any securities index based on securities in which the Portfolio may invest. The Portfolio will not write a call option on a security or currency unless it owns the underlying security or currency or has the right to obtain it at no additional cost.
The use of futures contracts and the writing and purchasing of options are highly specialized activities that involve investment techniques and risks different from those associated with ordinary securities transactions, including transactional expense, price volatility and a high degree of leverage. The writing of options could result in significant increases in the Portfolio's turnover rate. The use of futures and the writing of options also could result in the inability of the Portfolio to purchase or sell a security at a time that would otherwise be favorable for it to do so, or the need for the Portfolio to sell a security at a disadvantageous time, due to its need to maintain "cover" or to segregate securities in connection with these techniques. When the Portfolio uses these techniques, the Portfolio will place cash, fixed income or equity securities in a segregated account or will "cover" its position to the extent required by SEC staff policy. Futures and options contracts are considered derivatives.
For an additional discussion of options and their risks, see this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Forward Commitments and When-Issued Securities. In a when-issued or forward commitment transaction, the Portfolio commits to purchase securities in order to secure an advantageous price and yield at the time of the commitment and pays for the securities when they are delivered at a future date (generally within two months). If the seller fails to complete the sale, the Portfolio may lose the opportunity to obtain a favorable price and yield. When issued securities or securities subject to a forward commitment may decline or increase in value during the period from the Portfolio's investment commitment to the settlement of the purchase, which may magnify fluctuation in the Portfolio's net asset value.
Repurchase Agreements. Subject to guidelines established by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. The Portfolio may enter into repurchase agreements on up to 25% of its net assets. In a repurchase agreement, the Portfolio buys a security from a Federal Reserve member bank, or a securities dealer and simultaneously agrees to sell it back at a higher price, at a specified date, usually less than a week later. The underlying securities must fall within the Portfolio's investment policies and limitations. Under the repurchase agreement guidelines, the Sub-advisor monitors the creditworthiness of repurchase agreement sellers. For an additional discussion of repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Portfolio sells securities to a bank or a securities dealer and at the same time agrees to repurchase the same securities at a higher price on a specific date. During the period before the repurchase, the Portfolio continues to receive principal and interest payments on the securities. The Portfolio is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop"), as well as by the interest earned on the cash proceeds of the initial sale. Reverse repurchase agreements may increase fluctuations in the Portfolio's net asset value and may be viewed as a form of leverage. The Sub-advisor monitors the creditworthiness of parties to reverse repurchase agreements. For an additional discussion of reverse repurchase agreements and certain risks involved therein, see this Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's SAI under "Investment Objectives and Policies."
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the risk factors related to certain securities, instruments and techniques that may be used by one or more of the Portfolios are described in the "Investment Objectives and Policies" section of this Prospectus and in the "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods" sections of the Trust's SAI. The following is a description of certain additional risk factors related to various of these securities, instruments and techniques. The risks so described only apply to those Portfolios which may invest in such securities and instruments or use such techniques. Also included is a general description of some of the investment instruments, techniques and methods which may be used by one or more of the Portfolios. The methods described only apply to those Portfolios which may use such methods.
Derivative Instruments:
To the extent permitted by the investment objectives and policies of a Portfolio, a Portfolio may invest in securities and other instruments that are commonly referred to as "derivatives." For instance, a Portfolio may purchase and write call and put options on securities, securities indexes and foreign currencies, and enter into futures contracts and use options on futures contracts, and enter into swap agreements with respect to foreign currencies, interest rates, and securities indexes. A Portfolio may use these techniques to hedge against changes in interest rates, foreign currency exchange rates or securities prices or as part of their overall investment strategies.
In general, derivative instruments are those securities or other instruments whose value is derived from or related to the value of some other instrument or asset, but not those securities whose payment of principal and/or interest depend upon cash flows from underlying assets, such as mortgage or asset-backed securities. The value of some derivative instruments in which a Portfolio invests may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of a Portfolio, the ability of the Portfolio to successfully utilize these instruments may depend in part upon the ability of the Sub-advisor to forecast interest rates and other economic factors correctly. If the Sub-advisor incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Portfolio could be exposed to the risk of a loss.
A Portfolio might not employ any of the derivative strategies described below, and no assurance can be given that any strategy used will succeed. If a Sub-advisor incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for a Portfolio, the Portfolio might have been in a better position if it had not entered into the transaction at all. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of related investments. In addition, while some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain, or even result in losses, by offsetting favorable price movements in related investments. Furthermore, a Portfolio may be unable to purchase or sell a portfolio security at a time that otherwise would be favorable for it to do so, or need to sell a portfolio security at a disadvantageous time, due to the need to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments. Finally, a Portfolio may be unable to close out or to liquidate its derivatives positions.
Options and Futures Contracts:
Call Options. A call option on a security gives the purchaser of the option, in return for a premium paid to the writer (seller), the right to buy the underlying security at the exercise price at any time during the option period. Upon exercise by the purchaser, the writer (seller) of a call option has the obligation to sell the underlying security at the exercise price. When a Portfolio purchases a call option, it will pay a premium to the party writing the option and a commission to the broker selling the option. If the option is exercised by such Portfolio, the amount of the premium and the commission paid may be greater than the amount of the brokerage commission that would be charged if the security were to be purchased directly. By writing a call option, a Portfolio assumes the risk that it may be required to deliver the security having a market value higher than its market value at the time the option was written. The Portfolio will write call options in order to obtain a return on its investments from the premiums received and will retain the premiums whether or not the options are exercised. Any decline in the market value of portfolio securities will be offset to the extent of the premiums received (net of transaction costs). If an option is exercised, the premium received on the option will effectively increase the exercise price.
If a Portfolio writes a call option on a security it already owns, it gives up the opportunity for capital appreciation above the exercise price should market price of the underlying security increase, but retains the risk of loss should the price of the underlying security decline.
A call option on a securities index is similar to a call option on an individual security, except that the value of the option depends on the weighted value of the group of securities comprising the index, and all settlements are made in cash. A call option may be terminated by the writer (seller) by entering into a closing purchase transaction in which it purchases an option of the same series as the option previously written.
Put Options. A put option on a security gives the purchaser of the option, in return for premium paid to the writer (seller), the right to sell the underlying security at the exercise price at any time during the option period. Upon exercise by the purchaser, the writer of a put option has the obligation to purchase the underlying security at the exercise price. By writing a put option, a Portfolio assumes the risk that it may be required to purchase the underlying security at a price in excess of its current market value.
A put option on a securities index is similar to a put option on an individual security, except that the value of the option depends on the weighted value of the group of securities comprising the index, and all settlements are made in cash.
A Portfolio may sell a call option or a put option which it has previously purchased prior to the purchase (in the case of a call) or the sale (in the case of a put) of the underlying security. Any such sale would result in a net gain or loss depending on whether the amount received on the sale is more or less than the premium and other transaction costs paid on the call or put which is sold.
Futures Contracts and Related Options. A financial futures contract calls for delivery of a particular security at a specified price at a certain time in the future. The seller of the contract agrees to make delivery of the type of security called for in the contract and the buyer agrees to take delivery at a specified future time. A Portfolio may also write call options and purchase put options on financial futures contracts as a hedge to attempt to protect the Portfolio's securities from a decrease in value. When a Portfolio writes a call option on a futures contract, it is undertaking the obligation of selling a futures contract at a fixed price at any time during a specified period if the option is exercised. Conversely, the purchaser of a put option on a futures contract is entitled (but not obligated) to sell a futures contract at a fixed price during the life of the option.
Financial futures contracts consist of interest rate futures contracts and securities index futures contracts. An interest rate futures contract obligates the seller of the contract to deliver, and the purchaser to take delivery of, interest rate securities called for in a contract at a specified future time at a specified price. A stock index assigns relative values to common stocks included in the index and the index fluctuates with changes in the market values of the common stocks included. A stock index futures contract is a bilateral contract pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the stock index value at the close of the last trading day of the contract and the price at which the futures contract is originally struck. An option on a financial futures contract gives the purchaser the right to assume a position in the contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option.
Risks of Options and Futures Contracts. Futures contracts and options can be highly volatile and could result in reduction of a Portfolio's total return, and a Portfolio's attempt to use such investments for hedging purposes may not be successful. Successful futures strategies require the ability to predict future movements in securities prices, interest rates and other economic factors. A Portfolio's potential losses from the use of futures extends beyond its initial investment in such contracts. Also, losses from options and futures could be significant if a Portfolio is unable to close out its position due to distortions in the market or lack of liquidity.
The use of futures and options involves investment risks and transaction costs to which a Portfolio would not be subject absent the use of these strategies. If a Sub-advisor seeks to protect a Portfolio against potential adverse movements in the securities, foreign currency or interest rate markets using these instruments, and such markets do not move in a direction adverse to the Portfolio, the Portfolio could be left in a less favorable position than if such strategies had not been used. The successful use of these strategies therefore may depend on the ability of the Sub-advisor to correctly forecast interest rate movements and general stock market price movements. Risks inherent in the use of futures and options include: (a) the risk that interest rates, securities prices and currency markets will not move in the directions anticipated; (b) imperfect correlation between the price of futures and options and movements in the prices of the securities or currencies being hedged; (c) the fact that skills needed to use these strategies are different from those needed to select portfolio securities; (d) the possible absence of a liquid secondary market for any particular instrument at any time; and (e) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences. A Portfolio's ability to terminate option positions established in the over-the-counter market may be more limited than in the case of exchange-traded options and may also involve the risk that securities dealers participating in such transactions would fail to meet their obligations to such Portfolio.
The use of options and futures involves the risk of imperfect correlation between movements in options and futures prices and movements in the price of securities which are the subject of a hedge. Particularly with respect to options on stock indices and stock index futures, the risk of imperfect correlation increases as the composition of the Portfolio diverges from the composition of the relevant index.
Pursuant to regulations of the Commodity Futures Trading Commission, the Trust has represented that:
(i) a Portfolio will not purchase or sell futures or options on futures contracts or stock indices for purposes other than bona fide hedging transactions (as defined by the CFTC) if as a result the sum of the initial margin deposits and premiums required to establish positions in futures contracts and related options that do not fall within the definition of bona fide hedging transactions would exceed 5% of the fair market value of the Portfolio's net assets; and
(ii) a Portfolio will not enter into any futures contracts if the aggregate amount of the Portfolio's commitments under outstanding futures contracts positions would exceed the market value of the Portfolio's total assets.
Asset-Backed Securities:
Asset-backed securities represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, for example, credit card, automobile or trade receivables. Asset-backed commercial paper, one type of asset-backed security, is issued by a special purpose entity, organized solely to issue the commercial paper and to purchase interests in the assets. The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which shorten the securities' weighted average life and may lower their return. If the credit support or enhancement is exhausted, losses or delays in payment may result if the required payments of principal and interest are not made. The value of these securities also may change because of changes in the market's perception of the creditworthiness of the servicing agent for the pool, the originator of the pool, or the financial institution providing the credit support or enhancement.
Mortgage Pass-Through Securities:
Mortgage pass-through securities are securities representing interests in "pools" of mortgage loans secured by residential or commercial real property in which payments of both interest and principal on the securities are generally made monthly, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans which underlie the securities (net of fees paid to the issuer or guarantor of the securities). Early repayment of principal on some mortgage-related securities (arising from prepayments of principal due to sale of the underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) expose a Portfolio to a lower rate of return upon reinvestment of principal. Also, if a security subject to prepayment has been purchased at a premium, in the event of prepayment the value of the premium would be lost. Like other fixed-income securities, when interest rates rise, the value of a mortgage-related security will generally decline; however, when interest rates are declining, the value of mortgage-related securities with prepayment features may not increase as much as other fixed-income securities. The value of these securities also may change because of changes in the market's perception of the creditworthiness of the federal agency or private institution that issued them. In addition, the mortgage securities market in general may be adversely affected by changes in governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs):
CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Portfolio invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. CMOs may also be less marketable than other securities.
Stripped Agency Mortgage-Backed Securities:
Stripped Agency Mortgage-Backed securities represent interests in a pool of mortgages, the cash flow of which has been separated into its interest and principal components. "IOs" (interest only securities) receive the interest portion of the cash flow while "POs" (principal only securities) receive the principal portion. Stripped Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or by private issuers. Unlike other debt instruments and other mortgage-backed securities, the value of IOs tends to move in the same direction as interest rates.
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 prices 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 or is derived from a full faith and credit obligation. Conversely, if the underlying mortgage assets experience slower than anticipated prepayments of principal, the price on a PO class will be affected more severely than would be the case with a traditional mortgage-backed security.
Foreign Securities:
Investments in securities of foreign issuers may involve risks that are not present with domestic investments. While investments in foreign securities are intended to reduce risk by providing further diversification, such investments involve sovereign risk in addition to credit and market risks. Sovereign risk includes local political or economic developments, potential nationalization, withholding taxes on dividend or interest payments, and currency blockage (which would prevent cash from being brought back to the United States). Compared to United States issuers, there is generally less publicly available information about foreign issuers and there may be less governmental regulation and supervision of foreign stock exchanges, brokers and listed companies. Brokerage commissions on foreign securities exchanges, which may be fixed, are generally higher than in the United States. Foreign issuers are not generally subject to uniform accounting and auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic issuers. Securities of some foreign issuers are less liquid and their prices are more volatile than securities of comparable domestic issuers. In some countries, there may also be the possibility of expropriation or confiscatory taxation, limitations on the removal of funds or other assets, difficulty in enforcing contractual and other obligations, political or social instability or revolution, or diplomatic developments which could affect investments in those countries. Settlement of transactions in some foreign markets may be delayed or less frequent than in the United States, which could affect the liquidity of investments. For example, securities which are listed on foreign exchanges or traded in foreign markets may trade on days (such as Saturday or Holidays) when a Portfolio does not compute its price or accept orders for the purchase, redemption or exchange of its shares. As a result, the net asset value of a Portfolio may be significantly affected by trading on days when shareholders cannot make transactions. Further, it may be more difficult for the Trust's agents to keep currently informed about corporate actions which may affect the price of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., increasing the risk of delayed settlements or loss of certificates for portfolio securities.
Currency Fluctuations. Investments in foreign securities may be denominated in foreign currencies. The value of Portfolio investments denominated in foreign currencies may be affected, favorably or unfavorably, by the relative strength of the U.S. dollar, changes in foreign currency and U.S. dollar exchange rates and exchange control regulations. A Portfolio's net asset value per share may, therefore, be affected by changes in currency exchange rates. Changes in foreign currency exchange rates may also affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by a Portfolio. Foreign currency exchange rates generally are determined by the forces of supply and demand in foreign exchange markets and the relative merits of investment in different countries, actual or perceived changes in interest rates or other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks or the failure to intervene, or by currency controls or political developments in the U.S. or abroad. In addition, a Portfolio may incur costs in connection with conversions between various currencies. Investors should understand and consider carefully the special risks involved in foreign investing. These risks are often heightened for investments in emerging or developing countries.
Developing Countries. Investing in developing countries involves certain risks not typically associated with investing in U.S. securities, and imposes risks greater than, or in addition to, risks of investing in foreign, developed countries. These risks include: the risk of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; social, economic and political uncertainty and instability (including the risk of war); more substantial government involvement in the economy; higher rates of inflation; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on a Portfolio's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain developing countries; the fact that companies in developing countries may be smaller, less seasoned and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets.
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"):
ADRs are dollar-denominated receipts generally issued by a domestic bank that represents the deposit of a security of a foreign issuer. ADRs may be publicly traded on exchanges or over-the-counter in the United States. EDRs are receipts similar to ADRs and are issued and traded in Europe. GDRs may be offered privately in the United States and also trade in public or private markets in other countries. Depositary Receipts may be issued as sponsored or unsponsored programs. In sponsored programs, the issuer makes arrangements to have its securities traded in the form of a Depositary Receipt. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, the issuers of unsponsored Depositary Receipts are not obligated to disclose material information in the United States and, therefore, the import of such information may not be reflected in the market value of such securities.
Forward Foreign Currency Exchange Contracts:
A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date, which may be any fixed number of days from the date the contract is agreed upon by the parties, at a price set at the time of the contract. By entering into a forward foreign currency contract, a Portfolio "locks in" the exchange rate between the currency it will deliver and the currency it will receive for the duration of the contract. As a result, a Portfolio reduces its exposure to changes in the value of the currency it will deliver and increases its exposure to changes in the value of the currency into which it will exchange. The effect on the value of a Portfolio is similar to selling securities denominated in one currency and purchasing securities denominated in another. The Portfolios may enter into these contracts for the purposes of hedging against foreign exchange risk arising from such Portfolio's investment or anticipated investment in securities denominated in or exposed to foreign currencies. Although a Sub-advisor may, from time to time, seek to protect a Portfolio by using forward contracts, anticipated currency movements may not be accurately predicted and the Portfolio may incur a gain or a loss on a forward contract. A forward contract may reduce a Portfolio's losses on securities denominated in foreign currency, but it may also reduce the potential gain on the securities depending on changes in the currency's value relative to the U.S. dollar or other currencies.
Lower-Rated High-Yield Bonds:
Lower-rated high-yield bonds (commonly known as "junk bonds") are generally considered to be high risk investments, as they are subject to a higher risk of default than higher-rated bonds. In addition, the market for lower-rated high-yield bonds generally is more limited than the market for higher-rated bonds, and because their markets may be thinner and less active, the market prices of lower-rated high-yield bonds may fluctuate more than the prices of higher-rated bonds, particularly in times of market stress. In addition, while the market for high-yield corporate debt securities has been in existence for many years, the market in recent years has experienced a dramatic increase in the large-scale use of such securities to fund highly leveraged corporate acquisitions and restructurings. Accordingly, past experience may not provide an accurate indication of future performance of the high-yield bond market, especially during periods of economic recession. Other risks which may be associated with lower-rated high-yield bonds include: the exercise of any redemption or call provisions in a declining market may result in their replacement by lower yielding bonds; and legislation, from time to time, may adversely affect their market. Since the risk of default is higher among lower-rated high-yield bonds, a Sub-advisor's research and analysis are an important ingredient in the selection of lower-rated high-yield bonds. Through portfolio diversification, good credit analysis and attention to current developments and trends in interest rates and economic conditions, investment risk may be reduced, although there is no assurance that losses will not occur.
Illiquid and Restricted Securities:
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities. Illiquid securities are deemed as such because they are subject to restrictions on their resale ("restricted securities") or because, based upon their nature or the market for such securities, they are not readily marketable. Restricted securities are acquired through private placement transactions, directly from the issuer or from security holders, generally at higher yields or on terms more favorable to investors than comparable publicly traded securities. However, the restrictions on resale may make it difficult for a Portfolio to dispose of such securities at the time considered most advantageous by its Sub-advisor, and/or may involve expenses that would not be incurred in the sale of securities that were freely marketable. A Portfolio that may purchase restricted securities may qualify for and trade restricted securities in the "institutional trading market" pursuant to Rule 144A of the Securities Act of 1933. Trading in the institutional trading market may enable a Sub-advisor to dispose of restricted securities at a time the Sub-advisor considers advantageous and/or at a more favorable price than would be available if such securities were not traded in such market. However, the institutional trading market is relatively new and liquidity of a Portfolio's investments in such market could be impaired if trading does not develop or declines. Risks associated with restricted securities include the potential obligation to pay all or part of the registration expenses in order to sell certain restricted securities. A considerable period of time may elapse between the time of the decision to sell a security and the time a Portfolio may be permitted to sell it under an effective registration statement. If, during such a period, adverse conditions were to develop, a Portfolio might obtain a less favorable price than prevailing when it decided to sell.
Repurchase Agreements:
The Board of Trustees of the Trust has promulgated guidelines with respect to repurchase agreements. Repurchase agreements are agreements by which a Portfolio purchases a security and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The resale price is in excess of the purchase price and reflects an agreed upon market rate unrelated to the coupon rate on the purchased security. A repurchase transaction is usually accomplished either by crediting the amount of securities purchased to the account of a Portfolio's custodian maintained in a central depository or book-entry system or by physical delivery of the securities to a Portfolio's custodian in return for delivery of the purchase price to the seller. Repurchase transactions are intended to be short-term transactions with the seller repurchasing the securities, usually within seven days.
A Portfolio which enters into a repurchase agreement bears a risk of loss in the event that the other party to such an agreement defaults on its obligation and such Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities, including the risk of a possible decline in value of the underlying securities during the period such Portfolio seeks to assert these rights, as well as the risk of incurring expenses in asserting these rights and the risk of losing all or part of the income from such an agreement. If the seller institution defaults, a Portfolio might incur a loss or delay in the realization of proceeds if the value of the collateral securing the repurchase agreement declines and it might incur disposition costs in liquidating the collateral. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by a Portfolio might be delayed pending court action.
Reverse Repurchase Agreements:
In a reverse repurchase agreement, a Portfolio transfers possession of a portfolio instrument to another person, such as a broker-dealer or financial institution in return for a percentage of the instrument's market value in cash and agrees that on a stipulated date in the future such Portfolio will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed upon rate. When effecting reverse repurchase agreements, assets of a Portfolio, in a dollar amount sufficient to make payment for the obligations to be repurchased, are segregated on such Portfolio's records at the trade date and are maintained until the transaction is settled. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Portfolio may decline below the repurchase price of the securities which it is obligated to repurchase.
Borrowing:
Each Portfolio's borrowings are limited so that immediately after such borrowing the value of the Portfolio's assets (including borrowings) less its liabilities (not including borrowings) is at least three times the amount of the borrowings. Should a Portfolio, for any reason, have borrowings that do not meet the above test then, within three business days, such Portfolio must reduce such borrowings so as to meet the necessary test. Under such a circumstance, such Portfolio may have to liquidate securities at a time when it is disadvantageous to do so. Gains made with additional funds borrowed will generally cause the net asset value of such Portfolio's shares to rise faster than could be the case without borrowings. Conversely, if investment results fail to cover the cost of borrowings, the net asset value of such Portfolio could decrease faster than if there had been no borrowings.
Convertible Securities and Warrants:
Convertible securities generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree. Warrants are options to buy a stated number of shares of common stock at a specified price any time during the life of the warrants. The value of warrants may fluctuate more than the value of the securities underlying such warrants. The value of a warrant detached from its underlying security will expire without value if the rights under such warrant are not exercised prior to its expiration date.
Lending:
With respect to the lending of securities, there is the risk of delays in receiving additional collateral or in the recovery of securities and possible loss of rights in collateral in the event that a borrower fails financially.
Other Investment Companies:
The Trust has made arrangements with certain money market mutual funds so that the Sub-advisors for the various Portfolios can "sweep" excess cash balances of the Portfolios to those funds for temporary investment purposes. Mutual funds pay their own operating expenses, and the Portfolios, as shareholders in the money market funds, will indirectly pay their proportionate share of such funds' expenses. Investments in other mutual funds and investment companies will be made subject to the restrictions of the Investment Company Act of 1940, which, among other restrictions, places certain limits on the proportion of a Portfolio's assets that can be invested in other investment companies.
REGULATORY MATTERS:
The Trust currently does not foresee any disadvantages to the holders of variable annuity contracts and variable life insurance policies of affiliated or unaffiliated Participating Insurance Companies or participants of Qualified Plans (see page 2 of this Prospectus) arising from the fact that the interests of the holders of variable annuity contracts and variable life insurance policies and participants of Qualified Plans may differ due to differences of tax treatment or other considerations or due to conflicts between the affiliated or unaffiliated Participating Insurance Companies or Qualified Plans. Nevertheless, the Trustees intend to monitor events in order to identify any material irreconcilable conflicts which may possibly arise and to determine what action, if any, should be taken in response to such conflicts. The variable annuity contracts and variable life insurance policies are described in the separate prospectuses issued by the Participating Insurance Companies. The Trust assumes no responsibility for such prospectuses.
PORTFOLIO TURNOVER:
Each Portfolio may generally change its investments at any time in accordance with its Sub-advisor's appraisal of factors affecting any particular issuer or the market or economy in general. The frequency of the Portfolio's transactions -- the Portfolio's turnover rate -- will vary from year to year depending upon market conditions. High turnover (generally in excess of 100%) involves correspondingly greater brokerage commissions and other transaction costs. Trading in fixed income securities does not generally involve the payment of brokerage commissions, but does involve indirect transaction costs. A 100% portfolio turnover rate would occur if all the securities in a portfolio of investments were replaced during a given period. The following Portfolios have anticipated annual rates of turnover exceeding 100%.
JanCap Growth Portfolio (not to exceed 200% under normal market conditions).
AST Janus Overseas Growth Portfolio (not to exceed 200% under normal market conditions).
T. Rowe Price International Bond Portfolio (not to exceed 350%).
Founders Capital Appreciation Portfolio (not to exceed 150% under normal market conditions).
Founders Passport Portfolio (not to exceed 150% under normal market conditions).
PIMCO Total Return Bond Portfolio (not to exceed 350% under normal market conditions).
PIMCO Limited Maturity Bond Portfolio (not to exceed 350% under normal market conditions).
Robertson Stephens Value + Growth Portfolio (not to exceed 250% under normal market conditions).
Twentieth Century International Growth Portfolio (not to exceed 150% under normal market conditions).
Twentieth Century Strategic Balanced Portfolio (not to exceed 150% under normal market conditions).
AST Putnam International Equity Portfolio (not to exceed 150% under normal market conditions).
AST Putnam Balanced Portfolio (not to exceed 200% under normal market conditions).
Cohen & Steers Realty Portfolio (not to exceed 150% under normal market conditions).
Neuberger&Berman Mid-Cap Value Portfolio (not to exceed 150% under normal market conditions).
Neuberger&Berman Mid-Cap Growth Portfolio (not to exceed 200% under normal market conditions).
For further details regarding the portfolio turnover rates, see "Portfolio Turnover" in the Trust's SAI.
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing Portfolio securities transactions with broker-dealers is to obtain, and maintain the availability of, execution at the best net price available and in the most effective manner possible. The Trust's brokerage allocation policy may permit a Portfolio to pay a broker-dealer which furnishes research services a higher commission than that which might be charged by another broker-dealer which does not furnish research services, provided that such commission is deemed reasonable in relation to the value of the services provided by such broker-dealer. Each Portfolio's Sub-advisor may consider the use of broker-dealers that are, or might be deemed to be, their affiliates or affiliates of the Investment Manager. In addition, a Sub-advisor may consider sale of shares of the Portfolios or variable insurance products that use the Portfolios as investment vehicles, or may consider or follow recommendations of the Investment Manager that take such sales into account, as factors in selection of broker-dealers to effect transactions, subject to the requirements of best net price available and most favorable execution. In this regard, the Investment Manager has directed certain of the Sub-advisors to try to effect a portion of their Portfolios' transactions through broker-dealers that give prominence to variable insurance products using the Portfolios as investment vehicles, to the extent consistent with best net price available and most favorable execution. For a complete discussion of portfolio transactions and brokerage allocation, see "Brokerage Allocation" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS:
For each Portfolio the Trust has adopted a number of investment restrictions which are fundamental policies and may not be changed without the approval of the holders of a majority of the affected Portfolio's outstanding voting securities as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust's SAI describes all the restrictions on each Portfolio's investment activities.
NET ASSET VALUES:
The net asset value per share of each Portfolio, other than the AST Money Market Portfolio, is determined by dividing the market value of that Portfolio's securities as of the close of trading plus any cash or other assets (including dividends and accrued interest) less all liabilities (including accrued expenses) by the number of shares outstanding in that Portfolio. Each Portfolio will determine the net asset value of its shares as of 4:00 P.M. Eastern Time on each "business" day, which is each day that the New York Stock Exchange (the "NYSE") is open for business. The Trust's Board of Trustees has established procedures for valuing the Portfolios' securities. In general, these valuations are based on market value. However, in certain circumstances where market quotations are not readily available, assets are valued by methods specified in the procedures that are believed to accurately reflect the assets' fair value. In addition, the AST Money Market Portfolio values all securities by the amortized cost method. With respect to all Portfolios, short-term investments that will mature in 60 days or less are valued at amortized cost, which is intended to approximate market value. See "Computation of Net Asset Values" in the Trust's SAI.
PURCHASE AND REDEMPTION OF SHARES:
Purchases of shares of the Portfolios may be made only by separate
accounts of Participating Insurance Companies for the purpose of funding
variable annuity contracts and variable life insurance policies or by Qualified
Plans. The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of the Trust based on, among other things,
the amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies) to be effected on that day
pursuant to variable annuity contracts and variable life insurance policies.
Orders received by the Trust or the Trust's transfer agent are effected on days
on which the NYSE is open for trading. For orders received before 4:00 P.M.
Eastern time, purchases and redemptions of the shares of the Trust are effected
at the net asset value per share determined as of 4:00 P.M. Eastern Time on that
same day. Orders received after 4:00 P.M. Eastern Time are effected at the next
calculated net asset value. Payment for redemptions will be made by the Trust's
transfer agent on behalf of the Trust within seven days after the request is
received. The Trust does not assess any fees, either when it sells or when it
redeems its securities. Surrender charges, mortality and expense risk fees and
other charges may be assessed by Participating Insurance Companies under the
variable annuity contracts or variable life insurance policies.
These fees should be described in the Participating Insurance Companies'
prospectuses.
As of the date of this Prospectus, American Skandia Life Assurance Corporation ("ASLAC") and Kemper Investors Life Insurance Company are the only Participating Insurance Companies. In the future, shares of the Trust may be sold to and held by separate accounts that fund variable annuity and variable life insurance contracts issued by other affiliated and unaffiliated Participating Insurance Companies and also directly to Qualified Plans. While it is not anticipated, should any conflict arise between the holders of variable annuity contracts and variable life insurance policies of affiliated or unaffiliated Participating Insurance Companies and participants in Qualified Plans which would require that a substantial amount of net assets be withdrawn from the Trust, orderly Portfolio management could be disrupted to the potential detriment of such holders (see "Other Information" for more details). As of February 15, 1998, more than 99% of each Portfolio of the Trust was owned of record by ASLAC on behalf of the owners of variable annuity contracts issued by ASLAC.
ORGANIZATION AND MANAGEMENT OF THE TRUST:
The Trust is a managed, open-end investment company organized as a Massachusetts business trust, whose separate Portfolios are diversified, unless otherwise indicated. As of the date of this Prospectus, twenty-nine Portfolios are available. The Trust may offer additional Portfolios with a range of investment objectives that Participating Insurance Companies may consider suitable for variable annuities and variable life insurance policies or that may be considered suitable for Qualified Plans. The Trust's current approach to achieving this goal is to seek to have multiple organizations unaffiliated with each other be responsible for conducting the investment programs for the Portfolios. Each such organization would be responsible for the Portfolio or Portfolios to which such organization's expertise is best suited.
Formerly, the Trust was known as the Henderson International Growth Fund, which consisted of only one Portfolio. The Investment Manager was Henderson International, Inc. Shareholders of what was, at the time, the Henderson International Growth Fund, approved certain changes in a meeting held April 17, 1992. These changes included engagement of a new Investment Manager, engagement of a Sub-advisor and election of new Trustees. Subsequent to that meeting, the new Trustees adopted a number of resolutions, including, but not limited to, resolutions renaming the Trust. Since that time the Trustees have adopted a number of resolutions, including, but not limited to, making new Portfolios available and adopting forms of Investment Management Agreements and Sub-advisory Agreements between the Investment Manager and the Trust and the Investment Manager and each Sub-advisor, respectively.
The Trustees of the Trust have oversight responsibility for the operations of each Portfolio. The Trustees are David E.A. Carson, Julian A. Lerner, Thomas M. O'Brien, F. Don Schwartz, Jan R. Carendi and Gordon C. Boronow. Additional information about the Trustees and the Trust's executive officers may be found in the Trust's SAI under the section "Management."
Investment Manager: American Skandia Investment Services, Incorporated ("ASISI"), One Corporate Drive, Shelton, Connecticut, acts as Investment Manager to the Trust. ASISI, a Connecticut corporation organized in 1991, is registered as an investment adviser with the Securities and Exchange Commission. Prior to April 7, 1995, ASISI was known as American Skandia Life Investment Management, Inc. ASISI is a wholly-owned subsidiary of American Skandia Investment Holding Corporation, whose indirect parent is Skandia Insurance Company Ltd. ("Skandia"). Skandia is a Swedish company that owns, directly or indirectly, a number of insurance companies in many countries. The predecessor to Skandia commenced operations in 1855.
American Skandia Life Assurance Corporation, a Participating Insurance Company, is also a wholly-owned subsidiary of American Skandia Investment Holding Corporation. Certain officers of the Trust are officers and/or directors of one or more of the following companies: ASISI, American Skandia Life Assurance Corporation, American Skandia Marketing, Incorporated (the principal underwriter for various annuities deemed to be securities for American Skandia Life Assurance Corporation) and American Skandia Investment Holding Corporation.
Sub-advisors:
Lord Abbett & Co. ("Lord Abbett"), The General Motors Building, 767 Fifth Avenue, New York, New York 10153-0203, serves as Sub-advisor for the Lord Abbett Growth and Income Portfolio and the Lord Abbett Small Cap Value Portfolio. Lord Abbett has been an investment manager for over 65 years. As of December 31, 1997, Lord Abbett managed approximately $25 billion in a family of mutual funds and other advisory accounts.
The portfolio manager responsible for management of the Lord Abbett Growth and Income Portfolio is W. Thomas Hudson, Jr., Executive Vice President. Mr. Hudson has served in this capacity since the Portfolio's inception and has held certain positions in the equity research department of Lord Abbett since 1982.
The portfolio manager responsible for management of the Lord Abbett Small Cap Value Portfolio is Robert P. Fetch. Mr. Fetch, who has managed the Portfolio since its inception, joined Lord Abbett as a Portfolio Manager in August, 1995. From 1989 to 1995, Mr. Fetch was a Managing Director of Prudential Investment Advisors.
Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver, Colorado 80206-4923, serves as Sub-advisor for the JanCap Growth Portfolio and the AST Janus Overseas Growth Portfolio. Janus serves as the investment advisor to the Janus Funds, as well as advisor or sub-advisor to several other mutual funds and individual, corporate, charitable and retirement accounts. As of December 31, 1997, Janus managed assets worth over $67 billion. Kansas City Southern Industries, Inc. ("KCSI") owns approximately 83% of the outstanding voting stock of Janus, most of which it acquired in 1984. KCSI is a publicly-traded holding company whose primary subsidiaries are engaged in transportation and financial services.
The portfolio manager responsible for management of the JanCap Growth Portfolio is Scott W. Schoelzel. Mr. Schoelzel, a Senior Portfolio Manager at Janus who has managed the Portfolio since August, 1997, joined Janus in January, 1994 as Vice President of Investments. From 1991 to 1993, Mr. Schoelzel was a Portfolio Manager with Founders Asset Management.
The portfolio manager responsible for management of the AST Janus Overseas Growth Portfolio is Helen Young Hayes, Executive Vice President and portfolio manager of the Janus Worldwide Fund and Janus Overseas Fund. Ms. Hayes joined Janus in 1987. She has managed or co-managed Janus Worldwide Fund, Janus Overseas Fund and the Portfolio since their respective inceptions. Ms. Hayes holds a Bachelor of Arts in Economics from Yale University and is a Chartered Financial Analyst.
J.P. Morgan Investment Management Inc. ("J.P. Morgan"), with principal offices at 522 Fifth Avenue, New York, New York 10036, serves as Sub-advisor for the AST Money Market Portfolio. J.P. Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank holding company organized under the laws of Delaware which is located at 60 Wall Street, New York, New York 10260. J.P. Morgan & Co., through J.P. Morgan and other subsidiaries, offers a wide range of services to governmental, institutional, corporate and individual customers, and acts as investment advisor to individual and institutional clients with combined assets under management of approximately $255 billion as of December31, 1997. J.P. Morgan has managed investments for clients for almost a century, since 1913. In addition, J.P. Morgan has managed short-term fixed income assets for clients since 1969. As of December 31, 1997, these short-term assets under J.P. Morgan's management totaled over $25 billion. As of the date of this Prospectus, J.P. Morgan was also engaged to manage a portion of the assets of a separate account of American Skandia Life Assurance Corporation, an affiliate of the Investment Manager and, as of the date of this Prospectus, one of two Participating Insurance Companies.
Federated Investment Counseling ("Federated Investment"), Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, serves as Sub-advisor for the Federated High Yield Portfolio. Federated Investment, organized as a Delaware business trust in 1989 and a wholly owned subsidiary of Federated Investors, is a registered investment advisor under the Investment Advisers Act of 1940. Federated Investment and other subsidiaries of Federated Investors serve as investment advisors to a number of investment companies and private accounts. Total assets under management or administration by these and other subsidiaries of Federated Investors as of December 31, 1997, was over $120 billion.
Mark E. Durbiano and Stefanie L. Bachhuber are primarily responsible for the day-to-day management of the Federated High Yield Portfolio. Mr. Durbiano, who has managed the Portfolio since it commenced operations in 1994, joined Federated Investors in 1982 and has been a Senior Vice President of a subsidiary of Federated Investment since January, 1996. From 1988 through 1995, Mr. Durbiano was a Vice President of a subsidiary of Federated Investment. Ms. Bachhuber, who has co-managed the Portfolio since July, 1997, joined Federated Investors in 1993 as an Investment Analyst and has been an Assistant Vice President of a subsidiary of Federated Investment since 1996. Ms. Bachhuber earned her M.B.A., with a concentration in finance, from Duke University in 1993.
T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, serves as Sub-advisor for the T. Rowe Price Asset Allocation Portfolio, the T. Rowe Price Natural Resources Portfolio, and the T. Rowe Price Small Company Value Portfolio. T. Rowe Price was founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1997, the firm and its affiliates managed approximately $126 billion for approximately 5 million individual and institutional accounts.
The T. Rowe Price Asset Allocation Portfolio is managed by an Investment Advisory Committee composed of the following members: Edmund M. Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark, Peter Van Dyke, M. David Testa and Richard T. Whitney. The Committee Chairman has day-to-day responsibility for managing the Portfolio and works with the Committee in developing and executing the Portfolio's investment program. Mr. Notzon joined T. Rowe Price in 1989 and has been managing investments since 1991.
The T. Rowe Price Natural Resources Portfolio is managed by an Investment Advisory Committee composed of the following members: David J. Wallack, Chairman, Charles M. Ober, David M. Lee, Hugh M. Evans III, Richard P. Howard and James A.C. Kennedy. The Committee Chairman has day-to-day responsibility for managing the Portfolio and works with the Committee in developing and executing the Portfolio's investment program. Mr. Wallack, who joined T. Rowe Price in 1990, is a Vice President of T. Rowe Price and an Investment Analyst for the firm's Equity Research Division.
The T. Rowe Price Small Company Value Portfolio is managed by an Investment Advisory Committee composed of the following members: Preston G. Athey, Chairman, Hugh M. Evans III and Gregory A. McCrickard. The Committee Chairman has day-to-day responsibility for managing the Portfolio and works with the Committee in developing and executing the Portfolio's investment program. Mr. Athey joined T. Rowe Price in 1978, has been managing investments since 1982 and has been Chairman of the Investment Advisory Committee since the Portfolio's inception in December, 1996.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), 100 East Pratt Street, Baltimore, Maryland 21202, serves as Sub-advisor for the T. Rowe Price International Equity Portfolio and the T. Rowe Price International Bond Portfolio. Price-Fleming was founded in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming Holdings Limited. Price-Fleming is one of the world's largest international mutual fund asset managers with approximately $30 billion under management as of December 31, 1997 in its offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. Each Portfolio has an investment advisory group that has day-to-day responsibility for managing the Portfolio and developing and executing the Portfolio's investment program.
The advisory group for the T. Rowe Price International Equity Portfolio consists of Martin G. Wade, Peter B. Askew, Mark J.T. Edwards, John R. Ford, James B.M. Seddon, and David J.L. Warren. Martin Wade joined Price-Fleming in 1979 and has 27 years of experience with Fleming Group (Fleming Group includes Robert Fleming Holdings Ltd. and/or Jardine Fleming International Holdings Ltd.) in research, client service and investment management. Peter Askew joined Price-Fleming in 1988 and has 21 years of experience managing multicurrency fixed income portfolios. Mark J.T. Edwards joined Price-Fleming in 1986 and has 15 years of experience in financial analysis. John R. Ford joined Price-Fleming in 1982 and has 16 years of experience with Fleming Group in research and portfolio management. James B.M. Seddon joined Price-Fleming in 1987 and has 11 years of experience in investment management. David J.L. Warren joined Price-Fleming in 1984 and has 16 years experience in equity research, fixed income research and portfolio management.
The advisory group for the T. Rowe Price International Bond Portfolio consists of Peter Askew, Christopher Rothery and Michael Conelius. Peter Askew joined Price-Fleming in 1988 and has 21 years of experience managing multi-currency fixed-income portfolios. Christopher Rothery joined Price-Fleming in 1994 and has 8 years of experience managing multi-currency fixed-income portfolios. Prior to joining Price-Fleming, he worked with Fleming International Fixed Income Management Limited. Michael Conelius joined Price-Fleming in 1995. Prior to that, he had been with T. Rowe Price since 1988.
Founders Asset Management, Inc. ("Founders"), Founders Financial Center, 2930 East Third Avenue, Denver, Colorado 80206, serves as Sub-advisor for the Founders Capital Appreciation Portfolio and the Founders Passport Portfolio. Founders has acted as an investment advisor since 1938 and serves as investment advisor to Founders Discovery, Frontier, Passport, Special, International Equity, Worldwide Growth, Growth, Blue Chip, Balanced, Government Securities, and Money Market Funds. Founders, which is also the investment advisor for a number of private accounts, managed assets aggregating approximately $6.4 billion as of December 31, 1997. Founders is a subsidiary of Mellon Bank, N.A., which is part of a large bank holding company.
Michael K. Haines, a Senior Vice President of Investments of Founders, has been responsible for management of the Founders Capital Appreciation Portfolio since the Portfolio commenced operations in January 1994. Mr. Haines has been associated with Founders since 1985, serving as a lead portfolio manager and an assistant portfolio manager.
Michael W. Gerding, a Vice President of Investments of Founders, has been responsible for management of the Founders Passport Portfolio since Founders became the Portfolio's Sub-advisor in October 1996. Mr. Gerding is a chartered financial analyst who has been part of Founders' investment department since 1990.
INVESCO Funds Group, Inc. ("INVESCO"), 7800 East Union Avenue, P.O. Box 173706, Denver, Colorado 80217-3706, serves as Sub-advisor for the INVESCO Equity Income Portfolio. INVESCO was established in 1932. AMVESCAP PLC, the parent of INVESCO, is one of the largest independent investment management businesses in the world and managed approximately $192.2 billion of assets as of December 31, 1997.
The portfolio managers responsible for management of the Portfolio are Charles P. Mayer, Portfolio Co-Manager, and Donovan J. (Jerry) Paul, Portfolio Co-Manager. Mr. Mayer has served as Co-Manager of the Portfolio since April, 1993. Mr. Mayer began his investment career in 1969 and is now a senior vice president of INVESCO. From 1993 to 1994, he was vice president of INVESCO, and from 1984 to 1993, he was a portfolio manager with Westinghouse Pension. Mr. Paul has served as Co-Manager of the Portfolio since May 1994. Mr. Paul entered the investment management industry in 1976, and has been a senior vice president of INVESCO since 1994. From 1993 to 1994, he was president of Quixote Investment Management, Inc.
Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive, Suite 360, Newport Beach, California 92660 serves as Sub-advisor for the PIMCO Total Return Bond Portfolio and the PIMCO Limited Maturity Bond Portfolio. PIMCO is an investment counseling firm founded in 1971 and, as of December 31, 1997, had approximately $118 billion of assets under management. PIMCO is a subsidiary general partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between Pacific Investment Management Corporation, a California corporation, and an indirect wholly owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners, LLC, a California limited liability company controlled by the managing directors of PIMCO.
The portfolio manager responsible for management of the PIMCO Total Return Bond Portfolio and the PIMCO Limited Maturity Bond Portfolio is William H. Gross. Mr. Gross is managing director of PIMCO has been associated with the firm since 1971, and has managed each Portfolio since their respective commencement of operations.
Robertson, Stephens & Company Investment Management, L.P. ("Robertson Stephens"), 555 California Street, San Francisco, California 94104, serves as Sub-advisor for the Robertson Stephens Value + Growth Portfolio. Robertson Stephens, a California limited partnership, was formed in 1993 and is registered as an investment advisor with the Securities and Exchange Commission. The sole limited partner of Robertson Stephens is Robertson, Stephens & Company, L.L.C., a major investment banking firm specializing in emerging growth companies that has developed substantial investment research, underwriting, and venture capital expertise. As of December 31, 1997, Robertson Stephens and its affiliates have in excess of $4.9 billion under management in public and private investment funds. Robertson, Stephens & Company, L.L.C., is an indirect wholly-owned subsidiary of BankAmerica Corporation, one of the four largest bank holding companies in the United States.
Mr. Ronald Elijah has been the portfolio manager responsible for management of the Robertson Stephens Value + Growth Portfolio since the Portfolio commenced operations in May 1996. Mr. Elijah joined Robertson Stephens as a portfolio manager in 1992.
American Century Investment Management, Inc. ("American Century") (formerly, Investors Research Corporation), American Century Tower, 4500 Main Street, Kansas City, Missouri 64111, serves as Sub-advisor for the Twentieth Century International Growth Portfolio and the Twentieth Century Strategic Balanced Portfolio. American Century has been providing investment advisory services to investment companies and institutional clients since 1958. In June 1995, American Century Companies, Inc. ("ACC"), the parent of American Century, acquired Benham Management International, Inc. In the acquisition, Benham Management Corporation ("BMC"), the investment adviser to The Benham Group of mutual funds, became a wholly owned subsidiary of ACC. Certain employees of BMC will be providing investment management services to American Century funds, while certain American Century employees will be providing investment management services to Benham funds. As of December 31, 1997, American Century and its affiliates managed assets totaling approximately $62 billion.
American Century utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the Portfolios.
The portfolio manager members of the portfolio team responsible for management of the Twentieth Century International Growth Portfolio are Henrik Strabo and Mark S. Kopinski. Henrik Strabo joined American Century in 1993 as an investment analyst member of the American Century International Equity and International Small Company Fund team, has been a portfolio manager member of the team since 1994 and has managed the Portfolio since its inception. Prior to joining American Century, Mr. Strabo was Vice President, International Equity Sales with Barclays de Zoete Wedd (1991 to 1993). Mark S. Kopinski, Vice President and Portfolio Manager for American Century, rejoined American Century in April 1997 and has co-managed the Portfolio since that time. From June 1995 to March 1997, Mr. Kopinski served as Vice President and Portfolio Manager for Federated Investors, Inc. Prior to June 1995, Mr. Kopinski was a Vice President and Portfolio Manager for American Century.
The portfolio manager members of the portfolio team responsible for the day-to-day management of the equity portion of the Twentieth Century Strategic Balanced Portfolio are James E. Stowers III, Bruce A. Wimberly and John Sykora. Mr. Stowers, Chief Executive Officer and Portfolio Manager, joined American Century in 1981. Mr. Wimberly, Portfolio Manager, joined American Century in 1994 as an Investment Analyst. Prior to joining American Century, Mr. Wimberly attended Kellogg Graduate School of Management, Northwestern University, where he obtained his M.B.A. degree in August 1994. Mr. Sykora, Portfolio Manager, joined American Century in May 1994 as an Investment Analyst, a position he held until August 1997. Mr. Sykora served as a Financial Analyst for Business Men's Assurance Company of America from August 1993 to 1994. Prior to that, Mr. Sykora attended Michigan State University where he obtained his MBA degree. The portfolio manager members of the portfolio team responsible for management of the fixed income portion of the Portfolio are Casey Colton, Norman E. Hoops, Brian Howell, Jeffrey L. Houston and David Schroeder. Casey Colton joined BMC in 1990 as a Municipal Analyst. Norman Hoops joined American Century in November 1989 as a Vice President and Portfolio Manager and became Senior Vice President and Fixed Income Portfolio Manager in April 1993. Brian Howell joined BMC in 1987 as a research analyst and was promoted to his current position in January 1994. Jeffrey Houston has worked for American Century as a Portfolio Manager since November, 1990. David Schroeder joined BMC in 1990.
Putnam Investment Management, Inc. ("Putnam Management"), One Post Office Square, Boston, Massachusetts 02109, serves as Sub-advisor for the AST Putnam Value Growth & Income Portfolio, the AST Putnam International Equity Portfolio, and the AST Putnam Balanced Portfolio. Putnam Management is a subsidiary of Putnam Investments, Inc., a holding company which in turn is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose principal businesses are international insurance and reinsurance brokerage, employee benefit consulting and investment management. Putnam Management is one of America's oldest and largest money management firms, managing mutual funds since 1937. As of December 31, 1997, Putnam Management and its affiliates managed nearly $235 billion in assets.
Anthony I. Kreisel, Managing Director of Putnam Management, has had primary responsibility for the day-to-day management of the AST Putnam Value Growth & Income Portfolio since the Portfolio's inception in December, 1996. Mr. Kreisel has been employed as an investment professional by Putnam Management since 1986.
Justin Scott, Managing Director of Putnam Management, and Omid Kamshad, Senior Vice President of Putnam Management, have had primary responsibility for the day-to-day management of the AST Putnam International Equity Portfolio since Putnam Management became the Portfolio's Sub-advisor in October, 1996. Mr. Scott has been employed as an investment professional by Putnam Management since 1988. Mr. Kamshad has been employed as an investment professional by Putnam Management since January, 1996. Prior to January, 1996, Mr. Kamshad was Director of Investments at Lombard Odier International. Prior to April, 1995, he was Director at Baring Asset Management Company.
Putnam Management's Global Asset Allocation Committee has primary responsibility for the day-to-day management of the AST Putnam Balanced Portfolio. No person is primarily responsible for making recommendations to the Committee in respect of the Portfolio.
Cohen & Steers Capital Management, Inc. ("Cohen & Steers"), 757 Third Avenue, New York, New York 10017, acts as the Sub-advisor for the Cohen & Steers Realty Portfolio. Cohen & Steers, a registered investment advisor, is the leading U.S. manager of portfolios dedicated to investments in real estate investment trusts ("REITS"). As of December 31, 1997, Cohen & Steers managed approximately $5.8 billion in assets.
Robert H. Steers, Chairman, and Martin Cohen, President formed Cohen & Steers in 1986 and have been responsible for the day-to-day management of the Cohen & Steers Realty Portfolio since its inception. Mr. Cohen and Mr. Steers may be deemed "controlling persons" of Cohen & Steers on the basis of their ownership of Cohen & Steers' stock.
Stein Roe & Farnham Incorporated ("Stein Roe"), One South Wacker Drive, Chicago, Illinois 60606 serves as Sub-advisor to the Stein Roe Venture Portfolio. Stein Roe was organized in 1986 to succeed the business of Stein Roe & Farnham, a partnership that had advised and managed mutual fund since 1949. Stein Roe is a wholly owned subsidiary of Liberty Financial Companies, Inc., which in turn is a majority owned indirect subsidiary of Liberty Mutual Insurance Company. As of December 31, 1997, Stein Roe managed approximately $28.5 billion in assets.
Richard B. Peterson and John S. McLandsborough have been co-portfolio managers of the Portfolio since its inception. Mr. Peterson is a senior vice president of Stein Roe. Mr. Peterson began his investment career at Stein Roe & Farnham in 1965 and rejoined Stein Roe in 1991 after 15 years of equity research and portfolio management experience with State Farm Investment Management Corp. Prior to joining Stein Roe in April 1996, Mr. McLandsborough was an equity research analyst with CS First Boston from June 1994 until January 1996 with National City Bank of Cleveland prior thereto.
Bankers Trust Company ("Bankers Trust") is the Sub-advisor to the Bankers Trust Enhanced 500 Portfolio. Bankers Trust, a New York banking corporation with executive offices at 130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, 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 supplier of financial services to the international and domestic institutional markets. As of December 31, 1997 Bankers Trust New York Corporation was the seventh largest bank holding company in the United States. Bankers Trust is one of the nation's largest and most experienced investment managers with approximately $317.8 billion in assets under management globally.
Frank Salerno, Managing Director of Bankers Trust, has been responsible for the day-to-day management of the Portfolio since its inception. Mr. Salerno oversees administration, management and trading of international and domestic equity index strategies. He has been employed by Bankers Trust since 1981.
Marsico Capital Management, LLC ("Marsico Capital"), 1200 17th Street, Suite 1300, Denver, CO 80202, serves as Sub-advisor for the Marsico Capital Growth Portfolio. Thomas F. Marsico, who has managed the Portfolio since its inception, has primary responsibility for management of the Portfolio. Mr. Marsico is President and Chief Executive Officer, and has sole voting control, of Marsico Capital. Prior to forming Marsico Capital in September, 1997, Mr. Marsico served as Executive Vice President and Portfolio Manager at Janus Capital Corporation ("Janus"). Mr. Marsico joined Janus in March, 1986 and served as Portfolio Manager of the Janus Twenty Fund from February, 1988 to August, 1997 and the Janus Growth & Income Fund from May, 1990 (inception) to August, 1997. As of December 31, 1997, Marsico Capital managed over $131 million in assets.
Neuberger&Berman Management Incorporated ("N&B Management") serves as sub-advisor for the Neuberger&Berman Mid-Cap Value Portfolio and the Neuberger&Berman Mid-Cap Growth Portfolio. N&B Management and its predecessor firms have specialized in the management of mutual funds since 1950. All of the voting stock of N&B Management is owned by individuals who are principals of Neuberger&Berman, LLC ("Neuberger&Berman"). Neuberger&Berman is a member firm of the NYSE and other principal exchanges, acts as the Portfolios' principal broker in the purchase and sale of portfolio securities and the sale of covered call options, and provides N&B Management with certain assistance in the management of the Portfolios without added cost to the Portfolios. Neuberger&Berman and its affiliates, including N&B Management, manage securities accounts, including mutual funds, that had approximately $52.9 billion of assets as of December 31, 1997.
Michael M. Kassen and Robert I. Gendelman have been primarily responsible for the day-to-day management of Neuberger&Berman Mid-Cap Value Portfolio since N&B Management became the Portfolio's Sub-Advisor in May 1998. Mr. Kassen has been a Vice President of N&B Management and a principal of Neuberger&Berman since December 1992, and was an employee of N&B Management from 1990 to December 1992. Mr. Gendelman is a principal of Neuberger&Berman and has been an Assistant Vice President of N&B Management since 1994. He was a portfolio manager for another mutual fund manager from 1992 to 1993.
Jennifer K. Silver and Brooke A. Cobb have been primarily responsible for the day-to-day management of the Neuberger&Berman Mid-Cap Growth Portfolio since N&B Management became the Portfolio's Sub-advisor in May 1988. Ms. Silver is Director of the Neuberger&Berman Growth Equity Group, and both she and Mr. Cobb are Vice Presidents of N&B Management. Ms. Silver is a principal of Neuberger&Berman. Previously, Ms. Silver was a portfolio manager for several large mutual funds managed by a prominent investment adviser. Previously, Mr. Cobb was the chief investment officer for an investment advisory firm managing individual accounts from 1995 to 1997 and, from 1992 to 1995, a portfolio manager of a large mutual fund managed by a prominent adviser.
Investment Management Agreements: The Trust has entered into Investment Management Agreements with the Investment Manager (the "Management Agreements") which provide that the Investment Manager will furnish each applicable Portfolio with investment advice and investment management and administrative services with respect to the applicable Portfolio subject to the supervision of the Board of Trustees and in conformity with the stated policies of the applicable Portfolio. The Investment Manager has engaged the Sub-advisors noted above to conduct the investment programs of each Portfolio, including the purchase, retention, disposition and lending of securities. Such Sub-advisors are required to provide research and statistical analysis and to keep books and records of securities transactions. The Investment Manager is responsible for monitoring the activities of the Sub-advisors and reporting on the activities of the Sub-advisors to the Trustees. The Investment Manager must also provide or obtain for the Trust, and thereafter supervise, such executive, administrative, accounting, custody, transfer agent and shareholder servicing services as are deemed advisable by the Trustees of the Trust.
Under the terms of the Management Agreements, each Portfolio pays all of its expenses, including, but not limited to, the costs incurred in connection with the maintenance of its registration under the Securities Act of 1933, as amended, and the 1940 Act, printing and mailing prospectuses and statements of additional information to shareholders, certain office and financial accounting services, taxes or governmental fees, brokerage commissions, portfolio pricing, custodial, transfer and shareholder servicing agent costs, expenses of outside counsel and independent accountants, preparation of shareholder reports and expenses of trustee and shareholder meetings. Expenses incurred by the Trust not directly attributable to any specific Portfolio or Portfolios are allocated on the basis of the net assets of the respective Portfolios.
The Investment Manager receives a fee, payable each month, for the performance of its services. The Investment Manager pays each Sub-advisor a portion of such fee for the performance of the Sub-advisory services. The Investment Management fee payable differs from Portfolio to Portfolio, reflecting the objective, policies and restrictions of each Portfolio and the nature of each Investment Management Agreement and Sub-advisory Agreement. Each Portfolio's fee is accrued daily for the purposes of determining the offering and redemption price of the Portfolio's shares. The fees payable to the Investment Manager are as follows:
Lord Abbett Growth and Income Portfolio: An annual rate of .75% of the average daily net assets of the Portfolio.
Lord Abbett Small Cap Value Portfolio: An annual rate of 0.95% of the average daily net assets of the Portfolio.
JanCap Growth Portfolio: An annual rate of .90% of the average daily net assets of the Portfolio. The Investment Manager has voluntarily agreed to waive a portion of its fee equal to .05% of the average daily net assets of the Portfolio in excess of $1 billion. The Investment Manager may terminate this voluntary agreement at any time.
AST Janus Overseas Growth Portfolio: An annual rate of 1.0% of the average daily net assets of the Portfolio.
AST Money Market Portfolio: An annual rate of .50% of the average daily net assets of the Portfolio. The Investment Manager has voluntarily agreed to waive a portion of its fee equal to .05% of the average daily net assets of the Portfolio. The Investment Manager may terminate this voluntary agreement at any time.
Federated High Yield Portfolio: An annual rate of .75% of the average daily net assets of the Portfolio.
T. Rowe Price Asset Allocation Portfolio: An annual rate of .85% of the average daily net assets of the Portfolio.
T. Rowe Price International Equity Portfolio: An annual rate of 1.0% of the average daily net assets of the Portfolio.
T. Rowe Price Natural Resources Portfolio: An annual rate of .90% of the average daily net assets of the Portfolio.
T. Rowe Price International Bond Portfolio: An annual rate of .80% of the average daily net assets of the Portfolio.
T. Rowe Price Small Company Value Portfolio: An annual rate of .90% of the average daily net assets of the Portfolio.
Founders Capital Appreciation Portfolio: An annual rate of .90% of the average daily net assets of the Portfolio.
Founders Passport Portfolio: An annual rate of 1.0% of the average daily net assets of the Portfolio.
INVESCO Equity Income Portfolio: An annual rate of .75% of the average daily net assets of the Portfolio.
PIMCO Total Return Bond Portfolio: An annual rate of .65% of the average daily net assets of the Portfolio.
PIMCO Limited Maturity Bond Portfolio: An annual rate of .65% of the average daily net assets of the Portfolio.
Robertson Stephens Value + Growth Portfolio: An annual rate of 1.00% of the average daily net assets of the Portfolio.
Twentieth Century International Growth Portfolio: An annual rate of 1.0% of the average daily net assets of the Portfolio.
Twentieth Century Strategic Balanced Portfolio: An annual rate of .85% of the average daily net assets of the Portfolio.
AST Putnam Value Growth & Income Portfolio: An annual rate of .75% of the average daily net assets of the Portfolio.
AST Putnam International Equity Portfolio: An annual rate of 1.0% of the average daily net assets of the Portfolio not in excess of $75 million; plus .85% of the Portfolio's average daily net assets over $75 million.
AST Putnam Balanced Portfolio: An annual rate of .75% of the average daily net assets of the Portfolio not in excess of $300 million; plus .70% of the Portfolio's average daily net assets in excess of $300 million.
Cohen & Steers Realty Portfolio: An annual rate of 1.00% of the average daily net assets of the Portfolio.
Stein Roe Venture Portfolio: An annual rate of .95% of the average daily net assets of the Portfolio.
Bankers Trust Enhanced 500 Portfolio: An annual rate of .60% of the average daily net assets of the Portfolio
Marsico Capital Growth Portfolio: An annual rate of .90% of the average daily net assets of the Portfolio.
Neuberger&Berman Mid-Cap Value Portfolio: An annual rate of .90% of the portion of the average daily net assets of the Portfolio not in excess of $1 billion; plus .85% of the portion of the net assets over $1 billion. Prior to May 1, 1998, the Investment Manager had engaged Federated Investment Counseling as Sub-advisor for the Portfolio (formerly, the Federated Utility Income Portfolio), for a total Investment Management fee equal to .75% of the first $50 million of the average daily net assets of the Portfolio; plus .60% of the Portfolio's average daily net assets in excess of $50 million.
Neuberger&Berman Mid-Cap Growth Portfolio: An annual rate of .90% of the portion of the average daily net assets of the Portfolio not in excess of $1 billion; plus .85% of the portion of the net assets over $1 billion. Prior to May 1, 1998, the Investment Manager had engaged Berger Associates, Inc. as Sub-advisor for the Portfolio (formerly, the Berger Capital Growth Portfolio), for a total Investment Management fee of .75% of the average daily net assets of the Portfolio.
The Investment Manager has agreed, by the terms of the Management Agreements for certain Portfolios of the Trust, and voluntarily for the other Portfolios of the Trust, to reimburse the Portfolio for certain operating expenses so that total expenses of the Portfolio do not exceed a specified percentage of the Portfolio's average daily net assets. Such specified percentage differs between the Portfolios, reflecting the objective, policies and restrictions of each Portfolio and the expenses involved in conducting an investment program for each Portfolio. For an additional discussion of Portfolio expense limitations, see "Investment Advisory and Other Services" in the Trust's SAI.
Sub-Advisory Agreements: The Investment Manager pays each Sub-advisor for the performance of sub-advisory services. The fee paid to the Sub-advisors differs from Portfolio to Portfolio, reflecting the objectives, policies and restrictions of each Portfolio and the nature of each Sub-advisory Agreement. Each Sub-advisor's fee is accrued daily for purposes of determining the amount payable to the Sub-advisor. The fees payable to the present Sub-advisors are as follows:
Lord, Abbett & Co. for the Lord Abbett Growth and Income Portfolio: An annual rate of .50% of the portion of the average daily net assets of the Portfolio not in excess of $200 million; plus .40% of the portion over $200 million but not in excess of $500 million; plus .375% of the portion over $500 million but not in excess of $700 million; plus .35% of the portion over $700 million but not in excess of $900 million; plus .30% of the portion in excess of $900 million.
Lord, Abbett & Co. for the Lord Abbett Small Cap Value Portfolio: An annual rate of .50% of the average daily net assets of the Portfolio.
Janus Capital Corporation for the JanCap Growth Portfolio: An annual rate of .60% of the portion of the average daily net assets of the Portfolio not in excess of $100 million; plus .55% of the portion over $100 million but not in excess of $1 billion; plus .50% of the portion over $1 billion. Commencing September 4, 1996, the Sub-advisor has voluntarily agreed to waive a portion of its fee equal to .10% of the Portfolio's average daily net assets over $500 million but not in excess of $1 billion; and .05% of the portion of the Portfolio's average daily net assets over $1 billion. The Sub-advisor may terminate this voluntary agreement at any time.
Janus Capital Corporation for the AST Janus Overseas Growth Portfolio:
An annual rate of .65% of the portion of the average daily net assets of the
Portfolio not in excess of $100 million; plus .60% of the portion of the net
assets over $100 million but not in excess of $500 million; and .50% of the
portion of the net assets over $500 million.
J.P. Morgan Investment Management Inc. for the AST Money Market Portfolio: An annual rate of .25% of the portion of the average daily net assets of the Portfolio not in excess of $100 million; plus .20% of the portion over $100 million but not in excess of $200 million; plus .15% of the portion over $200 million but not in excess of $1 billion; and .10% of the portion in excess of $1 billion. Commencing December 30, 1996, the Sub-advisor has voluntarily agreed to waive a portion of its fee equal to .10% of the portion of the Portfolio's average daily net assets not in excess of $100 million; and .05% of the portion of the Portfolio's average daily net assets over $100 million but not in excess of $200 million; and .06% of the portion of the Portfolio's average daily net assets over $500 million but not in excess of $1 billion; and .04% of the portion of the Portfolio's average daily net assets over $1 billion. The Sub-advisor may terminate this voluntary agreement at any time.
Federated Investment Counseling for the Federated High Yield Portfolio:
An annual rate of .50% of the portion of the average daily net assets of the
Portfolio under $30 million; plus .40% of the portion of the net assets equal to
or in excess of $30 million but under $50 million; plus .30% of the portion
equal to or in excess of $50 million but under $75 million; and .25% of the
portion equal to or in excess of $75 million.
T. Rowe Price Associates, Inc. for the T. Rowe Price Asset Allocation Portfolio: An annual rate of .50% of the portion of the average daily net assets of the Portfolio not in excess of $25 million; plus .35% of the portion in excess of $25 million but not in excess of $50 million; and .25% of the portion in excess of $50 million.
Rowe Price-Fleming International, Inc. for the T. Rowe Price International Equity Portfolio: An annual rate of .75% of the portion of the average daily net assets of the Portfolio not in excess of $20 million; plus .60% of the portion of the net assets over $20 million but not in excess of $50 million; and .50% of the portion in excess of $50 million. Commencing May 1, 1996, the Sub-advisor has voluntarily agreed to waive a portion of its fee equal to .25% of the portion of the Portfolio's average daily net assets not in excess of $20 million and .10% of the portion of the net assets over $20 million but not in excess of $50 million, so long as the average daily net assets of the Portfolio equal or exceed $200 million. The Sub-advisor may terminate this voluntary agreement at any time.
T. Rowe Price Associates, Inc. for the T. Rowe Price Natural Resources Portfolio: An annual rate of .60% of the portion of the average daily net assets of the Portfolio not in excess of $20 million; plus .50% of the portion of the net assets over $20 million but not in excess of $50 million. When the net assets of the Portfolio exceed $50 million, the fee is an annual rate of .50% of the average daily net assets of the Portfolio.
Rowe Price-Fleming International, Inc. for the T. Rowe Price International Bond Portfolio: An annual rate of .40% of the average daily net assets of the Portfolio.
T. Rowe Price Associates, Inc. for the T. Rowe Price Small Company Value Portfolio: An annual rate of .60% of the portion of the average daily net assets of the Portfolio not in excess of $20 million; plus .50% of the portion of the net assets over $20 million but not in excess of $50 million. When the net assets of the Portfolio exceed $50 million, the fee is an annual rate of .50% of the average daily net assets of the Portfolio.
Founders Asset Management, Inc. for the Founders Capital Appreciation Portfolio: An annual rate of .65% of the portion of the average daily net assets of the Portfolio not in excess of $75 million; plus .60% of the portion of the net assets over $75 million but not in excess of $150 million; and .55% of the net assets in excess of $150 million.
Founders Asset Management, Inc. for the Founders Passport Portfolio: An annual rate of .60% of the portion of the average net assets of the Portfolio not in excess of $100 million; plus .50% of the portion of the average net assets of the Portfolio in excess of $100 million.
INVESCO Funds Group, Inc. for the INVESCO Equity Income Portfolio: An annual rate of .50% of the portion of the average daily net assets of the Portfolio not in excess of $25 million; plus .45% of the portion of the net assets over $25 million but not in excess of $75 million; plus .40% of the portion of the net assets in excess of $75 million but not in excess of $100 million; and .35% of the portion of the net assets over $100 million.
Pacific Investment Management Company for the PIMCO Total Return Bond Portfolio: An annual rate of .30% of the average daily net assets of the Portfolio not in excess of $150 million; and .25% on the portion of the net assets over $150 million.
Pacific Investment Management Company for the PIMCO Limited Maturity Bond Portfolio: An annual rate of .30% of the average daily net assets of the Portfolio not in excess of $150 million; and .25% on the portion of the net assets over $150 million.
Robertson, Stephens & Company Investment Management, L.P. for the Robertson Stephens Value + Growth Portfolio: An annual rate of .60% of the average daily net assets of the Portfolio not in excess of $200 million; and .50% of the portion of the net assets over $200 million.
American Century Investment Management, Inc. for the Twentieth Century International Growth Portfolio: An annual rate of .70% of the portion of the average daily net assets of the Portfolio not in excess of $100 million; plus .60% of the portion of the net assets over $100 million.
American Century Investment Management, Inc. for the Twentieth Century Strategic Balanced Portfolio: An annual rate of .50% of the portion of the of the average daily net assets of the Portfolio not in excess of $50 million; plus .45% of the portion of the net assets over $50 million.
Putnam Investment Management, Inc. for the AST Putnam Value Growth & Income Portfolio: An annual rate of .45% of the portion of the average daily net assets of the Portfolio not in excess of $150 million; plus .40% of the portion of the net assets over $150 million but not in excess of $300 million; plus .35% of the portion of the net assets over $300 million.
Putnam Investment Management, Inc. for the AST Putnam International Equity Portfolio: An annual rate of .65% of the portion of the average daily net assets of the Portfolio not in excess of $150 million; plus .55% of the portion of the average daily net assets of the Portfolio over $150 million but not in excess of $300 million; plus .45% of the portion of the average daily net assets of the Portfolio in excess of $300 million.
Putnam Investment Management, Inc. for the AST Putnam Balanced Portfolio: An annual rate of .45% of the portion of the average daily net assets of the Portfolio not in excess of $150 million; plus .40% of the portion of the average daily net assets of the Portfolio over $150 million but not in excess of $300 million; plus .35% of the portion of the average daily net assets of the Portfolio in excess of $300 million.
Cohen & Steers Capital Management, Inc. for the Cohen & Steers Realty Portfolio: An annual rate of .60% of the portion of the average daily net assets of the Portfolio not in excess of $100 million; plus .40% of the portion of the net assets over $100 million but not in excess of $250 million; plus .30% of the portion of the net assets over $250 million.
Stein Roe & Farnham Incorporated for the Stein Roe Venture Portfolio:
An annual rate of .50% of the average daily net assets of the Portfolio.
Bankers Trust Company for the Bankers Trust Enhanced 500 Portfolio: An annual rate of .17% of the portion of the average daily net assets of the Portfolio not in excess of $300 million; plus .13% of the portion of the net assets over $300 million.
Marsico Capital Management, LLC for the Marsico Capital Growth Portfolio:
An annual rate of 0.45% of the average daily net assets of the Portfolio.
Neuberger & Berman Management, Incorporated for the Neuberger & Berman Mid-Cap Value Portfolio: An annual rate of .50% of the portion of the average daily net assets of the Portfolio not in excess of $750 million; plus .45% of the portion of the net assets over $750 million but not in excess of $1 billion; plus .40% of the portion in excess of $1 billion. Prior to May 1, 1998, the Investment Manager had engaged Federated Investment Counseling as Sub-advisor for the Portfolio (formerly, the Federated Utility Income Portfolio), for a total Sub-advisory fee of .50% of the portion of the average daily net assets of the Portfolio not in excess $25 million; plus .35% of the portion in excess of $25 million but not in excess of $50 million; plus .25% of the portion in excess of $50 million.
Neuberger & Berman Management, Incorporated for the Neuberger & Berman Mid-Cap Growth Portfolio: An annual rate of .45% of the portion of the average daily net assets of the Portfolio not in excess of $100 million; plus .40% of the portion of the net assets over $100 million. Prior to May 1, 1998, the Investment Manager had engaged Berger Associates, Inc. as Sub-advisor for the Portfolio (formerly, the Berger Capital Growth Portfolio), for a total Sub-advisory fee of .55% of the average daily net assets of the Portfolio not in excess of $25 million; plus .50% of the portion of average daily net assets over $25 million but not in excess of $50 million; plus .40% of the portion of the average daily net assets over $50 million.
Administrator: PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington, Delaware 19809, a Delaware corporation that is an indirect wholly-owned subsidiary of PNC Financial Corp., serves as the administrator for the Trust pursuant to a Trust Accounting and Administration Agreement between the Trust and the Administrator, dated May 1, 1992 (the "Administration Agreement"). The Administrator provides certain fund accounting and administrative services to the Trust, including, among other services, accounting relating to the Trust and investment transactions of the Trust, and computing daily net asset values. The Administrator does not have any responsibility or authority for the management of the assets of the Trust, the determination of its investment policies, or for any matter pertaining to the distribution of securities issued by the Trust.
As compensation for the services and facilities provided by the Administrator under the Administration Agreement, the Trust has agreed to pay to the Administrator its "out-of-pocket" expenses plus the greater of certain percentages of the average daily net assets of the Trust or certain specified minimum annual amounts calculated for each Portfolio. The percentages of the average daily net assets are: (a) 0.10% of the first $200 million; (b) 0.06% of the next $200 million; (c) 0.0375% of the next $200 million; and (d) 0.03% of average daily net assets over $600 million. The minimum amount is $75,000 for each of the Lord Abbett Growth and Income Portfolio, the JanCap Growth Portfolio, the AST Money Market Portfolio, the Federated High Yield Portfolio, the T. Rowe Price Asset Allocation Portfolio, the T. Rowe Price Natural Resources Portfolio, the T. Rowe Price Small Company Value Portfolio, the Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio, the PIMCO Total Return Bond Portfolio, the PIMCO Limited Maturity Bond Portfolio, the Robertson Stephens Value & Growth Portfolio, the Twentieth Century Strategic Balanced Portfolio, the AST Putnam Value Growth & Income Portfolio, the AST Putnam Balanced Portfolio, the Neuberger&Berman Mid-Cap Value Portfolio and the Neuberger&Berman Mid-Cap Growth Portfolio. The minimum amount is $100,000 for the AST Janus Overseas Growth Portfolio, the T. Rowe Price International Bond Portfolio, the T. Rowe Price International Equity Portfolio, the Founders Passport Portfolio, the Twentieth Century International Growth Portfolio and the AST Putnam International Equity Portfolio. The minimum amount for the fiscal year ending December 31, 1998 for each of the Lord Abbett Small Cap Value Portfolio, the Cohen & Steers Realty Portfolio, the Stein Roe Venture Portfolio, the Bankers Trust Enhanced 500 Portfolio, and the Marsico Capital Growth Portfolio is $34,375. For an additional discussion of the services provided by the Administrator under the Administration Agreement, and the "out-of-pocket" expenses the Trust is to pay the Administrator, see the Trust's SAI under "Management of the Trust: The Administrator and Transfer and Shareholder Servicing Agent."
Sale of Shares: Shares are sold at net asset value to Participating Insurance Companies and Qualified Plans. The Trust has entered into separate agreements for the sale of shares with American Skandia Life Assurance Corporation ("ASLAC") and Kemper Investors Life Insurance Company ("Kemper"), respectively. Pursuant to these agreements, the Trust will pay ASLAC and Kemper for printing and delivery of certain documents to the beneficial owners of Trust shares who are holders of variable annuity and variable life insurance policies issued by ASLAC and Kemper. Such documents include prospectuses, semi-annual and annual reports and any proxy materials. The Trust will pay ASLAC 0.1%, on an annualized basis, of the net asset value of the shares legally owned by any separate account of ASLAC, and will pay Kemper 0.1%, on an annualized basis, of the net asset value of the shares legally owned by the separate accounts of Kemper named in the sales agreement. The Trust may enter into sales agreements with other Participating Insurance Companies or certain Qualified Plans in the future. Qualified Plans and owners of variable annuity contracts and variable insurance policies will receive annual and semi-annual reports including the financial statement of the Portfolios that they have authorized for investment.
TAX MATTERS:
This discussion of federal income tax consequences applies to the Participating Insurance Companies, Qualified Plans and plan participants in certain types of Qualified Plans since the separate accounts of the Participating Insurance Companies, the Qualified Plans and plan participants in certain Qualified Plans will be the shareholders of the Trust. Holders of variable annuity contracts or variable life insurance policies must consult the prospectuses of their respective contracts or policies for information on the federal income tax consequences to such holders, and plan participants must consult with any applicable plan documents for information on the federal income tax consequences to such holders. The Trust intends to qualify as a regulated investment company by satisfying the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), including requirements with respect to diversification of assets, distribution of income and sources of income. It is the Trust's policy to distribute to shareholders all of its investment income (net of expenses) and any capital gains (net of capital losses) in accordance with the timing requirements imposed by the Code so that the Trust will satisfy the distribution requirement of Subchapter M and not be subject to federal income taxes or the 4% excise tax.
Distributions by the Trust of its net investment income and the excess, if any, of its net short-term capital gain over its net long-term capital loss are taxable to shareholders as ordinary income. These distributions are treated as dividends for federal income tax purposes, but will not qualify for the 70% dividends-received deduction for corporate shareholders. Distributions by the Trust of the excess, if any, of its net long-term capital gain over its net short-term capital loss are designated as capital gain dividends and are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder held his shares.
Portions of certain Portfolio's investment income may be subject to foreign income taxes withheld at source. The Trust may elect to "pass-through" to the shareholders of such Portfolios these foreign taxes, in which event each shareholder will be required to include his pro rata portion thereof in his gross income, but will be able to deduct or (subject to various limitations) claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for federal income tax purposes whether received in cash or reinvested in additional shares of the Trust. In general, distributions by the Trust are taken into account by the shareholders in the year in which they are made. However, certain distributions made during January will be treated as having been paid by the Trust and received by the shareholders on December 31 of the preceding year. A statement setting forth the federal income tax status of all distributions made or deemed made during the year, including any amount of foreign taxes "passed through," will be sent to shareholders promptly after the end of each year. Notwithstanding the foregoing, distributions by the Trust to certain Qualified Plans may be exempt from federal income tax.
Under Code Section 817(h), a segregated asset account upon which a variable annuity contract or variable life insurance policy is based must be "adequately diversified." A segregated asset account will be adequately diversified if it satisfies one of two alternative tests set forth in Treasury regulations. For purposes of these alternative diversification tests, a segregated asset account investing in shares of a regulated investment company will be entitled to "look-through" the regulated investment company to its pro rata portion of the regulated investment company's assets, provided the regulated investment company satisfies certain conditions relating to the ownership of its shares. The Trust intends to satisfy these ownership conditions. Further, the Trust intends that each Portfolio separately will be adequately diversified. Accordingly, a segregated asset account investing solely in shares of a Portfolio will be adequately diversified, and a segregated asset account investing in shares of one or more Trust Portfolios and shares of other adequately diversified funds generally will be adequately diversified.
The foregoing discussion of federal income tax consequences is based on tax laws and regulations in effect on the date of this Prospectus, and is subject to change by legislative or administrative action. As the foregoing discussion is for general information only, a prospective shareholder should also review the more detailed discussion of federal income tax considerations relevant to the Trust that is contained in the Trust's SAI. In addition, each prospective shareholder should consult with his own tax advisor as to the tax consequences of investments in the Trust, including the application of state and local taxes which may differ from the federal income tax consequences described above.
DESCRIPTION OF SHARES OF THE TRUST:
The Trust's Declaration of Trust dated October 31, 1988, which governs certain Trust matters, permits the Trust's Board of Trustees to issue multiple classes of shares, and within each class, an unlimited number of shares of beneficial interest with a par value of $.001 per share. Each share entitles the holder to one vote for the election of Trustees and on all other matters that are not specific to one class of shares, and to participate equally in dividends, distributions of capital gains and net assets of each applicable Portfolio. Only shareholders of shares of a specific Portfolio may vote on matters specific to that Portfolio. Shares of one class may not bear the same economic relationship to the Trust as shares of another class. In the event of dissolution or liquidation, holders of shares of a Portfolio will receive pro rata, subject to the rights of creditors, the proceeds of the sale of the assets held in such Portfolio less the liabilities attributable to such Portfolio. Shareholders of a Portfolio will not be liable for the expenses, obligations or debts of another Portfolio.
There are no preemptive or conversion rights applicable to any of the Trust's shares. The Trust's shares, when issued, will be fully paid, non-assessable and transferable. The Trustees may at any time create additional series of shares without shareholder approval.
Generally, there will not be annual meetings of shareholders. A Trustee may, in accordance with certain rules of the Securities and Exchange Commission, be removed from office when the holders of record of not less than two-thirds of the outstanding shares either present a written declaration to the Trust's custodian or vote in person or by proxy at a meeting called for this purpose. In addition, the Trustees will promptly call a meeting of shareholders to remove a Trustee(s) when requested to do so in writing by record holders of not less than 10% of the outstanding shares. Finally, the Trustees shall, in certain circumstances, give such shareholders access to a list of the names and addresses of all other shareholders or inform them of the number of shareholders and the cost of mailing their request.
Under Massachusetts law, shareholders could, under certain circumstances, be held liable for the obligations of the Trust. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the Trustees to all parties, and each party thereto must expressly waive all rights of action directly against shareholders. The Declaration of Trust provides for indemnification out of the Trust's property for all loss and expense of any shareholder of the Trust held liable on account of being or having been a shareholder. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust would be unable to meet its obligations wherein the complaining party was held not to be bound by the disclaimer.
The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, nothing in the Declaration of Trust protects a Trustee against any liability to which the Trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involving the conduct of his office. The Declaration of Trust provides for indemnification by the Trust of the Trustees and officers of the Trust except with respect to any matter as to which any such person did not act in good faith in the reasonable belief that his action was in or not opposed to the best interests of the Trust. Such person may not be indemnified against any liability to the Trust or the Trust's shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Declaration of Trust also authorizes the purchase of liability insurance on behalf of Trustees and officers.
PERFORMANCE:
The Portfolios may measure performance in terms of total return, which is calculated for any specified period of time by assuming the purchase of shares of the Portfolio at the net asset value at the beginning of the period. Each dividend or other distribution paid by each Portfolio during such period is assumed to have been reinvested at the net asset value on the reinvestment date. The shares then owned as a result of this process are valued at the net asset value at the end of the period. The percentage increase is determined by subtracting the initial value of the investment from the ending value and dividing the remainder by the initial value. Each Portfolio's total return shows a Portfolio's overall dollar or percentage change in value, including changes in share price and assuming each Portfolio's dividends and capital gains distributions are reinvested. An average annual total return reflects the hypothetical annually compounded return that would have produced the same cumulative return if a Portfolio's performance had been constant over the entire period. Total return figures are based on the overall change in value of a hypothetical investment in each Portfolio. Because average annual returns for more than one year tend to smooth out variations in each Portfolio's return, investors should recognize that such figures are not the same as actual year-by-year results. To illustrate the components of overall performance, a Portfolio may separate its cumulative and average annual returns into income results and capital gains or losses.
The Portfolios may also measure performance in terms of yield. Each Portfolio's yield shows the rate of income the Portfolio earns on its investments as a percentage of the Portfolio's share price. To calculate yield, the Portfolio takes the interest and dividend income it earned from its investments for a 30-day period (net of expenses), divides it by the average number of Portfolio shares entitled to receive dividends, and expresses the result as an annualized percentage rate based on the Portfolio's net asset value at the end of the 30-day period. For the Portfolio's investments denominated in foreign currencies, income and expenses are calculated in their respective currencies and then converted to U.S. dollars. Yields are calculated according to methods that are standardized for all stock and bond funds. Because yield calculation methods differ from the method used for other accounting purposes (for instance, currency gains and losses are not reflected in the yield calculation), a Portfolio's yield may not equal the income paid to shareholders' accounts or the income reported in the Portfolio's financial statements.
The Portfolios impose no sales or other charges that would impact the total return or yield computations. Portfolio performance figures are based upon historical results and are not intended to indicate future performance. The investment return and principal value of an investment in any of the Portfolios will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.
Yield and total returns quoted from the Portfolios include the effect of deducting each Portfolio's expenses, but may not include charges and expenses attributable to any particular insurance product. Because shares of the Portfolios may be purchased through variable insurance contracts, the prospectus of the Participating Insurance Company sponsoring such contract should be carefully reviewed for information on relevant charges and expenses. Excluding these charges from quotations of each Portfolio's performance has the effect of increasing the performance quoted. The effect of these charges should be considered when comparing a Portfolio's performance to that of other mutual funds. In advertising and sales literature, these figures will be accompanied by figures that reflect the applicable contract charges.
From time to time in advertisements or sales material, the Portfolios (or Participating Insurance Companies) may discuss their performance ratings or other information as published by recognized mutual fund statistical or rating services, such as Lipper Analytical Services, Inc., Morningstar or by publications of general interest, such as Forbes or Money. The Portfolios may also compare their performance to that of other selected mutual funds, mutual fund averages or recognized stock market indicators, including the Standard & Poor's 500 Stock Index, the Standard & Poor Midcap Index, the Dow Jones Industrial Average, the Russell 2000 and the NASDAQ composite. In addition, the Portfolios may compare their total return or yield to the yield on U.S. Treasury obligations and to the percentage change in the Consumer Price Index. Each of the AST Janus Overseas Growth Portfolio, T. Rowe Price International Equity Portfolio, T. Rowe Price International Bond Portfolio, Founders Passport Portfolio, Twentieth Century International Growth Portfolio and AST Putnam International Equity Portfolio may compare its performance to the record of global market indicators such as Morgan Stanley Capital International Europe, Australia, Far East Index (EAFE Index), an unmanaged index of foreign common stock prices translated into U.S. dollars. Such performance ratings or comparisons may be made with funds that may have different investment restrictions, objectives, policies or techniques than the Portfolios and such other funds or market indicators may be comprised of securities that differ significantly from the Portfolios' investments.
TRANSFER AND SHAREHOLDER SERVICING AGENT: PFPC Inc., 103 Bellevue Parkway, Wilmington, Delaware 19809, serves as the Trust's transfer and shareholder servicing agent.
CUSTODIAN: The custodian for all cash and securities holdings of the AST Janus Overseas Growth Portfolio, T. Rowe Price International Equity Portfolio, T. Rowe Price International Bond Portfolio, Founders Passport Portfolio, Twentieth Century International Growth Portfolio and AST Putnam International Equity Portfolio is Morgan Stanley Trust Company, One Pierrepont, Brooklyn, New York. The custodian for all cash and securities holdings of the other Portfolios is PNC Bank, Airport Business Center, International Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113. For these Portfolios, Morgan Stanley Trust Company will serve as co-custodian with respect to foreign securities holdings.
COUNSEL AND AUDITORS: The firm of Werner & Kennedy, 1633 Broadway, 46th Floor, New York, New York 10019, is counsel for the Trust. Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has been appointed independent auditor for the Trust.
OTHER INFORMATION: This Prospectus omits certain information contained in the registration statement filed with the Securities and Exchange Commission. Copies of the registration statement, including items omitted herefrom, may be obtained from the Commission by paying the charges prescribed under its rules and regulations.
Shareholder inquiries should be made by telephone to (203) 926-1888 or, if in writing, to the Trust's office at One Corporate Drive, Shelton, Connecticut 06484. Holders of variable annuity contracts or variable life insurance policies issued by Participating Insurance Companies for which shares of the Trust are the investment vehicle will receive from the Participating Insurance Companies unaudited semi-annual financial statements and year-end financial statements audited by the Trust's independent auditors. If applicable, each plan participant will receive from the Qualified Plan trustees, or directly from the Trust, unaudited semi-annual financial statements and year-end financial statements audited by the Trust's independent auditors. Each report will show the investments owned by the Trust and the market values of the investments and will provide other information about the Trust and its operations.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATION OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
STATEMENT OF ADDITIONAL INFORMATION May 1, 1998
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
American Skandia Trust (the "Trust") is a managed, open-end investment company whose separate portfolios ("Portfolios") are diversified, unless otherwise indicated. The Trust seeks to meet the differing objectives of its Portfolios. Currently, these Portfolios are the Lord Abbett Growth and Income Portfolio, the Lord Abbett Small Cap Value Portfolio, the JanCap Growth Portfolio, the AST Janus Overseas Growth Portfolio, the AST Money Market Portfolio, the Federated High Yield Portfolio, the T. Rowe Price Asset Allocation Portfolio, the T. Rowe Price International Equity Portfolio, the T. Rowe Price Natural Resources Portfolio, the T. Rowe Price International Bond Portfolio, the T. Rowe Price Small Company Value Portfolio, the Founders Capital Appreciation Portfolio, the Founders Passport Portfolio, the INVESCO Equity Income Portfolio, the PIMCO Total Return Bond Portfolio, the PIMCO Limited Maturity Bond Portfolio, the Robertson Stephens Value + Growth Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth Century Strategic Balanced Portfolio, the AST Putnam Value Growth & Income Portfolio, the AST Putnam International Equity Portfolio, the AST Putnam Balanced Portfolio, the Cohen Steers Realty Portfolio, the Stein Roe Venture Portfolio, the Bankers Trust Enhanced 500 Portfolio, the Marsico Capital Growth Portfolio, the Neuberger&Berman Mid-Cap Value Portfolio and the Neuberger&Berman Mid-Cap Growth Portfolio.
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Lord, Abbett & Co.: Lord Abbett Growth and
Income Portfolio, Lord Abbett Small Cap Value Portfolio; (b) Janus Capital
Corporation: JanCap Growth Portfolio, AST Janus Overseas Growth Portfolio; (c)
J.P. Morgan Investment Management Inc.: AST Money Market Portfolio; (d)
Federated Investment Counseling: Federated High Yield Portfolio; (e) T. Rowe
Price Associates, Inc.: T. Rowe Price Asset Allocation Portfolio, T. Rowe Price
Natural Resources Portfolio, T. Rowe Price Small Company Value Portfolio; (f)
Rowe Price-Fleming International, Inc.: T. Rowe Price International Equity
Portfolio, T. Rowe Price International Bond Portfolio; (g) Founders Asset
Management LLC: Founders Capital Appreciation Portfolio, Founders Passport
Portfolio; (h) INVESCO Funds Group, Inc.: INVESCO Equity Income Portfolio; (i)
Pacific Investment Management Company: PIMCO Total Return Bond Portfolio, PIMCO
Limited Maturity Bond Portfolio; (j) Robertson, Stephens & Company Investment
Management, L.P.: Robertson Stephens Value + Growth Portfolio; (k) American
Century Investment Management, Inc. (formerly, Investors Research Corporation):
Twentieth Century International Growth Portfolio, Twentieth Century Strategic
Balanced Portfolio; (l) Putnam Investment Management, Inc.: AST Putnam Value
Growth & Income Portfolio, AST Putnam International Equity Portfolio, AST Putnam
Balanced Portfolio; (m) Cohen & Steers Capital Management, Inc.: Cohen & Steers
Realty Portfolio; (n) Stein Roe & Farnham Incorporated: Stein Roe Venture
Portfolio; (o) Bankers Trust Company: Bankers Trust Enhanced 500 Portfolio; (p)
Marsico Capital Management, LLC: Marsico Capital Growth Portfolio; (q)
Neuberger&Berman Management, Incorporated: Neuberger&Berman Mid-Cap Value
Portfolio, Neuberger&Berman Mid-Cap Growth Portfolio.
This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Trust's current Prospectus, a copy of which may be obtained by writing the Trust's administrative office at One Corporate Drive, Shelton, Connecticut 06484 or by calling (203) 926-1888.
This Statement relates to the Trust's Prospectus dated May 1, 1998
TABLE OF CONTENTS
Caption Page
General Information and History....................................................................................3
Investment Objectives and Policies.................................................................................3
Lord Abbett Growth and Income Portfolio.......................................................................3
Lord Abbett Small Cap Value Portfolio.........................................................................4
JanCap Growth Portfolio.......................................................................................8
AST Janus Overseas Growth Portfolio...........................................................................10
AST Money Market Portfolio....................................................................................13
Federated High Yield Portfolio................................................................................14
T. Rowe Price Asset Allocation Portfolio......................................................................16
T. Rowe Price International Equity Portfolio..................................................................26
T. Rowe Price Natural Resources Portfolio.....................................................................35
T. Rowe Price International Bond Portfolio....................................................................45
T. Rowe Price Small Company Value Portfolio...................................................................55
Founders Capital Appreciation Portfolio.......................................................................65
Founders Passport Portfolio...................................................................................72
INVESCO Equity Income Portfolio...............................................................................79
PIMCO Total Return Bond Portfolio.............................................................................81
PIMCO Limited Maturity Bond Portfolio.........................................................................92
Robertson Stephens Value + Growth Portfolio...................................................................103
Twentieth Century International Growth Portfolio..............................................................111
Twentieth Century Strategic Balanced Portfolio................................................................113
AST Putnam Value Growth & Income Portfolio....................................................................119
AST Putnam International Equity Portfolio.....................................................................128
AST Putnam Balanced Portfolio.................................................................................136
Cohen Steers Realty Portfolio.................................................................................145
Stein Roe Venture Portfolio...................................................................................149
Bankers Trust Enhanced 500 Portfolio..........................................................................158
Marsico Capital Growth Portfolio..............................................................................162
Neuberger&Berman Mid-Cap Value Portfolio......................................................................164
Neuberger&Berman Mid-Cap Growth Portfolio.....................................................................171
Investment Restrictions............................................................................................182
Certain Risk Factors and Investment Methods........................................................................200
Portfolio Turnover.................................................................................................216
Management.........................................................................................................217
Investment Advisory and Other Services.............................................................................219
Brokerage Allocation...............................................................................................224
Allocation of Investments..........................................................................................224
Computation of Net Asset Values....................................................................................225
Purchase and Redemption of Shares..................................................................................225
Tax Matters........................................................................................................225
Underwriter........................................................................................................225
Performance........................................................................................................226
Other Information..................................................................................................227
Financial Statements...............................................................................................228
Appendix...........................................................................................................358
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GENERAL INFORMATION AND HISTORY:
.........Prior to May 1, 1992, the Trust was known as the Henderson International Growth Fund, which consisted of only one portfolio. This Portfolio is now known as the AST Putnam International Equity Portfolio (formerly, the Seligman Henderson International Equity Portfolio). The Lord Abbett Growth and Income Portfolio was first offered as of May 1, 1992. The JanCap Growth Portfolio and the AST Money Market Portfolio were first offered as of November 4, 1992. The Neuberger&Berman Mid-Cap Value Portfolio (formerly, the Federated Utility Income Portfolio) and the AST Putnam Balanced Portfolio (formerly, the AST Phoenix Balanced Asset Portfolio) were first offered as of May 1, 1993. The Federated High Yield Portfolio, the T. Rowe Price Asset Allocation Portfolio, the T. Rowe Price International Equity Portfolio, the Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio and the PIMCO Total Return Bond Portfolio were first offered as of December 31, 1993. The T. Rowe Price International Bond Portfolio (formerly, the AST Scudder International Bond Portfolio) was first offered as of May 1, 1994. The Neuberger&Berman Mid-Cap Growth Portfolio (formerly, the Berger Capital Growth Portfolio) was first offered as of October 19, 1994. The Founders Passport Portfolio (formerly, the Seligman Henderson International Small Cap Portfolio), the T. Rowe Price Natural Resources Portfolio and the PIMCO Limited Maturity Bond Portfolio were first offered as of May 2, 1995. The Robertson Stephens Value + Growth Portfolio was first offered as of May 2, 1996. The AST Janus Overseas Growth Portfolio, the T. Rowe Price Small Company Value Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth Century Strategic Balanced Portfolio and the AST Putnam Value Growth & Income Portfolio were first offered as of January 2, 1997. The Marsico Capital Growth Portfolio was first offered as of December 22, 1997. The Lord Abbett Small Cap Value Portfolio, the Cohen & Steers Realty Portfolio, the Stein Roe Venture Portfolio, and the Bankers Trust Enhanced 500 Portfolio were first offered as of January 2, 1998.
INVESTMENT OBJECTIVES AND POLICIES:
.........The following information supplements, and should be read in conjunction with, the discussion in the Trust's Prospectus of the investment objective and policies of each Portfolio. The investment objective and supplemental information regarding the investment policies for each of the Portfolios are described below and should be considered separately. Each Portfolio has a different investment objective and certain policies may vary. As a result, the risks, opportunities and return in each Portfolio may differ. There can be no assurance that any Portfolio's investment objective will be achieved. Certain risk factors in relation to various securities and instruments in which the Portfolios may invest are described in this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
.........The investment objective and the investment policies and limitations of each Portfolio, unless otherwise specified, are not "fundamental" policies and may be changed by the Board of Trustees of the Trust without approval of the shareholders of the affected Portfolio. Those investment policies specifically labeled as fundamental, including those described in the "Investment Restrictions" section of this Statement. may not be changed without shareholder approval. Fundamental investment policies of a Portfolio may be changed only with the approval of at least the lesser of (1) 67% or more of the total shares of the Portfolio represented at a meeting at which more than 50% of the outstanding shares of the Portfolio are represented, or (2) a majority of the outstanding shares of the Portfolio.
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Portfolio is long-term growth of capital and income without excessive fluctuation in market value. This is a fundamental objective of the Portfolio.
Investment Policies:
.........Covered Call Options. The Portfolio may write covered call options which are traded on a national securities exchange with respect to its securities in an attempt to increase income and to provide greater flexibility in the disposition of securities. A "call option" is a contract sold for a price (the "premium") giving its holder the right to buy a specific number of shares of stock at a specific price prior to a specified date. A "covered call option" is a call option issued on securities already owned by the writer of the call option for delivery to the holder upon the exercise of the option. During the period of the option, the Portfolio forgoes the opportunity to profit from any increase in the market price of the underlying security above the exercise price of the option (to the extent that the increase exceeds the net premium). The Portfolio may also enter into "closing purchase transactions" in order to terminate its obligation to deliver the underlying security (this may result in a short-term gain or loss). A closing purchase transaction is the purchase of a call option (at a cost which may be more or less than the premium received for writing the original call option) on the same security with the same exercise price and call period as the option previously written. If the Portfolio is unable to enter into a closing purchase transaction, it may be required to hold a security that it might otherwise have sold to protect against depreciation. The Sub-advisor does not intend to have the Portfolio write covered call options with respect to securities with an aggregate market value of more than 10% of the Portfolio's gross assets at the time an option is written. This percentage limitation will not be increased without prior disclosure in the current Prospectus of the Trust. For an additional discussion of call options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
.........Illiquid Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest in illiquid securities. Investments in illiquid securities are limited to a maximum of 10% of Portfolio net assets. Illiquid securities for the purposes of this limitation do not include securities eligible for resale pursuant to Rule 144A of the Securities Act of 1933 which have been determined to be liquid by the Sub-advisor under the supervision of the Trustees. Examples of factors which the Sub-advisor may take into account with respect to a Rule 144A security include the frequency of trades and quotes for the security, the number of dealers willing to purchase or sell the security and the number of other potential purchasers, dealer undertakings to make a market in the security, and the nature of the security and the nature of the marketplace (e.g., the time period needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). For a discussion of illiquid or restricted securities and certain risks involved therein see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lord Abbett Small Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek long-term capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
.........Repurchase Agreements. If the Portfolio enters into repurchase agreements, it will do so only with those primary reporting dealers that report to the Federal Reserve Bank of New York and with the 100 largest U.S. commercial banks and the underlying securities purchased under the agreements will consist only of those securities in which the Portfolio otherwise may invest.
.........The Board of Trustees of the Trust has promulgated guidelines with respect to repurchase agreements.
.........Foreign Currency Hedging Techniques. The Portfolio expects to enter into forward foreign currency contracts in primarily two circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when management believes that the currency of a particular foreign country may suffer a decline against the U.S. dollar, the Portfolio may enter into a forward contract to sell the amount of foreign currency approximating the value of some or all of the Portfolio's securities denominated in such foreign currency or, in the alternative, the Portfolio may use a cross-hedging technique whereby it sells another currency which the Portfolio expects to decline in a similar way but which has a lower transaction cost. The Portfolio does not intend to enter into forward contracts under this second circumstance on a continuous basis. For an additional discussion of forward foreign currency contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
.........The Portfolio also may purchase foreign currency put options and write foreign currency call options on U.S. exchanges or U.S. over-the-counter markets. Exchange-listed options markets in the United States include several major currencies, and trading may be thin and illiquid. A number of major investment firms trade unlisted options which are more flexible than exchange-listed options with respect to strike price and maturity date. Unlisted options generally are available in a wider range of currencies. Unlisted foreign currency options are generally less liquid than listed options and involve the credit risk associated with the individual issuer. Unlisted options, together with other illiquid securities, are subject to a limit of 15% of the Portfolio's net assets.
.........The Portfolio may write a call option on a foreign currency only in conjunction with a purchase of a put option on that currency. Such a strategy is designed to reduce the cost of downside currency protection by limiting currency appreciation potential. The face value of such call writing may not exceed 90% of the value of the securities denominated in such currency invested in by the Portfolio or in such cross currency (referred to above) to cover such call writing. For an additional discussion of foreign currency options and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
.........Call Options on Stock. The Portfolio may, from time to time, write call options on its portfolio securities. The Portfolio may write only call options which are "covered," meaning that the Portfolio either owns the underlying security or has an absolute and immediate right to acquire that security, without additional cash consideration, upon conversion or exchange of other securities currently held in its portfolio. In addition, the Portfolio will not permit the call to become uncovered prior to the expiration of the option or termination through a closing purchase transaction.
.........The Portfolio would not be able to effect a closing purchase transaction after it had received notice of exercise. In order to write a call option, the Portfolio is required to comply with the rules of The Options Clearing Corporation and the various exchanges with respect to collateral requirements. The Portfolio may not purchase call options except in connection with a closing purchase transaction. It is possible that the cost of effecting a closing purchase transaction may be greater than the premium received by the Portfolio for writing the option.
.........Generally, the Portfolio intends to write listed covered call options during periods when it anticipates declines in the market values of portfolio securities because the premiums received may offset to some extent the decline in the Portfolio's net asset value occasioned by such declines in market value. Except as part of the "sell discipline" described below, the Portfolio will generally not write listed covered call options when it anticipates that the market values of its portfolio securities will increase.
.........One reason for the Portfolio to write call options is as part of a "sell discipline." If the Portfolio decides that a portfolio security would be overvalued and should be sold at a certain price higher than the current price, it could write an option on the stock at the higher price. Should the stock subsequently reach that price and the option be exercised, the Portfolio would, in effect, have increased the selling price of that stock, which it would have sold at that price in any event, by the amount of the premium. In the event the market price of the stock declined and the option were not exercised, the premium would offset all or some portion of the decline. It is possible that the price of the stock could increase beyond the exercise price; in that event, the Portfolio would forego the opportunity to sell the stock at that higher price.
.........In addition, call options may be used as part of a different strategy in connection with sales of portfolio securities. If, in the judgment of the Sub-advisor, the market price of a stock is overvalued and it should be sold, the Portfolio may elect to write a call option with an exercise price below the current market price. As long as the value of the underlying security remains above the exercise price during the term of the option, the option will, in all probability, be exercised, in which case the Portfolio will be required to sell the stock at the exercise price. If the sum of the premium and the exercise price exceeds the market price of the stock at the time the call option is written, the Portfolio would, in effect, have increased the selling price of the stock. The Portfolio would not write a call option in these circumstances if the sum of the premium and the exercise price were less than the current market price of the stock. For an additional discussion of call options and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
.........Put Options on Stock. The Portfolio may also write listed put options. Writing listed put options is a useful portfolio investment strategy when the Portfolio has cash or other reserves available for investment as a result of sales of Portfolio shares or, more importantly, because the Sub-advisor believes a more defensive and less fully invested position is desirable in light of market conditions. If the Sub-advisor wishes to invest its cash or reserves in a particular security at a price lower than current market value, it may write a put option on that security at an exercise price which reflects the lower price it is willing to pay. The buyer of the put option generally will not exercise the option unless the market price of the underlying security declines to a price near or below the exercise price. If the Portfolio writes a listed put, the price of the underlying stock declines and the option is exercised, the premium, net of transaction charges, will reduce the purchase price paid by the Portfolio for the stock. The price of the stock may decline by an amount in excess of the premium, in which event the Portfolio would have foregone an opportunity to purchase the stock at a lower price.
.........If, prior to the exercise of a put option, the Portfolio determines that it no longer wishes to invest in the stock on which the put option had been written, the Portfolio may be able to effect a closing purchase transaction on an exchange by purchasing a put option of the same series as the one which it has previously written. The cost of effecting a closing purchase transaction may be greater than the premium received on writing the put option and there is no guarantee that a closing purchase transaction can be effected. For an additional discussion of put options and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
.........Stock Index Options. Except as describe below, the Portfolio will write call options on indices only if on such date it holds a portfolio of stocks at least equal to the value of the index times the multiplier times the number of contracts. When the Portfolio writes a call option on a broadly-based stock market index, the Portfolio will segregate or put into escrow with its custodian, or pledge to a broker as collateral for the option, one or more "qualified securities" with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts.
.........Trading in index options commenced in April 1983 with the S&P 100 option (formerly called the CBOE 100). Since that time a number of additional index option contracts have been introduced including options on industry indices. Although the markets for certain index option contracts have developed rapidly, the markets for other index options are still relatively illiquid. The ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop in all index option contracts. The Portfolio will not purchase or sell any index option contract unless and until, in the Sub-advisor's opinion, the market for such options has developed sufficiently that such risk in connection with such transactions in no greater than such risk in connection with options on stocks. For an additional discussion of stock index options and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
.........Segregated Accounts. If the Portfolio has written an option on an industry or market segment index, it will segregate or put into escrow with its custodian, or pledge to a broker as collateral for the option, at least ten different "qualified securities," which are securities of an issuer in such industry or market segment, with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts. A "qualified security" is an equity security which is listed on a national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System against which the Portfolio has not written a stock call option and which has not been hedged by the Portfolio by the sale of stock index futures. Such securities will include stocks which represent at least 50% of the weighting of the industry or market segment index and will represent at least 50% of the Portfolio's holdings in that industry or market segment. No individual security will represent more than 25% of the amount so segregated, pledged or escrowed. If at the close of business on any day the market value of such qualified securities so segregated, escrowed or pledged falls below 100% of the current index value times the multiplier times the number of contracts, the Portfolio will so segregate, escrow or pledge an amount in cash or other liquid assets equal in value to the difference. In addition, when the Portfolio writes a call on an index which is in-the-money at the time the call is written, the Portfolio will segregate with its custodian or pledge to the broker as collateral cash or other liquid assets equal in value to the amount by which the call is in-the-money times the multiplier times the number of contracts. Any amount segregated pursuant to the foregoing sentence may be applied to the Portfolio's obligation to segregate additional amounts in the event that the market value of the qualified securities falls below 100% of the current index value times the multiplier times the number of contracts. However, if the Portfolio holds a call on the same index as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash or other liquid assets in a segregated account with its custodian, it will not be subject to the requirements describe in this paragraph. In instances involving the purchase of stock index futures contracts by the Portfolio, an amount of cash or permitted securities equal to the market value of the futures contracts will be deposited in a segregated account with the its custodian and/or in a margin account with a broker to collateralize the position and thereby insure that the use of such futures are unleveraged.
.........Stock Index Futures. The Portfolio will engage in transactions in stock index futures contracts as a hedge against changes resulting from market conditions in the values of securities which are held in the Portfolio's portfolio or which it intends to purchase. The Portfolio will engage in such transactions when they are economically appropriate for the reduction of risks inherent in the ongoing management of the Portfolio. The Portfolio may not purchase or sell stock index futures if, immediately thereafter, more than one-third of its net assets would be hedged and, in addition, except as described above in the case of a call written and held on the same index, will write call options on indices or sell stock index futures only if the amount resulting from the multiplication of the then current level of the index (or indices) upon which the option or future contract(s) is based, the applicable multiplier(s), and the number of futures or options contracts which would be outstanding, would not exceed one-third of the value of the Portfolio's net assets.
.........Limitations on Stock Options, Options on Stock Indices and Stock Index Futures Transactions. The Portfolio may write put and call options on stocks only if they are covered, and such options must remain covered so long as the Portfolio is obligated as a writer. The Portfolio will not (a) write puts having an aggregate exercise price greater than 25% of the Portfolio's net assets; or (b) purchase (i) put options on stocks not held in the Portfolio's portfolio, (ii) put options on stock indices, or (iii) call options on stocks or stock indices if, after any such purchase, the aggregate premiums paid for such options would exceed 20% of the Portfolio's net assets.
.........Special Risks of Writing Calls on Indices. Because exercises of index options are settled in cash, a call writer cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific stocks, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. However, the Portfolio will write call options on indices only under the circumstances described above under "Limitations on Stock Options, Options on Stock Indices and Stock Index Futures Transactions."
.........Unless the Portfolio has other liquid assets that are sufficient to satisfy the exercise of a call, the Portfolio would be required to liquidate portfolio securities in order to satisfy the exercise. Because an exercise must be settled within hours after receiving the notice of exercise, if the Portfolio fails to anticipate an exercise, it may have to borrow (in amounts not exceeding 20% of the Portfolio's total assets) pending settlement of the sale of securities in its portfolio and would incur interest charges thereon.
.........When the Portfolio has written a call, there is also a risk that the market may decline between the time the call is written and the time the Portfolio is able to sell stocks in its portfolio. As with stock options, the Portfolio will not learn that an index option has been exercised until the day following the exercise date but, unlike a call on stock where the Portfolio would be able to deliver the underlying securities in settlement, the Series may have to sell part of its stock portfolio in order to make settlement in cash, and the price of such stocks might decline before they can be sold. This timing risk makes certain strategies involving more than one option substantially more risky with index options than with stock options. For example, even if an index call which the Portfolio has written is "covered" by an index call held by the Portfolio with the same strike price, the Portfolio will bear the risk that the level of the index may decline between the close of trading on the date the exercise notice is filed with the clearing corporation and the close of trading on the date the Portfolio exercises the call it holds or the time the Portfolio sells the call which in either case would occur no earlier than the day following the day the exercise notice was filed.
.........Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Lord Abbett Small Cap Value Portfolio. The limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
.........1. Pledge its assets (other than to secure borrowings or to the extent permitted by the Portfolio's investment policies as permitted by applicable law);
.........2. Make short sales of securities or maintain a short position except to the extent permitted by applicable law;
.........3. Invest knowingly more than 15% of its net assets (at the time of investment) in illiquid securities, except for securities qualifying for resale under Rule 144A of the Securities Act of 1933, deemed to be liquid by the Board of Trustees;
.........4. Invest in the securities of other investment companies except as permitted by applicable law;
.........5. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases, or exploration or other development programs, except that the Portfolio may invest in securities issued by companies that engage in oil, gas or other mineral exploration or other development activities; or
6. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent permitted in this Statement and the Trust's Prospectus, as they may be amended from time to time.
JanCap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is growth of capital in a manner consistent with the preservation of capital. Realization of income is not a significant investment consideration and any income realized on the Portfolio's investments, therefore, will be incidental to the Portfolio's objective. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio may, as a fundamental policy, invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies and restrictions as the Portfolio subject to the prior approval of the Investment Manager. The Investment Manager will not approve such investment unless: (a) the Investment Manager believes, on the advice of counsel, that such investment will not have an adverse effect on the tax status of the annuity contracts and/or life insurance policies supported by the separate accounts of the Participating Insurance Companies which purchase shares of the Trust; (b) the Investment Manager has given prior notice to the Participating Insurance Companies that it intends to permit such investment and has determined whether such Participating Insurance Companies intend to redeem any shares and/or discontinue the purchase of shares because of such investment; (c) the Trustees have determined that the fees to be paid by the Trust for administrative, accounting, custodial and transfer agency services for the Portfolio subsequent to such an investment are appropriate, or the Trustees have approved changes to the agreements providing such services to reflect a reduction in fees; (d) the Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any investment advisory fees paid to the investment manager of such open-end management investment company; and (e) shareholder approval is obtained if required by law. The Portfolio will apply for such exemptive or other relief under the provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules thereunder as may be necessary regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The Portfolio may enter into futures contracts on securities, financial indices, and foreign currencies and options on such contracts, and may invest in options on securities, financial indices and foreign currencies, forward contracts and swaps. The Portfolio will not enter into any futures contracts or options on futures contracts if the aggregate amount of the Portfolio's commitments under outstanding futures contract positions and options on futures contracts written by the Portfolio would exceed the market value of the total assets of the Portfolio (i.e., no leveraging). The Portfolio may invest in forward currency contracts with stated values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated transactions on the types of securities and indices based on the types of securities in which the Portfolio is permitted to invest directly. The Portfolio will effect such transactions only with investment dealers and other financial institutions (such as commercial banks or savings and loan institutions) deemed creditworthy by the Sub-advisor, and only pursuant to procedures adopted by the Sub-advisor for monitoring the creditworthiness of those entities. To the extent that an option bought or written by the Portfolio in a negotiated transaction is illiquid, the value of an option bought or the amount of the Portfolio's obligations under an option written by the Portfolio, as the case may be, will be subject to the Portfolio's limitation on illiquid investments. In the case of illiquid options, it may not be possible for the Portfolio to effect an offsetting transaction at a time when the Sub-advisor believes it would be advantageous for the Portfolio to do so. For a description of these strategies and instruments and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and Floors. In addition to the strategies noted above, the Portfolio, in order to attempt to protect the value of its investments from interest rate or currency exchange rate fluctuations, may enter into interest rate swaps and may buy or sell interest rate caps and floors. The Portfolio expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its investments. The Portfolio also may enter into these transactions to protect against any increase in the price of securities the Portfolio may consider buying at a later date. The Portfolio does not intend to use these transactions as speculative investments. Interest rate swaps involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The exchange commitments can involve payments to be made in the same currency or in different currencies. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending upon whether it is hedging its assets or its liabilities, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Portfolio's obligations over its entitlements with respect to each interest rate swap will be calculated on a daily basis and an amount of cash or other liquid assets having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Portfolio's custodian. If the Portfolio enters into an interest rate swap on other than a net basis, the Portfolio would maintain a segregated account in the full amount accrued on a daily basis of the Portfolio's obligations with respect to the swap. The Portfolio will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in one of the three highest rating categories of at least one nationally recognized statistical rating organization at the time of entering into such transaction. The Sub-advisor will monitor the creditworthiness of all counterparties on an ongoing basis. If there is a default by the other party to such a transaction, the Portfolio will have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. The Sub-advisor has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent the Portfolio sells (i.e., writes) caps and floors, it will maintain in a segregated account cash or other liquid assets having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that may be entered into by the Portfolio. These transactions may in some instances involve the delivery of securities or other underlying assets by the Portfolio or its counterparty to collateralize obligations under the swap. Under the documentation currently used in those markets, the risk of loss with respect to interest rate swaps is limited to the net amount of the payments that the Portfolio is contractually obligated to make. If the other party to an interest rate swap that is not collateralized defaults, the Portfolio would risk the loss of the net amount of the payments that the Portfolio contractually is entitled to receive. The Portfolio may buy and sell (i.e., write) caps and floors without limitation, subject to the segregated account requirement described above. For an additional discussion of these strategies, see this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. The Portfolio may also enter into reverse repurchase agreements. For a description of these investment techniques, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the JanCap Growth Portfolio. These limitations are not "fundamental" restrictions, and may be changed by the Trustees without shareholder approval.
1. The Portfolio will not purchase a security if as a result, more than 15% of its net assets in the aggregate, at market value, would be invested in securities which cannot be readily resold because of legal or contractual restrictions on resale or for which there is no readily available market, or repurchase agreements maturing in more than seven days or securities used as a cover for written over-the-counter options, if any. The Trustees, or the Investment Manager or the Sub-advisor acting pursuant to authority delegated by the Trustees, may determine that a readily available market exists for securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or any successor to such rule, and therefore that such securities are not subject to the foregoing limitation.
2. The Portfolio may borrow money for temporary or emergency purposes (not for leveraging or investment) in an amount not exceeding 25% of the value of its total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed 25% of the value of the Portfolio's total assets by reason of a decline in net assets will be reduced within three business days to the extent necessary to comply with the 25% limitation. Under such a circumstance, the Portfolio may have to liquidate securities at a time when it is disadvantageous to do so. This policy shall not prohibit reverse repurchase agreements or deposits of assets to margin or guarantee positions in futures, options, swaps or forward contracts, or the segregation of assets in connection with such contracts.
3. The Portfolio will not enter into any futures contracts or options on futures contracts for purposes other than bona fide hedging transactions (as defined by the CFTC) if as a result the sum of the initial margin deposits and premium required to establish positions in futures contracts and related options that do not fall within the definition of bona fide hedging transactions would exceed 5% of the fair market value of the Portfolio's net assets.
4. The Portfolio will not enter into any futures contracts if the aggregate amount of the Portfolio's commitments under outstanding futures contracts positions of the Portfolio would exceed the market value of the total assets of the Portfolio.
5. The Portfolio will not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, and provided that transactions in options, swaps and forward futures contracts are not deemed to constitute selling securities short.
6. The Portfolio will not mortgage or pledge any securities owned or held by the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's net asset value, provided that this limitation does not apply to reverse repurchase agreements or in the case of assets deposited to margin or guarantee positions in futures, options, swaps or forward contracts or placed in a segregated account in connection with such contracts.
AST Janus Overseas Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek long-term growth of capital. This is a fundamental objective of the Portfolio.
Investment Policies:
The portfolio pursues its objective by investing primarily in common stocks of foreign issuers of any size. The Portfolio normally invests at least 65% of its total assets in issuers from at least five different countries excluding the United States. The Portfolio may invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies and restrictions as the Portfolio subject to the prior approval of the Investment Manager. The Investment Manager will not approve such investment unless: (a) the Investment Manager believes, on the advice of counsel, that such investment will not have an adverse effect on the tax status of the annuity contracts and/or life insurance policies supported by the separate accounts of the Participating Insurance Companies which purchase shares of the Trust; (b) the Investment Manager has given prior notice to the Participating Insurance Companies that it intends to permit such investment and has determined whether such Participating Insurance Companies intend to redeem any shares and/or discontinue the purchase of shares because of such investment; (c) the Trustees have determined that the fees to be paid by the Trust for administrative, accounting, custodial and transfer agency services for the Portfolio subsequent to such an investment are appropriate, or the Trustees have approved changes to the agreements providing such services to reflect a reduction in fees; (d) the Sub-advisor has agreed to reduce its fee by the amount of any investment advisory fees paid to the investment manager of such open-end management investment company; and (e) shareholder approval is obtained if required by law. The Portfolio will apply for such exemptive relief under the provisions of the 1940 Act, or other such relief as may be necessary under the then governing rules and regulations of the 1940 Act, regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The Portfolio may enter into futures contracts on securities, financial indices, and foreign currencies and options on such contracts, and may invest in options on securities, financial indices and foreign currencies, forward contracts and swaps. The Portfolio will not enter into any futures contracts or options on futures contracts if the aggregate amount of the Portfolio's commitments under outstanding futures contracts positions and options on futures contracts written by the Portfolio would exceed the market value of the total assets of the Portfolio (i.e., no leveraging). The Portfolio may invest in forward currency contracts with stated values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated transactions on the types of securities and indices based on the types of securities in which the Portfolio is permitted to invest directly. The Portfolio will effect such transactions only with investment dealers and other financial institutions (such as commercial banks or savings and loan institutions) deemed creditworthy, and only pursuant to procedures adopted, by the Sub-advisor for monitoring the creditworthiness of those entities. To the extent that an option bought or written by the Portfolio in a negotiated transaction is illiquid, the value of an option bought or the amount of the Portfolio's obligations under an option written by the Portfolio, as the case may be, will be subject to the Portfolio's limitation on illiquid investments. In the case of illiquid options, it may not be possible for the Portfolio to effect an offsetting transaction at a time when the Sub-advisor believes it would be advantageous for the Portfolio to do so. For a description of these strategies and instruments and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Eurodollar Instruments. The Portfolio may make investments in Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated futures contracts or options thereon which are linked to the London Interbank Offered Rate ("LIBOR"), although foreign currency-denominated instruments are available from time to time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. The Portfolio might use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many interest rate swaps and fixed-income instruments are linked.
Swaps and Swap-Related Products. The Portfolio may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending upon whether it is hedging its assets or its liabilities, and will usually enter into interest rate swaps on a net basis (i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of the Portfolio's obligations over its entitlement with respect to each interest rate swap will be calculated on a daily basis and an amount of cash or high-grade liquid assets having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the custodian of the Portfolio. If the Portfolio enters into an interest rate swap on other than a net basis, it would maintain a segregated account in the full amount accrued on a daily basis of its obligations with respect to the swap. The Portfolio will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in one of the three highest rating categories of at least one nationally recognized statistical rating organization at the time of entering into such transaction. The Sub-advisor will monitor the creditworthiness of all counterparties on an ongoing basis. If there is a default by the other party to such a transaction, the Portfolio will have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. The Sub-advisor has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent the Portfolio sells (i.e., writes) caps and floors, it will segregate cash or high-grade liquid assets having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of its obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that may be entered into by the Portfolio. These transactions may in some instances involve the delivery of securities or other underlying assets by the Portfolio or its counterparty to collateralize obligations under the swap. Under the documentation currently used in those markets, the risk of loss with respect to interest rate swaps is limited to the net amount of the payments that the Portfolio is contractually obligated to make. If the other party to an interest rate swap that is not collateralized defaults, the Portfolio would risk the loss of the net amount of the payments that it contractually is entitled to receive. The Portfolio may buy and sell (i.e., write) caps and floors without limitation, subject to the segregation requirement described above. For an additional discussion of these strategies, see this Statement under "Certain Risk Factors and Investment Methods."
Illiquid Investments. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in illiquid investments (i.e., securities that are not readily marketable). The Sub-advisor will make liquidity determinations with respect to the Portfolio securities, including Rule 144A Securities, commercial paper and municipal lease obligations. Under the guidelines established by the Trustees, the Sub-advisor will consider the following factors: 1) the frequency of trades and quoted prices for the obligation; 2) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; 3) the willingness of dealers to undertake to make a market in the security; and 4) the nature of the security and the nature of marketplace trades, including the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer. In the case of commercial paper, the Sub-advisor will also consider whether the paper is traded flat or in default as to principal and interest and any ratings of the paper by an NRSRO.
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
Zero-Coupon, Pay-In-Kind and Step Coupon Securities. The Portfolio may invest up to 10% of its assets in zero-coupon, pay-in-kind and step coupon securities. For a discussion of zero-coupon debt securities and the risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Pass-Through Securities. The Portfolio may invest in various types of pass-through securities, such as mortgage-backed securities, asset-backed securities and participation interests. A pass-through security is a share or certificate of interest in a pool of debt obligations that have been repackaged by an intermediary, such as a bank or broker-dealer. The purchaser of a pass-through security receives an undivided interest in the underlying pool of securities. The issuers of the underlying securities make interest and principal payments to the intermediary which are passed through to purchasers, such as the Portfolio. For an additional discussion of pass-through securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Depositary Receipts. The Portfolio may invest in sponsored and unsponsored American Depositary Receipts ("ADRs"), which are receipts issued by an American bank or trust company evidencing ownership of underlying securities issued by a foreign issuer. ADRs, in registered form, are designed for use in U.S. securities markets. Unsponsored ADRs may be created without the participation of the foreign issuer. Holders of these ADRs generally bear all the costs of the ADR facility, whereas foreign issuers typically bear certain costs in a sponsored ADR. The bank or trust company depositary of an unsponsored ADR may be under no obligation to distribute shareholder communications received from the foreign issuer or to pass through voting rights. The Portfolio may also invest in European Depositary Receipts ("EDRs"), receipts issued by a European financial institution evidencing an arrangement similar to that of ADRs, Global Depositary Receipts ("GDRs") and in other similar instruments representing securities of foreign companies. EDRs, in bearer form, are designed for use in European securities markets. GDRs are securities convertible into equity securities of foreign issuers.
Other Income-Producing Securities. Other types of income producing securities that the Portfolio may purchase include, but are not limited to, the following types of securities:
Variable and Floating Rate Obligations. These types of securities are relatively long-term instruments that often carry demand features permitting the holder to demand payment of principal at any time or at specified intervals prior to maturity.
Standby Commitments. These instruments, which are similar to a put, give the Portfolio the option to obligate a broker, dealer or bank to repurchase a security held by that Portfolio at a specified price.
Tender Option Bonds. Tender option bonds are relatively long-term bonds that are coupled with the agreement of a third party (such as a broker, dealer or bank) to grant the holders of such securities the option to tender the securities to the institution at periodic intervals.
Inverse Floaters. Inverse floaters are debt instruments whose interest bears an inverse relationship to the interest rate on another security. The Portfolio will not invest more than 5% of its assets in inverse floaters. The Portfolio will purchase standby commitments, tender option bonds and instruments with demand features primarily for the purpose of increasing the liquidity of the Portfolio.
Repurchase and Reverse Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. Repurchase agreements that mature in more than seven days will be subject to the 15% limit on illiquid investments. While it is not possible to eliminate all risks from these transactions, it is the policy of the Sub-advisor to limit repurchase agreements to those parties whose creditworthiness has been reviewed and found satisfactory by Sub-advisor. The Portfolio may also enter into reverse repurchase agreements. While a reverse repurchase agreement is outstanding, the Portfolio will maintain cash and appropriate liquid assets in a segregated custodial account to cover its obligation under the agreement. The Portfolio will enter into reverse repurchase agreements only with parties that Sub-advisor deems creditworthy. For an additional description of these investment techniques, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May be Changed Without Shareholder Approval. The following limitations are applicable to the AST Janus Overseas Growth Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval:
1. The Portfolio will not (i) enter into any futures contracts and related options for purposes other than bona fide hedging transactions within the meaning of Commodity Futures Trading Commission ("CFTC") regulations if the aggregate initial margin and premiums required to establish positions in futures contracts and related options that do not fall within the definition of bona fide hedging transactions will exceed 5% of the fair market value of the Portfolio's net assets, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; and (ii) enter into any futures contracts if the aggregate amount of the Portfolio's commitments under outstanding futures contracts positions would exceed the market value of its total assets.
2. The Portfolio does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short without the payment of any additional consideration therefor, and provided that transactions in futures, options, swaps and forward contracts are not deemed to constitute selling securities short.
3. The Portfolio does not currently intend to purchase securities on margin, except that the Portfolio may obtain such short-term credits as are necessary for the clearance of transactions, and provided that margin payments and other deposits in connection with transactions in futures, options, swaps and forward contracts shall not be deemed to constitute purchasing securities on margin.
4. The Portfolio does not currently intend to purchase securities of other investment companies, except in compliance with the 1940 Act.
5. The Portfolio may not mortgage or pledge any securities owned or held by the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's net asset value, provided that this limitation does not apply to reverse repurchase agreements, deposits of assets to margin, guarantee positions in futures, options, swaps or forward contracts, or the segregation of assets in connection with such contracts.
6. The Portfolio does not currently intend to purchase any security or enter into a repurchase agreement if, as a result, more than 15% of its net assets would be invested in repurchase agreements not entitling the holder to payment of principal and interest within seven days and in securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market. The Trustees, or the Investment Manager acting pursuant to authority delegated by the Trustees, may determine that a readily available market exists for securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A Securities"), or any successor to such rule, and Section 4(2) commercial paper. Accordingly, such securities may not be subject to the foregoing limitation.
7. The Portfolio may not invest in companies for the purpose of exercising control of management.
AST Money Market Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high current income and maintain high levels of liquidity. This is a fundamental objective of the Portfolio.
Investment Policies:
Bank Obligations. The Portfolio will not invest in bank obligations for which any affiliate of the Sub-advisor is the ultimate obligor or accepting bank.
Asset-Backed Securities. The asset-backed securities in which the Portfolio may invest are subject to the Portfolio's overall credit requirements. However, asset-backed securities, in general, are subject to certain risks. Most of these risks are related to limited interests in applicable collateral. For example, 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 set off certain amounts on credit card debt thereby reducing the balance due. Additionally, if the letter of credit is exhausted, holders of asset-backed securities may also experience delays in payments or losses if the full amounts due on underlying sales contracts are not realized. Because asset-backed securities are relatively new, the market experience in these securities is limited and the market's ability to sustain liquidity through all phases of the market cycle has not been tested. For a discussion of asset-backed securities and the risks involved therein see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Synthetic Instruments. As may be permitted by current laws and regulations and if expressly permitted by the Board of Trustees of the Trust, the Portfolio may invest in certain synthetic instruments. Such instruments generally involve the deposit of asset-backed securities in a trust arrangement and the issuance of certificates evidencing interests in the trust. The certificates are generally sold in private placements in reliance on Rule 144A of the Securities Act of 1933 (without registering the certificates under such Act).
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. The repurchase agreements into which the Portfolio may enter will usually be short, from overnight to one week, and at no time will the Portfolio invest in repurchase agreements for more than thirteen months. The securities which are subject to repurchase agreements, however, may have maturity dates in excess of thirteen months from the effective date of the repurchase agreement. For a discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio invests the proceeds of borrowings under reverse repurchase agreements. The Portfolio will enter into a reverse repurchase agreement only when the interest income to be earned from the investment of the proceeds is greater than the interest expense of the transaction. The Portfolio will not invest the proceeds of a reverse repurchase agreement for a period which exceeds the duration of the reverse repurchase agreement. The Portfolio may not enter into reverse repurchase agreements exceeding in the aggregate one-third of the market value of its total assets, less liabilities other than the obligations created by reverse repurchase agreements. The Portfolio will establish and maintain with its custodian a separate account with a segregated portfolio of securities in an amount at least equal to its purchase obligations under its reverse repurchase agreements. If interest rates rise during the term of a reverse repurchase agreement, such reverse repurchase agreement may have a negative impact on the Portfolio's ability to maintain a net asset value of $1.00 per share.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated foreign securities. Any foreign commercial paper must not be subject to foreign withholding tax at the time of purchase. Foreign investments may be made directly in securities of foreign issuers or in the form of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and EDRs are receipts issued by a bank or trust company that evidence ownership of underlying securities issued by a foreign corporation and that are designed for use in the domestic, in the case of ADRs, or European, in the case of EDRs, securities markets. For a discussion of depositary receipts and the risks involved in investing in foreign securities, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Loans will be subject to termination by the Portfolio in the normal settlement time, generally three business days after notice, or by the borrower on one day's notice. Borrowed securities must be returned when the loan is terminated. The Portfolio may pay reasonable finders' and custodial fees in connection with a loan. In making a loan, the Portfolio will consider all facts and circumstances surrounding the making of the loan, including the creditworthiness of the borrowing financial institution. The Portfolio will not make any loans in excess of one year. The Portfolio will not lend its securities to any officer, employee or Trustee of the Trust, the Investment Manager, any Sub-advisor of the Trust, or the Administrator unless otherwise permitted by applicable law.
Federated High Yield Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high current income by investing primarily in a diversified portfolio of fixed income securities. The fixed income securities in which the Portfolio intends to invest are lower-rated corporate debt obligations. This is a fundamental objective of the Portfolio.
Investment Policies:
Corporate Debt Securities. The Portfolio invests primarily in corporate debt securities. The corporate debt obligations in which the Portfolio intends to invest are expected to be lower-rated. For a discussion of the special risks associated with lower-rated securities, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods." Corporate debt obligations in which the Portfolio invests may bear fixed, floating, floating and contingent, or increasing rates of interest. They may involve equity features such as conversion or exchange rights, warrants for the acquisition of common stock of the same or a different issuer, participations based on revenues, sales or profits, or the purchase of common stock in a unit transaction (where corporate debt securities and common stock are offered as a unit).
U.S. Government Obligations. The types of U.S. government obligations in which the Portfolio may invest include, but are not limited to, direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by U.S. government agencies or instrumentalities. These securities may be backed by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or the credit of the agency or instrumentality issuing the obligations. For an additional discussion of the types of U.S. government obligations in which the Portfolio may invest, see the Trust's Prospectus under "Investment Objectives and Policies."
Restricted Securities. The Portfolio expects that any restricted securities would be acquired either from institutional investors who originally acquired the securities in private placements or directly from the issuers of the securities in private placements. Restricted securities are generally subject to legal or contractual delays on resale. Restricted securities and securities that are not readily marketable may sell at a discount from the price they would bring if freely marketable. For a discussion of illiquid and restricted securities and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
When-Issued and Delayed Delivery Transactions. The Portfolio may purchase fixed-income securities on a when-issued or delayed delivery basis. The Portfolio may engage in when-issued and delayed delivery transactions only for the purpose of acquiring portfolio securities consistent with the Portfolio's investment objective and policies, not for investment leverage. These transactions are arrangements in which the Portfolio purchases securities with payment and delivery scheduled for a future time. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. These transactions are made to secure what is considered to be an advantageous price and yield for the Portfolio.
No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Portfolio sufficient to make payment for the securities to be purchased are segregated at the trade date. These securities are marked to market daily and will maintain until the transaction is settled. For an additional discussion of when-issued securities and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. The Portfolio will require its custodian to take possession of the securities subject to repurchase agreements, and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Portfolio, the Portfolio could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Portfolio might be delayed pending court action. The Portfolio believes that under the regular procedures normally in effect for custody of the Portfolio's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Portfolio and allow retention or disposition of such securities. The Portfolio will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Sub-advisor to be creditworthy, pursuant to guidelines established by the Board of Trustees. For an additional discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. In order to generate additional income, the Portfolio may lend its securities to brokers/dealers, banks, or other institutional borrowers of securities. The Portfolio will only enter into loan arrangements with broker/dealers, banks, or other institutions which the Sub-advisor has determined are creditworthy under guidelines established by the Trustees. The collateral received when the Portfolio lends portfolio securities must be valued daily and, should the market value of the loaned securities increase, the borrower must furnish additional collateral to the Portfolio. During the time portfolio securities are on loan, the borrower pays the Portfolio any dividends or interest paid on such securities. Loans are subject to termination at the option of the Portfolio or the borrower. The Portfolio may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or cash equivalent collateral to the borrower or placing broker. The Portfolio does not have the right to vote securities on loan, but would terminate the loan and regain the right to vote if that were considered important with respect to the investment.
Reverse Repurchase Agreements. The Portfolio may also enter into reverse repurchase agreements. When effecting reverse repurchase agreements, liquid assets of the Portfolio, in a dollar amount sufficient to make payment for the obligations to be purchased, are segregated at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. During the period any reverse repurchase agreements are outstanding, but only to the extent necessary to ensure completion of the reverse repurchase agreements, the Portfolio will restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreements. For a discussion of reverse repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio may experience greater portfolio turnover than would be expected with a portfolio of higher-rated securities. For an additional discussion of portfolio turnover, see this Statement and the Trust's Prospectus under "Portfolio Turnover."
Adverse Legislation. In 1989, legislation was enacted that required federally insured savings and loan associations to divest their holdings of lower-rated bonds by 1994. This legislation also created the Resolution Trust Corporation (the "RTC"), which disposed of a substantial portion of lower-rated bonds held by failed savings and loan associations. The reduction of the number of institutions empowered to purchase and hold lower-rated bonds, and the divestiture of bonds by these institutions and the RTC, have had an adverse impact on the overall liquidity of the market for such bonds. Federal and state legislatures and regulators have and may continue to propose new laws and regulations designed to limit the number or type of institutions that may purchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, or otherwise adversely impact the liquidity of such bonds. The Portfolio cannot predict the likelihood that any of these proposals will be adopted, or their potential impact on the liquidity of lower-rated bonds.
Foreign Securities. For a discussion of certain risks involved with investing in foreign securities, including currency risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Federated High Yield Portfolio. The limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval.
1. The Portfolio will not invest more than 15% of the value of its net assets in securities that are not readily marketable;
2. The Portfolio will not purchase the securities of any issuer (other than the U.S. government, its agencies, or instrumentalities or instruments secured by securities of such issuers, such as repurchase agreements) if as a result more than 5% of the value of its total assets would be invested in the securities of such issuer. For these purposes, the Portfolio takes all common stock and all preferred stock of an issuer each as a single class, regardless of priorities, series designations or other differences.
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a high level of total return by investing primarily in a diversified group of fixed-income and equity securities. This is a fundamental objective of the Portfolio.
Investment Policies: The Portfolio's share price will fluctuate with changing market conditions and interest rate levels and your investment may be worth more or less when redeemed than when purchased. The Portfolio should not be relied upon for short-term financial needs, nor used to play short-term swings in the stock or bond markets. The Portfolio cannot guarantee that it will achieve its investment objectives. Fixed income securities in which the Portfolio may invest include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S. Government sponsored enterprises and federal agencies. These include securities issued by the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business Association, and the Tennessee Valley Authority. Some of these securities are supported by the full faith and credit of the U.S. Treasury, and the remainder are supported only by the credit of the instrumentality, which may or may not include the right of the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other short-term debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with international commercial transactions. Certificates of deposit may have fixed or variable rates. The Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of foreign banks and foreign branches of foreign banks.
Savings and Loan Obligations. Negotiable certificates of deposit and other short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of certain supranational entities, such as the International Development Bank.
Mortgage-Backed Securities. Mortgage-backed securities are securities representing interest in a pool of mortgages. After purchase by the Portfolio, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event will require a sale of such security by the Portfolio. However, the Sub-advisor will consider such event in its determination of whether the Portfolio should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Portfolio will attempt to use comparable ratings as standards for investments in accordance with the investment policies continued in the Trust's Prospectus. For a discussion of mortgage-backed securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Portfolio invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. For an additional discussion of CMOs and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its assets in debt obligations known as asset-backed securities. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities and the amount and quality of any credit support provided to the securities. The rate of principal payment on asset-backed securities generally depends on the rate of principal payments received on the underlying assets which in turn may be affected by a variety of economic and other factors. As a result, the yield on any asset-backed security is difficult to predict with precision and actual yield to maturity may be more or less than the anticipated yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in asset-backed securities which are backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in asset-backed securities backed by receivables from revolving credit card agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed securities backed by assets other than those described above will be issued in the future. The Portfolio may invest in such securities in the future if such investment is otherwise consistent with its investment objective and policies. For a discussion of these securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus, the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered" call options and purchase options to close out options previously written by the Portfolio. In writing covered call options, the Portfolio expects to generate additional premium income which should serve to enhance the Portfolio's total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in the Sub-advisor's opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the Portfolio will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash or other liquid assets having a value equal to the fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Portfolio's investment objectives. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Portfolio will not do), but capable of enhancing the Portfolio's total return. When writing a covered call option, the Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely, retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Portfolio has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligations as a writer. If a call option which the Portfolio has written expires, the Portfolio will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security or currency. The Portfolio does not consider a security or currency covered by a call "pledged" as that term is used in the Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Portfolio may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the Portfolio will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, Sub-advisor, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Portfolio for writing covered call options will be recorded as a liability of the Portfolio. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of the New York Stock Exchange), or, in the absence of such sale, the latest asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the aggregate market value of all portfolio securities or currencies covering call or put options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or European style covered put options and purchase options to close out options previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which means that the Portfolio would maintain in a segregated account cash, U.S. government securities or other liquid high-grade debt obligations in an amount not less than the exercise price or the Portfolio will own an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" option at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Portfolio would generally write covered put options in circumstances where Sub-advisor wishes to purchase the underlying security or currency for the Portfolio's portfolio at a price lower than the current market price of the security or currency. In such event the Portfolio would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Portfolio would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Portfolio. In addition, the Portfolio, because it does not own the specific securities or currencies which it may be required to purchase in the exercise of the put, can not benefit from appreciation, if any, with respect to such specific securities or currencies.
The Portfolio will not write a covered put option if, as a result, the aggregate market value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written puts and calls, the value of purchased puts and calls on identical securities or currencies. For a discussion of options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or European style put options. The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its securities or currencies. An example of such use of put options is provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio will not commit more than 5% of its assets to premiums when purchasing call and put options. The Portfolio may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options may also be purchased at times to avoid realizing losses.
Purchasing Call Options. The Portfolio may purchase American or European call options. The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase call options for the purpose of increasing its current return or avoiding tax consequences which could reduce its current return. The Portfolio may also purchase call options in order to acquire the underlying securities or currencies. Examples of such uses of call options are provided this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio will not commit more than 5% of its assets to premiums when purchasing call and put options. The Portfolio may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options may also be purchased at times to avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Portfolio would look to a clearing corporation to exercise exchange-traded options, if the Portfolio were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with the Portfolio, there can be no assurance that the Portfolio will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. For a discussion of dealer options, see this Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into financial futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts").
Stock index futures contracts may be used to attempt to provide a hedge for a portion of the Portfolio's portfolio, as a cash management tool, or as an efficient way for the Sub-advisor to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. Stock index futures contracts are currently traded with respect to the S&P 500 Index and other broad stock market indices, such as the New York Stock Exchange Composite Stock Index and the Value Line Composite Stock Index. The Portfolio may, however, purchase or sell futures contracts with respect to any stock index. Nevertheless, to hedge the Portfolio's portfolio successfully, the Portfolio must sell futures contacts with respect to indices or subindexes whose movements will have a significant correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Portfolio. In this regard, the Portfolio could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on national or foreign futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal financial futures exchanges in the United States are the Board of Trade of the City of Chicago, the Chicago Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of Trade. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are traded in London at the London International Financial Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing the Portfolio's objectives in these areas. For a discussion of futures transactions and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in transactions in futures contracts and options thereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon if, with respect to positions which do not qualify as bona fide hedging under applicable CFTC rules, the sum of the amounts of initial margin deposits on the Portfolio's existing futures and premiums paid for options on futures would exceed 5% of the net asset value of the Portfolio after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5% limitation.
The Portfolio's use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or call options thereon or the writing of put options thereon by the Portfolio, an amount of cash, U.S. government securities or other liquid, high-grade debt obligations, equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Portfolio's custodian to cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the Portfolio's ability to engage in certain yield enhancement and risk management strategies. If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Portfolio would comply with such new restrictions.
Risks of Transactions in Futures Contracts. See this Statement and the Trust's Prospectus under "Certain Risks and Investment Methods" for an additional description of certain risks involved in futures contracts.
Options on Futures Contracts. As an alternative to writing or purchasing call and put options on stock index futures, the Portfolio may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Portfolio and other mutual funds or portfolios of mutual funds managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such aggregated orders would be allocated among the Portfolio and such other mutual funds or portfolios of mutual funds in a fair and non-discriminatory manner. See this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks involved in options on futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has no current intention of engaging in financial futures or options transactions other than those described above, it reserves the right to do so. Such futures or options trading might involve risks which differ from those involved in the futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to enter into foreign futures and options transactions. See this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks involved in foreign futures and options.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated and non-U.S. dollar-denominated securities of foreign issuers in developed countries. Because the Portfolio may invest in foreign securities, investment in the Portfolio involves risks that are different in some respects from an investment in a Portfolio which invests only in securities of U.S. domestic issuers. Foreign investments may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing, and financial reporting standards and requirements comparable to those applicable to U.S. companies. There may be less governmental supervision of securities markets, brokers and issuers of securities. Securities of some foreign companies are less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Settlement practices may include delays and may differ from those customary in United States markets. Investments in foreign securities may also be subject to other risks different from those affecting U.S. investments, including local political or economic developments, expropriation or nationalization of assets, restrictions on foreign investment and repatriation of capital, imposition of withholding taxes on dividend or interest payments, currency blockage (which would prevent cash from being brought back to the United States), and difficulty in enforcing legal rights outside the U.S. For an additional discussion of certain risks involved in investing in foreign securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into forward foreign currency exchange contracts under two circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Alternatively, where appropriate, the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Portfolio. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Other than as set forth above, and immediately below, the Portfolio will also not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. The Portfolio, however, in order to avoid excess transactions and transaction costs, may maintain a net exposure to forward contracts in excess of the value of the Portfolio's securities or other assets to which the forward contracts relate (including accrued interest to the maturity of the forward on such securities) provided the excess amount is "covered" by liquid, high-grade debt securities, denominated in any currency, at least equal at all times to the amount of such excess. For these purposes "the securities or other assets to which the forward contracts relate may be securities or assets denominated in a single currency, or where proxy forwards are used, securities denominated in more than one currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, the Sub-advisor believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract obligating it to purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the forward contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. However, as noted, in order to avoid excessive transactions and transaction costs, the Portfolio may use liquid, high-grade debt securities denominated in any currency, to cover the amount by which the value of a forward contract exceeds the value of the securities to which it relates.
If the Portfolio retains the portfolio security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Portfolio reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Portfolio is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts 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 which might result from an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. For a discussion of certain risks involved in foreign currency transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts. The Portfolio may enter into certain option, futures, and forward foreign exchange contracts, including options and futures on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered to have been closed at the end of the Portfolio's fiscal year and any gains or losses will be recognized for tax purposes at that time. Such gains or losses from the normal closing or settlement of such transactions will be characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of the holding period of the instrument. The Portfolio will be required to distribute net gains on such transactions to shareholders even though it may not have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and futures on currencies, which offset a foreign dollar denominated bond or currency position may be considered straddles for tax purposes in which case a loss on any position in a straddle will be subject to deferral to the extent of unrealized gain in an offsetting position. The holding period of the securities or currencies comprising the straddle will be deemed not to begin until the straddle is terminated. For securities offsetting a purchased put, this adjustment of the holding period may increase the gain from sales of securities held less than three months. The holding period of the security offsetting an "in-the-money qualified covered call" option on an equity security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding certain "qualified covered call" options on equity securities, may be long-term capital loss, if the security covering the option was held for more than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or currencies. Pending tax regulations could limit the extent that net gain realized from option, futures or foreign forward exchange contracts on currencies is qualifying income for purposes of the 90% requirement. In addition, gains realized on the sale or other disposition of securities, including option, futures or foreign forward exchange contracts on securities or securities indexes and, in some cases, currencies, held for less than three months, must be limited to less than 30% of the Portfolio's annual gross income. In order to avoid realizing excessive gains on securities or currencies held less than three months, the Portfolio may be required to defer the closing out of option, futures or foreign forward exchange contracts beyond the time when it would otherwise be advantageous to do so. It is anticipated that unrealized gains on Section 1256 option, futures and foreign forward exchange contracts, which have been open for less than three months as of the end of the Portfolio's fiscal year and which are recognized for tax purposes, will not be considered gains on securities or currencies held less than three months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been developed which combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments"). Often these hybrid instruments are indexed to the price of a commodity or particular currency or a domestic or foreign debt or equity securities index. Hybrid instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. For a discussion of certain risks involved in investing in hybrid instruments, see this Statement under "Certain Risk Factors and Investment Methods."
Illiquid and Restricted Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest in illiquid securities. The Portfolio may invest in illiquid securities including repurchase agreements which do not provide for payment within seven days, but will not acquire such securities if, as a result, they would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, the Portfolio may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in accordance with procedures prescribed by the Board of Trustees. If through the appreciation of restricted securities or the depreciation of unrestricted securities or the depreciation of liquid securities, the Portfolio should be in a position where more than 15% of the value of its net assets are invested in illiquid assets, including restricted securities, the Portfolio will take appropriate steps to protect liquidity.
The Portfolio may purchase securities which while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Portfolio, to trade in privately placed securities even though such securities are not registered under the 1933 Act. Sub-advisor, under the supervision of the Trust's Board of Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Portfolio's restriction of investing no more than 15% of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Sub-advisor will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, Sub-advisor could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored, and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, the Portfolio's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Portfolio does not invest more than 15% of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Portfolio's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities.
Repurchase Agreements. Subject to the guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements through which an investor (such as the Portfolio) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank which is a member of the Federal Reserve System. Any such dealer or bank will be on Sub-advisor's approved list and have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time, the bank or securities dealer agrees to repurchase the underlying security at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. Repurchase agreements which do not provide for payment within seven days will be considered illiquid. The Portfolio will only enter into repurchase agreements where (i) the underlying securities are of the type (excluding maturity limitations) which the Portfolio's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (iii) payment for the underlying security is made only upon physical delivery or evidence of book-entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Portfolio could experience both delays in liquidating the underlying securities and losses, including: (a) possible decline in the value of the underlying security during the period while the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights.
Lending of Portfolio Securities. For the purpose of realizing additional income, the Portfolio may make secured loans of Portfolio securities amounting to not more than 33 1/3% of its total assets. This policy is a fundamental policy. Securities loans are made to broker-dealers, institutional investors, or other persons pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Portfolio will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Portfolio has a right to call each loan and obtain the securities on five business days' notice or, in connection with securities trading on foreign markets, within such longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. The Portfolio will not have the right to vote securities while they are being lent, but it will call a loan in anticipation of any important vote. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to persons deemed by the Sub-advisor to be of good standing and will not be made unless, in the judgment of Sub-advisor, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange Commission, the Portfolio may make loans to, or borrow Portfolios from, other mutual funds or portfolios of mutual funds sponsored or advised by the Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no current intention of engaging in these practices at this time.
When-Issued Securities. The Portfolio may from time to time purchase securities on a "when-issued" basis. At the time the Portfolio makes the commitment to purchase a security on a when-issued basis, it will record the transaction and reflect the value of the security in determining its net asset value. The Portfolio does not believe that its net asset value or income will be adversely affected by its purchase of securities on a when-issued basis. The Portfolio will maintain cash and marketable securities equal in value to commitments for when-issued securities. Such segregated securities either will mature or, if necessary, be sold on or before the settlement date. For a discussion of when-issued securities, see this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable only to the T. Rowe Price Asset Allocation Portfolio. These limitations are not fundamental restrictions, and can be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of the Portfolio's total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its net assets would be invested in such securities. Securities eligible for resale under Rule 144A of the Securities Act of 1933 may be subject to this 15% limitation;
4. Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act;
5. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by the Portfolio as security for indebtedness except as may be necessary in connection with permissible borrowings or investments and then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's total assets at the time of borrowing or investment;
6. Invest in puts, calls, straddles, spreads, or any combination thereof to the extent permitted by the Trust's Prospectus and this Statement;
7. Purchase securities on margin, except (i) for use of short-term credit necessary for clearance of purchases of portfolio securities and (ii) the Portfolio may make margin deposits in connection with futures contracts or other permissible investments;
8. Invest in warrants if, as a result thereof, more than 10% of the value of the total assets of the Portfolio would be invested in warrants, provided that this restriction does not apply to warrants acquired as the result of the purchase of another security. For purposes of these percentage limitations, the warrants will be valued at the lower of cost or market;
9. Effect short sales of securities; or
10. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such positions would exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating restrictions to the contrary, the Portfolio may, as a fundamental policy, invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies and restrictions as the Portfolio subject to the prior approval of the Investment Manager. The Investment Manager will not approve such investment unless: (a) the Investment Manager believes, on the advice of counsel, that such investment will not have an adverse effect on the tax status of the annuity contracts and/or life insurance policies supported by the separate accounts of the Participating Insurance Companies which purchase shares of the Trust; (b) the Investment Manager has given prior notice to the Participating Insurance Companies that it intends to permit such investment and has determined whether such Participating Insurance Companies intend to redeem any shares and/or discontinue purchase of shares because of such investment; (c) the Trustees have determined that the fees to be paid by the Trust for administrative, accounting, custodial and transfer agency services for the Portfolio subsequent to such an investment are appropriate, or the Trustees have approved changes to the agreements providing such services to reflect a reduction in fees; (d) the Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any investment advisory fees paid to the investment manager of such open-end management investment company; and (e) shareholder approval is obtained if required by law. The Portfolio will apply for such exemptive relief under the provisions of the 1940 Act, or other such relief as may be necessary under the then governing rules and regulations of the 1940 Act, regarding investments in such investment companies.
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a total return on its assets from long-term growth of capital and income principally through investments in common stocks of established, non-U.S. companies. Investments may be made solely for capital appreciation or solely for income or any combination of both for the purpose of achieving a higher overall return. This is a fundamental objective of the Portfolio.
Investment Policies: The Sub-advisor regularly analyzes a broad range of international equity and fixed-income markets in order to assess the degree of risk and level of return that can be expected from each market. Based upon its current assessment, Sub-advisor believes long-term growth of capital may be achieved by investing in marketable securities of non-U.S. companies which have the potential for growth of capital. Of course, there can be no assurance that the Sub-advisor's forecasts of expected return will be reflected in the actual returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and foreign exchange conditions, and your investment may be worth more or less when redeemed than when purchased. The Portfolio should not be relied upon as a complete investment program, nor used to play short-term swings in the stock or foreign exchange markets. The Portfolio is subject to risks unique to international investing. Further, there is no assurance that the favorable trends discussed below will continue, and the Portfolio cannot guarantee it will achieve its objective.
It is the present intention of the Sub-advisor to invest in companies based in (or governments of or within) the Far East (for example, Japan, Hong Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom, Germany, Netherlands, France, Spain, and Switzerland), South Africa, Australia, Canada, and such other areas and countries as the Sub-advisor may determine from time to time.
In determining the appropriate distribution of investments among various countries and geographic regions, the Sub-advisor ordinarily considers the following factors: prospects for relative economic growth between foreign countries; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of individual investment opportunities available to international investors.
In analyzing companies for investment, the Sub-advisor ordinarily looks for one or more of the following characteristics: an above-average earnings growth per share; high return on invested capital; healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research and product development and marketing; efficient service; pricing flexibility; strength of management; and general operating characteristics which will enable the companies to compete successfully in their market place. While current dividend income is not a prerequisite in the selection of portfolio companies, the companies in which the Portfolio invests normally will have a record of paying dividends, and will generally be expected to increase the amounts of such dividends in future years as earnings increase.
It is expected that the Portfolio's investments will ordinarily be traded on exchanges located at least in the respective countries in which the various issuers of such securities are principally based.
The Portfolio will invest in securities denominated in currencies specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in over-the-counter markets or on stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market.
The Portfolio may invest in investment funds which have been authorized by the governments of certain countries specifically to permit foreign investment in securities of companies listed and traded on the stock exchanges in these respective countries. The Portfolio's investment in these funds is subject to the provisions of the 1940 Act discussed below. If the Portfolio invests in such investment funds, the Portfolio's shareholders will bear not only their proportionate share of the expenses of the Portfolio (including operating expenses and the fees of the Investment Manager), but also will bear indirectly similar expenses of the underlying investment funds. In addition, the securities of these investment funds may trade at a premium over their net asset value.
Apart from the matters described herein, the Portfolio is not aware at this time of the existence of any investment or exchange control regulations which might substantially impair the operations of the Portfolio as described in the Trust's Prospectus and this Statement. It should be noted, however, that this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe. The Portfolio will only invest in a company located in, or a government of, Eastern Europe or Russia, if the Sub-advisor believes the potential return justifies the risk. To the extent any securities issued by companies in Eastern Europe and Russia are considered illiquid, the Portfolio will be required to include such securities within its 15% restriction on investing in illiquid securities.
Risk Factors of Foreign Investing. There are special risks in investing in the Portfolio. Certain of these risks are inherent in any international mutual fund; others relate more to the countries in which the Portfolio will invest. Many of the risks are more pronounced for investments in developing or emerging countries. Although there is no universally accepted definition, a developing country is generally considered to be a country which is in the initial stages of its industrialization cycle with a per capita gross national product of less than $8,000.
Investors should understand that all investments have a risk factor. There can be no guarantee against loss resulting from an investment in the Portfolio, and there can be no assurance that the Portfolio's investment policies will be successful, or that its investment objective will be attained. The Portfolio is designed for individual and institutional investors seeking to diversify beyond the United States in an actively researched and managed portfolio, and is intended for long-term investors who can accept the risks entailed in investment in foreign securities. For a discussion of certain risks involved in foreign investing see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus, the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered" call options and purchase options to close out options previously written by the Portfolio. In writing covered call options, the Portfolio expects to generate additional premium income which should serve to enhance the Portfolio's total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in Sub-advisor's opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the Portfolio will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash or other liquid assets having a value equal to the fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Portfolio's investment objective. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Portfolio will not do), but capable of enhancing the Portfolio's total return. When writing a covered call option, the Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely, retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Portfolio has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligations as a writer. If a call option which the Portfolio has written expires, the Portfolio will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security or currency. The Portfolio does not consider a security or currency covered by a call "pledged" as that term is used in the Portfolio's policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Portfolio will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, the Sub-advisor, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Portfolio for writing covered call options will be recorded as a liability of the Portfolio. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of the New York Stock Exchange), or, in the absence of such sale, the average of the latest bid and asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option.
Call options written by the Portfolio will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Portfolio may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a profit on an outstanding call option, to prevent an underlying security or currency from being called, or, to permit the sale of the underlying security or currency. The Portfolio will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the aggregate market value of all portfolio securities or currencies covering call or put options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. Although the Portfolio has no current intention in the foreseeable future of writing American or European style covered put options and purchasing put options to close out options previously written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which means that the Portfolio would maintain in a segregated account cash, U.S. government securities or other liquid high-grade debt obligations in an amount not less than the exercise price or the Portfolio will own an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" options at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Portfolio would generally write covered put options in circumstances where the Sub-advisor wishes to purchase the underlying security or currency for the Portfolio's portfolio at a price lower than the current market price of the security or currency. In such event the Portfolio would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Portfolio would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Portfolio. In addition, the Portfolio, because it does not own the specific securities or currencies which it may be required to purchase in exercise of the put, cannot benefit from appreciation, if any, with respect to such specific securities or currencies.
The Portfolio will not write a covered put option if, as a result, the aggregate market value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written puts and calls, the value of purchased puts and calls on identical securities or currencies with identical maturity dates. For a discussion of certain risks involved in options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or European style put options. As the holder of a put option, the Portfolio has the right to sell the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its securities or currencies. An example of such use of put options is provided in this Statement under "Certain Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be recorded as an asset of the Portfolio. This asset will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of New York Stock Exchange), or, in the absence of such sale, the latest bid price. This asset will be terminated upon expiration of the option, the selling (writing) of an identical option in a closing transaction, or the delivery of the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or European style call options. As the holder of a call option, the Portfolio has the right to purchase the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase call options for the purpose of increasing its current return or avoiding tax consequences which could reduce its current return. The Portfolio may also purchase call options in order to acquire the underlying securities or currencies. Examples of such uses of call options are provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options may also be purchased at times to avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Portfolio would look to a clearing corporation to exercise exchange-traded options, if the Portfolio were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with the Portfolio, there can be no assurance that the Portfolio will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Failure by the dealer to perform would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into financial futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"); however, the Portfolio has no current intention of entering into interest rate futures. The Portfolio, however, reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a hedge for a portion of the Portfolio, as a cash management tool, or as an efficient way for the Sub-advisor to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. Stock index futures contracts are currently traded with respect to the S&P 500 Index and other broad stock market indices, such as the New York Stock Exchange Composite Stock Index and the Value Line Composite Stock Index. The Portfolio may, however, purchase or sell futures contracts with respect to any stock index whose movements will, in its judgment, have a significant correlation with movements in the prices of all or portions of the Portfolio's portfolio securities.
Interest rate or currency futures contracts may be used to attempt to hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Portfolio. In this regard, the Portfolio could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on national or foreign futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal financial futures exchanges in the United States are the Board of Trade of the City of Chicago, the Chicago Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of Trade. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are traded in London at the London International Financial Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing the Portfolio's objectives in these areas. For a discussion of futures transactions and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in transactions in futures contracts and options thereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon if, with respect to positions which do not qualify as bona fide hedging under applicable CFTC rules, the sum of the amounts of initial margin deposits on the Portfolio's existing futures and premiums paid for options on futures would exceed 5% of the net asset value of the Portfolio after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; provided however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5% limitation.
The Portfolio's use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or call options thereon or the writing of put options thereon by the Portfolio, an amount of cash or other liquid assets equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Portfolio's custodian to cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the Portfolio's ability to engage in certain yield enhancement and risk management strategies. If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Portfolio would comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or purchasing call and put options on stock index futures, the Portfolio may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Portfolio and other mutual funds or portfolios of mutual funds managed by the Sub-Advisor or T. Rowe Price Associates, Inc. Such aggregated orders would be allocated among the Portfolio and such other portfolios in a fair and non-discriminatory manner. See this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks involved in options and futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has no current intention of engaging in financial futures or option transactions other than those described above, it reserves the right to do so. Such futures or options trading might involve risks which differ from those involved in the futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in foreign futures and options. For a description of foreign futures and options and certain risks involved therein as well as certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into forward foreign currency exchange contracts under two circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Alternatively, where appropriate, the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Portfolio. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Other than as set forth above and immediately below, the Portfolio will also not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. The Portfolio, however, in order to avoid excess transactions and transaction costs, may maintain a net exposure to forward contracts in excess of the value of the Portfolio's securities or other assets to which the forward contracts relate (including accrued interest to the maturity of the forward on such securities) provided the excess amount is "covered" by liquid, high-grade debt securities, denominated in any currency, at least equal at all times to the amount of such excess. For these purposes "the securities or other assets to which the forward contracts relate" may be securities or assets denominated in a single currency, or where proxy forwards are used, securities denominated in more than one currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, the Sub-advisor believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract obligating it to purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the forward contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. However, as noted, in order to avoid excessive transactions and transaction costs, the Portfolio may use liquid, high-grade debt securities denominated in any currency, to cover the amount by which the value of a forward contract exceeds the value of the securities to which it relates.
If the Portfolio retains the portfolio security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Portfolio reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Portfolio is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts 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 which might result from an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. For an additional discussion of certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts. The Portfolio may enter into certain option, futures, and forward foreign exchange contracts, including options and futures on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered to have been closed at the end of the Portfolio's fiscal year and any gains or losses will be recognized for tax purposes at that time. Such gains or losses from the normal closing or settlement of such transactions will be characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of the holding period of the instrument. The Portfolio will be required to distribute net gains on such transactions to shareholders even though it may not have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and futures on currencies, which offset a foreign dollar denominated bond or currency position may be considered straddles for tax purposes in which case a loss on any position in a straddle will be subject to deferral to the extent of unrealized gain in an offsetting position. The holding period of the securities or currencies comprising the straddle will be deemed not to begin until the straddle is terminated. For securities offsetting a purchased put, this adjustment of the holding period may increase the gain from sales of securities held less than three months. The holding period of the security offsetting an "in-the-money qualified covered call" option on an equity security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding certain "qualified covered call" options on equity securities, may be long-term capital loss, if the security covering the option was held for more than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or currencies. Pending tax regulations could limit the extent that net gain realized from option, futures or foreign forward exchange contracts on currencies is qualifying income for purposes of the 90% requirement. In addition, gains realized on the sale or other disposition of securities, including option, futures or foreign forward exchange contracts on securities or securities indexes and, in some cases, currencies, held for less than three months, must be limited to less than 30% of the Portfolio's annual gross income. In order to avoid realizing excessive gains on securities or currencies held less than three months, the Portfolio may be required to defer the closing out of option, futures or foreign forward exchange contracts beyond the time when it would otherwise be advantageous to do so. It is anticipated that unrealized gains on Section 1256 option, futures and foreign forward exchange contracts, which have been open for less than three months as of the end of the Portfolio's fiscal year and which are recognized for tax purposes, will not be considered gains on securities or currencies held less than three months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been developed which combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments"). Often these hybrid instruments are indexed to the price of a commodity or particular currency or a domestic or foreign debt or equity securities index. Hybrid instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. For a discussion of certain risks involved in hybrid instruments, see this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements through which an investor (such as the Portfolio) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Any such dealer or bank will be on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that time, the bank or securities dealer agrees to repurchase the underlying security at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. Repurchase agreements which do not provide for payment within seven days will be treated as illiquid securities. The Portfolio will only enter into repurchase agreements where (i) the underlying securities are of the type (excluding maturity limitations) which the Portfolio's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (iii) payment for the underlying security is made only upon physical delivery or evidence of book-entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Portfolio could experience both delays in liquidating the underlying securities and losses, including: (a) possible decline in the value of the underlying security during the period while the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights.
Illiquid and Restricted Securities. The Portfolio may not invest in illiquid securities including repurchase agreements which do not provide for payment within seven days, if as a result, they would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, the Portfolio may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in accordance with procedures prescribed by the Trust's Board of Trustees. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Portfolio should be in a position where more than 15% of the value of its net assets are invested in illiquid assets, including restricted securities, the Portfolio will take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Portfolio, to trade in privately placed securities even though such securities are not registered under the 1933 Act. The Sub-advisor, under the supervision of the Trust's Board of Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Portfolio's restriction of investing no more than 15% of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination Sub-advisor will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, Sub-advisor could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, (4) and the nature of the security and of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored and, if as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, the Portfolio's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Portfolio does not invest more than 15% of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a Portfolio's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing additional income, the Portfolio may make secured loans of portfolio securities amounting to not more than 33 1/3% of its total assets. This policy is a "fundamental policy." Securities loans are made to broker-dealers, institutional investors, or other persons pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Portfolio will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Portfolio has a right to call each loan and obtain the securities on five business days' notice or, in connection with securities trading on foreign markets, within such longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. The Portfolio will not have the right to vote securities while they are being lent, but it will call a loan in anticipation of any important vote. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to persons deemed by the Sub-advisor to be of good standing and will not be made unless, in the judgment of the Sub-advisor, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange Commission, the Portfolio may make loans to, or borrow funds from, other mutual funds sponsored or advised by the Sub-advisor or T. Rowe Price Associates, Inc. The Portfolio has no current intention of engaging in these practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio may purchase securities on a "when-issued" or delayed delivery basis and may purchase securities on a forward commitment basis. Any or all of the Portfolio's investments in debt securities may be in the form of when-issueds and forwards. The price of such securities, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment take place at a later date. Normally, the settlement date occurs within 90 days of the purchase for when-issueds, but may be substantially longer for forwards. The Portfolio will cover its commitments with respect to these securities by maintaining cash and/or other liquid assets with its custodian bank equal in value to these commitments during the time between the purchase and the settlement. Such segregated securities either will mature or, if necessary, be sold on or before the settlement date. For a discussion of these securities and the risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the T. Rowe Price International Equity Portfolio. These limitations are not "fundamental" restrictions, and can be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of the Portfolio's total assets.
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its net assets would be invested in such securities. Securities eligible for resale under Rule 144A of the Securities Act of 1933 may be subject to this 15% limitation;
4. Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act;
5. Invest in puts, calls, straddles, spreads, or any combination thereof, except to the extent permitted by the Trust's Prospectus and this Statement;
6. Purchase securities on margin, except (i) for use of short-term credit necessary for clearance of purchases of portfolio securities and (ii) the Portfolio may make margin deposits in connection with futures contracts and other permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by the Portfolio as a security for indebtedness except as may be necessary in connection with permissible borrowings or investments and then such mortgaging, pledging, or hypothecating may not exceed 33 1/3% of the Portfolio's total assets at the time of borrowing or investment;
8. Effect short sales of securities;
9. Invest in warrants if, as a result thereof, more than 10% of the value of the total assets of the Portfolio would be invested in warrants, except that this restriction does not apply to warrants acquired as a result of the purchase of another security. For purposes of these percentage limitations, the warrants will be valued at the lower of cost or market; or
10. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such positions would exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating restrictions to the contrary, the Portfolio may, as a fundamental policy, invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies and restrictions as the Portfolio subject to the prior approval of the Investment Manager. The Investment Manager will not approve such investment unless: (a) the Investment Manager believes, on the advice of counsel, that such investment will not have an adverse effect on the tax status of the annuity contracts and/or life insurance policies supported by the separate accounts of the Participating Insurance Companies which purchase shares of the Trust; (b) the Investment Manager has given prior notice to the Participating Insurance Companies that it intends to permit such investment and has determined whether such Participating Insurance Companies intend to redeem any shares and/or discontinue purchase of shares because of such investment; (c) the Trustees have determined that the fees to be paid by the Trust for administrative, accounting, custodial and transfer agency services for the Portfolio subsequent to such an investment are appropriate, or the Trustees have approved changes to the agreements providing such services to reflect a reduction in fees; (d) the Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any investment advisory fees paid to the investment manager of such open-end management investment company; and (e) shareholder approval is obtained if required by law. The Portfolio will apply for such exemptive relief under the provisions of the 1940 Act, or other such relief as may be necessary under the then governing rules and regulations of the 1940 Act, regarding investments in such investment companies.
In addition to the restrictions described above, some foreign countries limit, or prohibit, all direct foreign investment in the securities of their companies. However, the governments of some countries have authorized the organization of investment portfolios to permit indirect foreign investment in such securities. For tax purposes these portfolios may be known as Passive Foreign Investment Companies. The Portfolio is subject to certain percentage limitations under the 1940 Act relating to the purchase of securities of investment companies, and may be subject to the limitation that no more than 10% of the value of the Portfolio's total assets may be invested in such securities.
T. Rowe Price Natural Resources Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek long-term growth of capital through investment primarily in common stocks of companies which own or develop natural resources and other basic commodities. Current income is not a factor in the selection of stocks for investment by the Portfolio. Total return will consist primarily of capital appreciation (or depreciation).
Investment Policies: The Portfolio will normally have primarily all of its assets in equity securities (e.g., common stocks). This portion of the Portfolio's assets will be subject to all of the risks of investing in the stock market. There is risk in all investment. The value of the portfolio securities of the Portfolio will fluctuate based upon market conditions. Although the Portfolio seeks to reduce risk by investing in a diversified portfolio, such diversification does not eliminate all risk. The fixed-income securities in which the Portfolio may invest include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S. Government sponsored enterprises and federal agencies. These include securities issued by the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business Association, and the Tennessee Valley Authority. Some of these securities are supported by the full faith and credit of the U.S. Treasury; and the remainder are supported only by the credit of the instrumentality, which may or may not include the right of the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other short-term debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with international commercial transactions. Certificates of deposit may have fixed or variable rates. The Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible corporate debt securities (e.g., bonds and debentures) which have one year or less remaining to maturity. Corporate notes may have fixed, variable, or floating rates.
Commercial Paper. Short-term promissory notes issued by corporations primarily to finance short-term credit needs. Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign government, province, instrumentality, political subdivision or similar unit thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of certain supranational entities, such as the International Development Bank.
Debt Obligations. Although primarily all of the Portfolio's assets are invested in common stocks, the Portfolio may invest in convertible securities, corporate debt securities and preferred stocks. See this Statement under "Certain Risk Factors and Investment Methods," for a discussion of debt obligations.
The Portfolio's investment program permits it to purchase below investment grade securities. Since investors generally perceive that there are greater risks associated with investment in lower quality securities, the yields from such securities normally exceed those obtainable from higher quality securities. However, the principal value of lower-rated securities generally will fluctuate more widely than higher quality securities. Lower quality investments entail a higher risk of default -- that is, the nonpayment of interest and principal by the issuer than higher quality investments. Such securities are also subject to special risks, discussed below. Although the Portfolio seeks to reduce risk by portfolio diversification, credit analysis, and attention to trends in the economy, industries and financial markets, such efforts will not eliminate all risk. There can, of course, be no assurance that the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event will require a sale of such security by the Portfolio. However, Sub-advisor will consider such event in its determination of whether the Portfolio should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Portfolio will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the prospectus.
Risks of Low-Rated Debt Securities. The Portfolio may invest in low quality bonds commonly referred to as "junk bonds." Junk bonds are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Because investment in low and lower-medium quality bonds involves greater investment risk, to the extent the Portfolio invests in such bonds, achievement of its investment objective will be more dependent on Sub-advisor's credit analysis than would be the case if the Portfolio was investing in higher quality bonds. For a discussion of the special risks involved in low-rated bonds, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities representing interest in a pool of mortgages. After purchase by the Portfolio, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event will require a sale of such security by the Portfolio. However, the Sub-advisor will consider such event in its determination of whether the Portfolio should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Portfolio will attempt to use comparable ratings as standards for investments in accordance with the investment policies continued in the Trust's Prospectus. For a discussion of mortgage-backed securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which a Portfolio invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. For an additional discussion of CMOs and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its assets in debt obligations known as asset-backed securities. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities and the amount and quality of any credit support provided to the securities. The rate of principal payment on asset-backed securities generally depends on the rate of principal payments received on the underlying assets which in turn may be affected by a variety of economic and other factors. As a result, the yield on any asset-backed security is difficult to predict with precision and actual yield to maturity may be more or less than the anticipated yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in asset-backed securities which are backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in asset-backed securities backed by receivables from revolving credit card agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed securities backed by assets other than those described above will be issued in the future. The Portfolio may invest in such securities in the future if such investment is otherwise consistent with its investment objective and policies. For a discussion of these securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency Mortgage-Backed securities represent interests in a pool of mortgages, the cash flow of which has been separated into its interest and principal components. "IOs" (interest only securities) receive the interest portion of the cash flow while "POs" (principal only securities) receive the principal portion. Stripped Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or by private issuers similar to those described above with respect to CMOs and privately-issued mortgage-backed certificates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. The value of the other mortgage-backed securities described herein, like other debt instruments, will tend to move in the opposite direction compared to interest rates. Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may generate taxable income from the current accrual of original issue discount, without a corresponding distribution of cash to the Portfolio.
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 prices 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 or is derived from a full faith and credit obligation. Conversely, if the underlying mortgage assets experience slower than anticipated prepayments of principal, the price on a PO class will be affected more severely than would be the case with a traditional mortgage-backed security.
The Portfolio will treat IOs and POs, other than government-issued IOs or POs backed by fixed rate mortgages, as illiquid securities and, accordingly, limit its investments in such securities, together with all other illiquid securities, to 15% of the Portfolio's net assets. Sub-advisor will determine the liquidity of these investments based on the following guidelines: the type of issuer; type of collateral, including age and prepayment characteristics; rate of interest on coupon relative to current market rates and the effect of the rate on the potential for prepayments; complexity of the issue's structure, including the number of tranches; size of the issue and the number of dealers who make a market in the IO or PO. The Portfolio will treat non-government-issued IOs and POs not backed by fixed or adjustable rate mortgages as illiquid unless and until the Securities and Exchange Commission modifies its position.
Writing Covered Call Options. The Portfolio may write (sell) American or European style "covered" call options and purchase options to close out options previously written by a Portfolio. In writing covered call options, the Portfolio expects to generate additional premium income which should serve to enhance the Portfolio's total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in Sub-advisor is opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the Portfolio will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash, U.S. government securities or other liquid high-grade debt obligations having a value equal to the fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Portfolio's investment objective. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Portfolio will not do), but capable of enhancing the Portfolio's total return. When writing a covered call option, a Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Portfolio has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligation as a writer. If a call option which the Portfolio has written expires, the Portfolio will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security or currency. The Portfolio does not consider a security or currency covered by a call to be "pledged" as that term is used in the Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Portfolio may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the Portfolio will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, Sub-advisor, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Portfolio for writing covered call options will be recorded as a liability of the Portfolio. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of the New York Stock Exchange), or, in the absence of such sale, the latest asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the aggregate market value of all portfolio securities or currencies covering call or put options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or European style covered put options and purchase options to close out options previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which means that the Portfolio would maintain in a segregated account cash, U.S. government securities or other liquid high-grade debt obligations in an amount not less than the exercise price or the Portfolio will own an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" option at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Portfolio would generally write covered put options in circumstances where the Sub-advisor wishes to purchase the underlying security or currency for the Portfolio at a price lower than the current market price of the security or currency. In such event the Portfolio would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Portfolio would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Portfolio. In addition, the Portfolio, because it does not own the specific securities or currencies which it may be required to purchase in exercise of the put, cannot benefit from appreciation, if any, with respect to such specific securities or currencies.
The Portfolio will not write a covered put option if, as a result, the aggregate market value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written puts and calls, the value of purchased puts and calls on identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European style put options. As the holder of a put option, the Portfolio has the right to sell the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its securities or currencies. An example of such use of put options is provided in this Statement under "Certain Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be recorded as an asset of the Portfolio. This asset will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of New York Stock Exchange), or, in the absence of such sale, the latest bid price. This asset will be terminated upon expiration of the option, the selling (writing) of an identical option in a closing transaction, or the delivery of the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or European style call options. As the holder of a call option, the Portfolio has the right to purchase the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase call options for the purpose of increasing its current return or avoiding tax consequences which could reduce its current return. The Portfolio may also purchase call options in order to acquire the underlying securities or currencies. Examples of such uses of call options are provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Portfolio would look to a clearing corporation to exercise exchange-traded options, if the Portfolio were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. For a discussion of dealer options, see this Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"). The Portfolio may also enter into futures on commodities related to the types of companies in which it invests, such as oil and gold futures. Otherwise the nature of such futures and the regulatory limitations and risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion of the Portfolio, as a cash management tool, or as an efficient way for the Sub-advisor to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. The Portfolio may purchase or sell futures contracts with respect to any stock index. Nevertheless, to hedge the Portfolio successfully, the Portfolio must sell futures contacts with respect to indices or subindices whose movements will have a significant correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Portfolio. In this regard, the Portfolio could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on national or foreign futures exchanges, and are standardized as to maturity date and underlying financial instrument. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the CFTC. Futures are traded in London, at the London International Financial Futures Exchange, in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing the Portfolio's objectives in these areas.
Regulatory Limitations. The Portfolio will engage in futures contracts and options thereon only for bona fide hedging, yield enhancement, and risk management purposes, in each case in accordance with rules and regulations of the CFTC.
The Portfolio may not purchase or sell futures contracts or related options if, with respect to positions which do not qualify as bona fide hedging under applicable CFTC rules, the sum of the amounts of initial margin deposits and premiums paid on those positions would exceed 5% of the net asset value of the Portfolio after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5% limitation. For purposes of this policy options on futures contracts and foreign currency options traded on a commodities exchange will be considered "related options." This policy may be modified by the Board of Trustees of the Trust without a shareholder vote and does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or the writing of call or put options thereon by the Portfolio, an amount of cash, U.S. government securities or other liquid, high-grade debt obligations, equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Portfolio's custodian to cover the position, or alternative cover (such as owning an offsetting position) will be employed. Assets used as cover or held in an identified account cannot be sold while the position in the corresponding option or future is open, unless they are replaced with similar assets. As a result, the commitment of a large portion of a Portfolio's assets to cover or identified accounts could impede portfolio management or the Portfolio's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Portfolio would comply with such new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell options on the same types of futures in which it may invest. As an alternative to writing or purchasing call and put options on stock index futures, the Portfolio may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Portfolio and other mutual funds or portfolios of mutual funds managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such aggregated orders would be allocated among such portfolios in a fair and non-discriminatory manner.
See this Statement and Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks in options and future contracts.
Additional Futures and Options Contracts. Although the Portfolio has no current intention of engaging in futures or options transactions other than those described above, it reserves the right to do so. Such futures and options trading might involve risks which differ from those involved in the futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in foreign futures and options. For a description of foreign futures and options and certain risks involved therein as well as certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated and non-U.S. dollar-denominated securities of foreign issuers. There are special risks in foreign investing. Certain of these risks are inherent in any international mutual fund while others relate more to the countries in which the Portfolio will invest. Many of the risks are more pronounced for investments in developing or emerging countries, such as many of the countries of Southeast Asia, Latin America, Eastern Europe and the Middle East. For an additional discussion of certain risks involved in investing in foreign securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. A forward foreign currency exchange contract involves 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. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades.
The Portfolio may enter into forward contracts for a variety of purposes in connection with the management of the foreign securities portion of its portfolio. The Portfolio's use of such contracts would include, but not be limited to, the following. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that one currency may experience a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Alternatively, where appropriate, the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Portfolio. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, Sub-advisor believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Portfolio will be served.
The Portfolio may enter into forward contracts for any other purpose consistent with the Portfolio's investment objective and policies. However, the Portfolio will not enter into a forward contract, or maintain exposure to any such contract(s), if the amount of foreign currency required to be delivered thereunder would exceed the Portfolio's holdings of liquid, high-grade debt securities and currency available for cover of the forward contract(s). In determining the amount to be delivered under a contract, the Portfolio may net offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the portfolio security and make delivery of the foreign currency, or it may retain the security and either extend the maturity of the forward contract (by "rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Portfolio reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Portfolio is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts 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 which might result from an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. For a discussion of certain risk factors involved in foreign currency transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts. The Portfolio may enter into certain option, futures, and forward foreign exchange contracts, including options and futures on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered to have been closed at the end of the Portfolio's fiscal year and any gains or losses will be recognized for tax purposes at that time. Such gains or losses from the normal closing or settlement of such transactions will be characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of the holding period of the instrument. The Portfolio will be required to distribute net gains on such transactions to shareholders even though it may not have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and futures on currencies, which offset a foreign dollar denominated bond or currency position may be considered straddles for tax purposes, in which case a loss on any position in a straddle will be subject to deferral to the extent of unrealized gain in an offsetting position. The holding period of the securities or currencies comprising the straddle will be deemed not to begin until the straddle is terminated. For securities offsetting a purchased put, this adjustment of the holding period may increase the gain from sales of securities held less than three months. The holding period of the security offsetting an "in-the-money qualified covered call" option on an equity security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding certain "qualified covered call" options on equity securities, may be long-term capital loss, if the security covering the option was held for more than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or currencies. Pending tax regulations could limit the extent that net gain realized from option, futures or foreign forward exchange contracts on currencies is qualifying income for purposes of the 90% requirement. In addition, gains realized on the sale or other disposition of securities, including option, futures or foreign forward exchange contracts on securities or securities indexes and, in some cases, currencies, held for less than three months, must be limited to less than 30% of the Portfolio's annual gross income. In order to avoid realizing excessive gains on securities or currencies held less than three months, the Portfolio may be required to defer the closing out of option, futures or foreign forward exchange contracts) beyond the time when it would otherwise be advantageous to do so. It is anticipated that unrealized gains on Section 1256 option, futures and foreign forward exchange contracts, which have been open for less than three months as of the end of the Portfolio's fiscal year and which are recognized for tax purposes, will not be considered gains on securities or currencies held less than three months for purposes of the 30% test.
Illiquid and Restricted Securities. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Portfolio should be in a position where more than 15% of the value of its net assets is invested in illiquid assets, including restricted securities, the Portfolio will take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Sub-advisor will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, Sub-advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) the nature of the security and
of marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to determine what,
if any, steps are required to assure that the Portfolio does not invest more
than 15% of its net assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine the elements of futures contracts, options or other financial instruments with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments. Hybrid Instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity or securities index at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. For a discussion of certain risks involved in investing in hybrid instruments see this statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Board of Trustees of the Trust, the Portfolio may enter into a repurchase agreement through which an investor (such as the Portfolio) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Any such dealer or bank will be on Sub-advisor's approved list and have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time, the bank or securities dealer agrees to repurchase the underlying security at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. Repurchase agreements which do not provide for payment within seven days will be treated as illiquid securities. The Portfolio will only enter into repurchase agreements where (i) the underlying securities are of the type (excluding maturity limitations) which the Portfolio's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (iii) payment for the underlying security is made only upon physical delivery or evidence of book- entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Portfolio could experience both delays in liquidating the underlying security and losses, including: (a) possible decline in the value of the underlying security during the period while the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Portfolio has no current intention, in the foreseeable future, of engaging in reverse repurchase agreements, the Portfolio reserves the right to do so. Reverse repurchase agreements are ordinary repurchase agreements in which a Portfolio is the seller of, rather than the investor in, securities, and agrees to repurchase them at an agreed upon time and price. Use of a reverse repurchase agreement may be preferable to a regular sale and later repurchase of the securities because it avoids certain market risks and transaction costs. A reverse repurchase agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of certain risks involved therein, see this Statement under "Certain Risk Factor and Investment Methods."
Lending of Portfolio Securities. Securities loans are made to broker-dealers or institutional investors or other persons, pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Portfolio will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Portfolio has a right to call each loan and obtain the securities on five business days' notice or, in connection with securities trading on foreign markets, within such longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. The Portfolio will not have the right to vote securities while they are being lent, but it will call a loan in anticipation of any important vote. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to firms deemed by Sub-advisor to be of good standing and will not be made unless, in the judgment of Sub-advisor, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange Commission and certain state regulatory agencies, the Portfolio may make loans to, or borrow funds from, other mutual funds sponsored or advised by the Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no current intention of engaging in these practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio may purchase securities on a "when-issued" or delayed delivery basis and may purchase securities on a forward commitment basis. Any or all of the Portfolio's investments in debt securities may be in the form of when-issueds and forwards. The price of such securities, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment take place at a later date. Normally, the settlement date occurs within 90 days of the purchase for when-issueds, but may be substantially longer for forwards. The Portfolio will cover its commitments with respect to these securities by maintaining cash and/or liquid, high-grade debt securities with its custodian bank equal in value to these commitments during the time between the purchase and the settlement. Such segregated securities either will mature or, if necessary, be sold on or before the settlement date. For a discussion of these securities and the risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the T. Rowe Price Natural Resources Portfolio. These limitations are not "fundamental" restrictions and can be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of its total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such options would exceed 5% of the Portfolio's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its net assets would be invested in such securities. Securities eligible for resale under Rule 144A of the Securities Act of 1933 may be subject to this 15% limitation;
5. Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act.
6. Purchase securities on margin, except (i) for use of short-term credit necessary for clearance of purchases of portfolio securities and (ii) the Portfolio may make margin deposits in connection with futures contracts or other permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by the Portfolio as security for indebtedness except as may be necessary in connection with permissible borrowings or investments and then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's total assets at the time of borrowing or investment;
8. Invest in puts, calls, straddles, spreads, or any combination thereof, except to the extent permitted by the Trust's Prospectus and this Statement;
9. Effect short sales of securities; or
10. Invest in warrants if, as a result thereof, more than 10% of the value of the net assets of the Portfolio would be invested in warrants, except that this restriction does not apply to warrants acquired as a result of the purchase of another security. For purposes of these percentage limitations, the warrants will be valued at the lower of cost or market.
T. Rowe Price International Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide high current income and capital appreciation by investing in high-quality, non dollar-denominated government and corporate bonds outside the United States. This is a fundamental objective of the Portfolio.
Investment Policies: The Portfolio also seeks to moderate price fluctuation by actively managing its maturity structure and currency exposure. The Portfolio's investments may include debt securities issued or guaranteed by a foreign national government, its agencies, instrumentalities or political subdivisions, debt securities issued or guaranteed by supranational organizations, corporate debt securities, bank or bank holding company debt securities and other debt securities including those convertible into common stock. The Portfolio will invest at least 65% of its assets in high-quality bonds but may invest up to 20% of assets in below investment-grade, high-risk bonds, including bonds in default or those with the lowest rating.
Sub-advisor regularly analyzes a broad range of international equity and fixed-income markets in order to assess the degree of risk and level of return that can be expected from each market. Of course, there can be no assurance that Sub-advisor's forecasts of expected return will be reflected in the actual returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and foreign exchange conditions, and your investment may be worth more or less when redeemed than when purchased. The Portfolio should not be relied upon as a complete investment program, nor used to play short-term swings in the global bond or foreign exchange markets. The Portfolio is subject to risks unique to international investing.
The Portfolio will invest in securities denominated in currencies specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in over-the-counter markets or on stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market.
The Portfolio may invest in investment portfolios which have been authorized by the governments of certain countries specifically to permit foreign investment in securities of companies listed and traded on the stock exchanges in these respective countries. The Portfolio's investment in these portfolios is subject to the provisions of the 1940 Act discussed below. If the Portfolio invests in such investment portfolios, the Portfolio's shareholders will bear not only their proportionate share of the expenses of the Portfolio (including operating expenses and the fees of the Investment Manager), but also will bear indirectly similar expenses of the underlying investment portfolios. In addition, the securities of these investment portfolios may trade at a premium over their net asset value.
Apart from the matters described herein, the Portfolio is not aware at this time of the existence of any investment or exchange control regulations which might substantially impair the operations of the Portfolio as described in the Trust's Prospectus and this Statement. It should be noted, however, that this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe, Russia or certain Latin American countries. The Portfolio will only invest in a company located in, or a government of, Eastern Europe, Russia or Latin America, if the Sub-advisor believes the potential return justifies the risk.
Risk Factors of Foreign Investing. There are special risks in investing in the Portfolio. Certain of these risks are inherent in any international mutual fund others relate more to the countries in which the Portfolio will invest. Many of the risks are more pronounced for investments in developing or emerging countries. Although there is no universally accepted definition, a developing country is generally considered to be a country which is in the initial stages of its industrialization cycle with a per capita gross national product of less than $8,000.
Investors should understand that all investments have a risk factor. There can be no guarantee against loss resulting from an investment in the Portfolio, and there can be no assurance that the Portfolio's investment policies will be successful, or that its investment objective will be attained. The Portfolio is designed for individual and institutional investors seeking to diversify beyond the United States in an actively researched and managed portfolio, and is intended for long-term investors who can accept the risks entailed in investment in foreign securities. For a discussion of certain risks involved in foreign investing see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus, the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered" call options and purchase options to close out options previously written by the Portfolio. In writing covered call options, the Portfolio expects to generate additional premium income which should serve to enhance the Portfolio's total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in Sub-advisor's opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the Portfolio will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash or other liquid assets having a value equal to the fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Portfolio's investment objective. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Portfolio will not do), but capable of enhancing the Portfolio's total return. When writing a covered call option, the Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely, retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Portfolio has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligations as a writer. If a call option which the Portfolio has written expires, the Portfolio will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security or currency, The Portfolio does not consider a security or currency covered by a call "pledged" as that term is used in the Portfolio's policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Portfolio will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, Sub-advisor, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Portfolio for writing covered call options will be recorded as a liability of the Portfolio. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of the New York Stock Exchange), or, in the absence of such sale, the average of the latest bid and asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option.
Call options written by the Portfolio will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Portfolio may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a profit on an outstanding call option, to prevent an underlying security or currency from being called, or, to permit the sale of the underlying security or currency. The Portfolio will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the aggregate market value of all portfolio securities or currencies covering call or put options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. Although the Portfolio has no current intention in the foreseeable future of writing American or European style covered put options and purchasing put options to close out options previously written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which means that the Portfolio would maintain in a segregated account cash, U.S. government securities or other liquid high-grade debt obligations in an amount not less than the exercise price or the Portfolio will own an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" options at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Portfolio would generally write covered put options in circumstances where Sub-advisor wishes to purchase the underlying security or currency for the Portfolio's portfolio at a price lower than the current market price of the security or currency. In such event the Portfolio would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Portfolio would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Portfolio. In addition, the Portfolio, because it does not own the specific securities or currencies which it may be required to purchase in exercise of the put, cannot benefit from appreciation, if any, with respect to such specific securities or currencies.
The Portfolio will not write a covered put option if, as a result, the aggregate market value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written puts and calls, the value of purchased puts and calls on identical securities or currencies with identical maturity dates. For a discussion of certain risks involved in options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or European style put options. As the holder of a put option, the Portfolio has the right to sell the underlying security or currency at the exercise price at any time during the option period. The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its securities or currencies. An example of such use of put options is provided in this Statement under "Certain Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be recorded as an asset of the Portfolio. This asset will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of New York Stock Exchange), or, in the absence of such sale, the latest bid price. This asset will be terminated upon expiration of the option, the selling (writing) of an identical option in a closing transaction, or the delivery of the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or European style call options. As the holder of a call option, the Portfolio has the right to purchase the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase call options for the purpose of increasing its current return or avoiding tax consequences which could reduce its current return. The Portfolio may also purchase call options in order to acquire the underlying securities or currencies. Examples of such uses of call options are provided below.
The Portfolio may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options may also be purchased at times to avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Portfolio would look to a clearing corporation to exercise exchange-traded options, if the Portfolio were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with the Portfolio, there can be no assurance that the Portfolio will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into financial futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"); however, the Portfolio has no current intention of entering into interest rate futures. The Portfolio, however, reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a hedge for a portion of the Portfolio's portfolio, as a cash management tool, or as an efficient way for Sub-advisor to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. Stock index futures contracts are currently traded with respect to the S&P 500 Index and other broad stock market indices, such as the New York Stock Exchange Composite Stock Index and the Value Line Composite Stock Index. The Portfolio may, however, purchase or sell futures contracts with respect to any stock index whose movements will, in its judgment, have a significant correlation with movements in the prices of all or portions of the Portfolio's portfolio securities.
Interest rate or currency futures contracts may be used to attempt to hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Portfolio. In this regard, the Portfolio could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on national or foreign futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal financial futures exchanges in the United States are the Board of Trade of the City of Chicago, the Chicago Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of Trade. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are traded in London at the London International Financial Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing the Portfolio's objectives in these areas. For a discussion of futures transactions and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in transactions in futures contracts and options thereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon if, with respect to positions which do not qualify as bona fide hedging under applicable CFTC rules, the sum of the amounts of initial margin deposits on the Portfolio's existing futures and premiums paid for options on futures would exceed 5% of the net asset value of the Portfolio after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; provided however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5% limitation.
The Portfolio's use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or call options thereon or the writing of put options thereon by the Portfolio, an amount of cash or other liquid assets equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Portfolio's custodian to cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the Portfolio's ability to engage in certain yield enhancement and risk management strategies. If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Portfolio would comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or purchasing call and put options on stock index futures, the Portfolio may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Portfolio and other mutual funds or portfolios of mutual funds managed by the Sub-advisor or T. Rowe Price Associates, Inc. Such aggregated orders would be allocated among the Portfolio and such other portfolios in a fair and non-discriminatory manner. See this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks involved in options and futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has no current intention of engaging in financial futures or option transactions other than those described above, it reserves the right to do so. Such futures or options trading might involve risks which differ from those involved in the futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in foreign futures and options. For a description of foreign futures and options and certain risks involved therein as well as certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into forward foreign currency exchange contracts under two circumstances. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Alternatively, where appropriate, the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Portfolio. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Other than as set forth above, and immediately below, the Portfolio will also not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of the Portfolio's securities or other assets denominated in that currency. The Portfolio, however, in order to avoid excess transactions and transaction costs, may maintain a net exposure to forward contracts in excess of the value of the Portfolio's securities or other assets to which the forward contracts relate (including accrued interest to the maturity of the forward on such securities) provided the excess amount is "covered" by liquid, high-grade debt securities, denominated in any currency, at least equal at all times to the amount of such excess. For these purposes "the securities or other assets to which the forward contracts relate may be securities or assets denominated in a single currency, or where proxy forwards are used, securities denominated in more than one currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, Sub-advisor believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract obligating it to purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the forward contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. However, as noted, in order to avoid excessive transactions and transaction costs, the Portfolio may use liquid, high-grade debt securities denominated in any currency, to cover the amount by which the value of a forward contract exceeds the value of the securities to which it relates.
If the Portfolio retains the portfolio security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Portfolio reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Portfolio is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts 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 which might result from an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. For an additional discussion of certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts. The Portfolio may enter into certain options, futures, and forward foreign exchange contracts, including options and futures on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered to have been closed at the end of the Portfolio's fiscal year and any gains or losses will be recognized for tax purposes at that time. Such gains or losses from the normal closing or settlement of such transactions will be characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of the holding period of the instrument. The Portfolio will be required to distribute net gains on such transactions to shareholders even though it may not have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and futures on currencies, which offset a foreign dollar denominated bond or currency position may be considered straddles for tax purposes in which case a loss on any position in a straddle will be subject to deferral to the extent of unrealized gain in an offsetting position. The holding period of the securities or currencies comprising the straddle will be deemed not to begin until the straddle is terminated. For securities offsetting a purchased put, this adjustment of the holding period may increase the gain from sales of securities held less than three months. The holding period of the security offsetting an "in-the-money qualified covered call" option on an equity security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding certain "qualified covered call" options on equity securities, may be long-term capital loss, if the security covering the option was held for more than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or currencies. Pending tax regulations could limit the extent that net gain realized from option, futures or foreign forward exchange contracts on currencies is qualifying income for purposes of the 90% requirement. In addition, gains realized on the sale or other disposition of securities, including option, futures or foreign forward exchange contracts on securities or securities indexes and, in some cases, currencies, held for less than three months, must be limited to less than 30% of the Portfolio's annual gross income. In order to avoid realizing excessive gains on securities or currencies held less than three months, the Portfolio may be required to defer the closing out of option, futures or foreign forward exchange contracts beyond the time when it would otherwise be advantageous to do so. It is anticipated that unrealized gains on Section 1256 option, futures and foreign forward exchange contracts, which have been open for less than three months as of the end of the Portfolio's fiscal year and which are recognized for tax purposes, will not be considered gains on securities or currencies held less than three months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been developed which combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments"). Often these hybrid instruments are indexed to the price of a commodity or particular currency or a domestic or foreign debt or equity securities index. Hybrid instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. For a discussion of certain risks involved in hybrid instruments, see this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements through which an investor (such as the Portfolio) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Any such dealer or bank will be on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that time, the bank or securities dealer agrees to repurchase the underlying security at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. Repurchase agreements which do not provide for payment within seven days will be treated as illiquid securities. The Portfolio will only enter into repurchase agreements where (i) the underlying securities are of the type (excluding maturity limitations) which the Portfolio's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (iii) payment for the underlying security is made only upon physical delivery or evidence of book-entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Portfolio could experience both delays in liquidating the underlying securities and losses, including: (a) possible decline in the value of the underlying security during the period while the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights.
Illiquid and Restricted Securities. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may invest in illiquid securities. The Portfolio may invest in illiquid securities, including restricted securities and repurchase agreements which do not provide for payment within seven days, but will not acquire such securities if, as a result, they would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, the Portfolio may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in accordance with procedures prescribed by the Trust's Board of Trustees. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Portfolio should be in a position where more than 15% of the value of its net assets are invested in illiquid assets, including restricted securities, the Portfolio will take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which, while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Portfolio, to trade in privately placed securities even though such securities are not registered under the 1933 Act. The Sub-advisor, under the supervision of the Trust's Board of Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Portfolio's restriction of investing no more than 15% of its net assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Sub-advisor will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, the Sub-advisor could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchases, (3) dealer undertakings to make a market, and (4) the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored, and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, the Portfolio's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Portfolio does not invest more than 15% of its net assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Portfolio's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities.
Debt Securities. The Portfolio's investment program permits it to purchase below investment grade securities. Since investors generally perceive that there are greater risks associated with investment in lower quality securities, the yields from such securities normally exceed those obtainable from higher quality securities. However, the principal value of lower-rated securities generally will fluctuate more widely than higher quality securities. Lower quality investments entail a higher risk of default -- that is, the nonpayment of interest and principal by the issuer than higher quality investments. Such securities are also subject to special risks, discussed below. Although the Portfolio seeks to reduce risk by portfolio diversification, credit analysis, and attention to trends in the economy, industries and financial markets, such efforts will not eliminate all risk. There can, of course, be no assurance that the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event will require a sale of such security by the Portfolio. However, Sub-advisor will consider such event in its determination of whether the Portfolio should continue to hold the security. To the extent that the ratings given by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") may change as a result of changes in such organizations or their rating systems, the Portfolio will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the prospectus. The Portfolio may invest up to 20% of its total assets in securities rated below BBB or Baa, including bonds in default or those with the lowest rating. See the Appendix to this Statement for a more complete description of the ratings assigned by ratings organizations and their respective characteristics.
High Yield, High Risk Securities. Below investment grade securities (rated below Baa by Moody's and below BBB by S&P) or unrated securities of equivalent quality in the Sub-advisor's judgment, carry a high degree of risk (including the possibility of default or bankruptcy of the issuers of such securities), generally involve greater volatility of price and risk of principal and income, and may be less liquid, than securities in the higher rating categories and are considered speculative. The lower the ratings of such debt securities, the greater their risks render them like equity securities. For an additional discussion of certain risks involved in investing in lower-rated debt securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Zero-Coupon Securities. The Portfolio may invest in zero-coupon securities which pay no cash income and are sold at substantial discounts from their value at maturity. For a discussion of zero-coupon securities and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Lending of Portfolio Securities. For the purpose of realizing additional income, the Portfolio may make secured loans of portfolio securities amounting to not more than 33 1/3% of its total assets. This policy is a "fundamental policy." Securities loans are made to broker-dealers, institutional investors, or other persons pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Portfolio will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Portfolio has a right to call each loan and obtain the securities on five business days' notice or, in connection with securities trading on foreign markets, within such longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. The Portfolio will not have the right to vote securities while they are being lent, but it will call a loan in anticipation of any important vote. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to persons deemed by the Sub-advisor to be of good standing and will not be made unless, in the judgment of Sub-advisor, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange Commission, the Portfolio may make loans to, or borrow funds from, other mutual funds sponsored or advised by the Sub-advisor or T. Rowe Price Associates, Inc. The Portfolio has no current intention of engaging in these practices at this time.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the T. Rowe Price International Bond Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Pledge, mortgage or hypothecate its assets in excess, together with permitted borrowings, of 1/3 of its total assets;
2. Purchase securities on margin, unless, by virtue of its ownership of other securities, it has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except in connection with arbitrage transactions and except that the Portfolio may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities;
3. Purchase illiquid securities if, as a result, more than 15% of its net assets would be invested in such securities;
4. Buy options on securities or financial instruments, unless the aggregate premiums paid on all such options held by the Portfolio at any time do not exceed 20% of its net assets; or sell put options on securities if, as a result, the aggregate value of the obligations underlying such put options would exceed 50% of the Portfolio's net assets;
5. Enter into futures contracts or purchase options thereon which do not represent bona fide hedging unless immediately after the purchase, the value of the aggregate initial margin with respect to all such futures contracts entered into on behalf of the Portfolio and the premiums paid for such options on futures contracts does not exceed 5% of the Portfolio's total assets, provided that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in computing the 5% limit;
6. Purchase warrants if as a result warrants taken at the lower of cost or market value would represent more than 10% of the value of the Portfolio's total net assets, except that this restriction does not apply to warrants acquired as a result of the purchase of another security;
7. Make securities loans if the value of such securities loaned exceeds 30% of the value of the Portfolio's total assets at the time any loan is made; all loans of portfolio securities will be fully collateralized and marked to market daily. The Portfolio has no current intention of making loans of portfolio securities that would amount to greater than 5% of the Portfolio's total assets; or
8. Purchase or sell real estate limited partnership interests.
9. Purchase securities which are not bonds denominated in foreign currency ("international bonds") if, immediately after such purchase, less than 65% of its total assets would be invested in international bonds, except that for temporary defensive purposes the Portfolio may purchase securities which are not international bonds without limitation;
10. Borrow money in excess of 5% of its total assets (taken at market value) or borrow other than from banks; however, in the case of reverse repurchase agreements, the Portfolio may invest in such agreements with other than banks subject to total asset coverage of 300% for such agreements and all borrowings;
11. Invest more than 20% of its total assets in below investment grade, high-risk bonds, including bonds in default or those with the lowest rating;
12. Invest in companies for the purpose of exercising management or control;
13. Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act; or
14. Effect short sales of securities.
In addition to the restrictions described above, some foreign countries limit, or prohibit, all direct foreign investment in the securities of their companies. However, the governments of some countries have authorized the organization of investment funds to permit indirect foreign investment in such securities. For tax purposes these funds may be known as Passive Foreign Investment Companies. The Portfolio is subject to certain percentage limitations under the 1940 Act relating to the purchase of securities of investment companies, and may be subject to the limitation that no more than 10% of the value of the Portfolio's total assets may be invested in such securities.
Restrictions with respect to repurchase agreements shall be construed to be for repurchase agreements entered into for the investment of available cash consistent with the Portfolio's repurchase agreement procedures, not repurchase commitments entered into for general investment purposes.
If a percentage restriction on investment or utilization of assets as set forth under "Investment Restrictions" and "Investment Policies" above is adhered to at the time an investment is made, a later change in percentage resulting from changes in the value or the total cost of Portfolio's assets will not be considered a violation of the restriction.
T. Rowe Price Small Company Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide long-term capital appreciation by investing primarily in small-capitalization stocks that appear to be undervalued. This is a fundamental objective of the Portfolio.
Investment Policies:
Although primarily all of the Portfolio's assets are invested in common stocks, the Portfolio may invest in convertible securities, corporate debt securities and preferred stocks. The fixed-income securities in which the Portfolio may invest include, but are not limited to, those described below. See this Statement under "Certain Risk Factors and Investment Methods," for an additional discussion of debt obligations.
U.S. Government Obligations. Bills, notes, bonds and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S. Government sponsored enterprises and federal agencies. These include securities issued by the Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business Association, and the Tennessee Valley Authority. Some of these securities are supported by the full faith and credit of the U.S. Treasury; and the remainder are supported only by the credit of the instrumentality, which may or may not include the right of the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other short-term debt obligations. Certificates of deposit are short-term obligations of commercial banks. A bankers' acceptance is a time draft drawn on a commercial bank by a borrower, usually in connection with international commercial transactions. Certificates of deposit may have fixed or variable rates. The Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible corporate debt securities (e.g., bonds and debentures) which have one year or less remaining to maturity. Corporate notes may have fixed, variable, or floating rates.
Commercial Paper. Short-term promissory notes issued by corporations primarily to finance short-term credit needs. Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign government, province, instrumentality, political subdivision or similar unit thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of certain supranational entities, such as the International Development Bank.
Lower-Rated Debt Securities. The Portfolio's investment program permits it to purchase below investment grade securities, commonly referred to as "junk bonds." Since investors generally perceive that there are greater risks associated with investment in lower quality securities, the yields from such securities normally exceed those obtainable from higher quality securities. However, the principal value of lower-rated securities generally will fluctuate more widely than higher quality securities. Lower quality investments entail a higher risk of default -- that is, the nonpayment of interest and principal by the issuer than higher quality investments. Such securities are also subject to special risks, discussed below. Although the Portfolio seeks to reduce risk by portfolio diversification, credit analysis, and attention to trends in the economy, industries and financial markets, such efforts will not eliminate all risk. There can, of course, be no assurance that the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event will require a sale of such security by the Portfolio. However, the Sub-advisor will consider such event in its determination of whether the Portfolio should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Portfolio will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the Trust's Prospectus.
Junk bonds are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Because investment in low and lower-medium quality bonds involves greater investment risk, to the extent the Portfolio invests in such bonds, achievement of its investment objective will be more dependent on the Sub-advisor's credit analysis than would be the case if the Portfolio was investing in higher quality bonds. For a discussion of the special risks involved in low-rated bonds, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities representing interests in a pool of mortgages. After purchase by the Portfolio, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Portfolio. Neither event will require a sale of such security by the Portfolio. However, the Sub-advisor will consider such event in its determination of whether the Portfolio should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the Portfolio will attempt to use comparable ratings as standards for investments in accordance with the investment policies contained in the Trust's Prospectus. For a discussion of mortgage-backed securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payments of principal and interest on the mortgages are passed through to the holders of the CMOs on the same schedule as they are received, although certain classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which the Portfolio invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities. For an additional discussion of CMOs and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency Mortgage-Backed securities represent interests in a pool of mortgages, the cash flow of which has been separated into its interest and principal components. "IOs" (interest only securities) receive the interest portion of the cash flow while "POs" (principal only securities) receive the principal portion. Stripped Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or by private issuers similar to those described above with respect to CMOs and privately-issued mortgage-backed certificates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. The value of the other mortgage-backed securities described herein, like other debt instruments, will tend to move in the opposite direction compared to interest rates. Under the Internal Revenue Code of 1986, as amended, POs may generate taxable income from the current accrual of original issue discount, without a corresponding distribution of cash to the Portfolio.
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 prices 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 or is derived from a full faith and credit obligation. Conversely, if the underlying mortgage assets experience slower than anticipated prepayments of principal, the price on a PO class will be affected more severely than would be the case with a traditional mortgage-backed security.
The Portfolio will treat IOs and POs, other than government-issued IOs or POs backed by fixed rate mortgages, as illiquid securities and, accordingly, limit its investments in such securities, together with all other illiquid securities, to 15% of the Portfolio's net assets. The Sub-advisor will determine the liquidity of these investments based on the following guidelines: the type of issuer; type of collateral, including age and prepayment characteristics; rate of interest on coupon relative to current market rates and the effect of the rate on the potential for prepayments; complexity of the issue's structure, including the number of tranches; size of the issue; and the number of dealers who make a market in the IO or PO. The Portfolio will treat non-government-issued IOs and POs not backed by fixed or adjustable rate mortgages as illiquid unless and until the Securities and Exchange Commission modifies its position.
Asset-Backed Securities. The Portfolio may invest a portion of its assets in debt obligations known as asset-backed securities. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities and the amount and quality of any credit support provided to the securities. The rate of principal payment on asset-backed securities generally depends on the rate of principal payments received on the underlying assets which in turn may be affected by a variety of economic and other factors. As a result, the yield on any asset-backed security is difficult to predict with precision and actual yield to maturity may be more or less than the anticipated yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in asset-backed securities which are backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in asset-backed securities backed by receivables from revolving credit card agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed securities backed by assets other than those described above will be issued in the future. The Portfolio may invest in such securities in the future if such investment is otherwise consistent with its investment objective and policies. For a discussion of these securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Call Options. The Portfolio may write (sell) American or European style "covered" call options and purchase options to close out options previously written by a Portfolio. In writing covered call options, the Portfolio expects to generate additional premium income which should serve to enhance the Portfolio's total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in the Sub-advisor's opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the Portfolio will own the security or currency subject to the option or an option to purchase the same underlying security or currency, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain with its custodian for the term of the option, an account consisting of cash or other liquid assets having a value equal to the fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written will be purchased solely on the basis of investment considerations consistent with the Portfolio's investment objective. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Portfolio will not do), but capable of enhancing the Portfolio's total return. When writing a covered call option, the Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Portfolio has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligation as a writer. If a call option which the Portfolio has written expires, the Portfolio will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying security or currency. The Portfolio does not consider a security or currency covered by a call to be "pledged" as that term is used in the Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration dates of less than nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, the Portfolio may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the Portfolio will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, the Sub-advisor, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by the Portfolio for writing covered call options will be recorded as a liability of the Portfolio. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of the New York Stock Exchange), or, in the absence of such sale, the latest asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the aggregate market value of all portfolio securities or currencies covering call or put options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written calls and puts, the value of purchased calls and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or European style covered put options and purchase options to close out options previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which means that the Portfolio would maintain in a segregated account cash, U.S. government securities or other liquid high-grade debt obligations in an amount not less than the exercise price or the Portfolio will own an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the "covered" option at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) The Portfolio would generally write covered put options in circumstances where the Sub-advisor wishes to purchase the underlying security or currency for the Portfolio at a price lower than the current market price of the security or currency. In such event the Portfolio would write a put option at an exercise price which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since the Portfolio would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to the Portfolio. In addition, the Portfolio, because it does not own the specific securities or currencies which it may be required to purchase in exercise of the put, cannot benefit from appreciation, if any, with respect to such specific securities or currencies.
The Portfolio will not write a covered put option if, as a result, the aggregate market value of all portfolio securities or currencies covering put or call options exceeds 25% of the market value of the Portfolio's net assets. In calculating the 25% limit, the Portfolio will offset, against the value of assets covering written puts and calls, the value of purchased puts and calls on identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European style put options. As the holder of a put option, the Portfolio has the right to sell the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its securities or currencies. An example of such use of put options is provided in this Statement under "Certain Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be recorded as an asset of the Portfolio. This asset will be adjusted daily to the option's current market value, which will be the latest sale price at the time at which the net asset value per share of the Portfolio is computed (close of New York Stock Exchange), or, in the absence of such sale, the latest bid price. This asset will be terminated upon expiration of the option, the selling (writing) of an identical option in a closing transaction, or the delivery of the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or European style call options. As the holder of a call option, the Portfolio has the right to purchase the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). The Portfolio may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. The Portfolio may purchase call options for the purpose of increasing its current return or avoiding tax consequences which could reduce its current return. The Portfolio may also purchase call options in order to acquire the underlying securities or currencies. Examples of such uses of call options are provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities or currencies it owns in order to protect unrealized gains on call options previously written by it. A call option would be purchased for this purpose where tax considerations make it inadvisable to realize such gains through a closing purchase transaction. Call options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Portfolio would look to a clearing corporation to exercise exchange-traded options, if the Portfolio were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. For a discussion of dealer options, see this Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures contracts, including stock index, interest rate and currency futures ("futures or futures contracts"). The Portfolio may also enter into futures on commodities related to the types of companies in which it invests, such as oil and gold futures. Otherwise the nature of such futures and the regulatory limitations and risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion of the Portfolio, as a cash management tool, or as an efficient way for the Sub-advisor to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. The Portfolio may purchase or sell futures contracts with respect to any stock index. Nevertheless, to hedge the Portfolio successfully, the Portfolio must sell futures contacts with respect to indices or subindices whose movements will have a significant correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to hedge against changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by the Portfolio. In this regard, the Portfolio could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on national or foreign futures exchanges, and are standardized as to maturity date and underlying financial instrument. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act by the CFTC. Futures are traded in London, at the London International Financial Futures Exchange, in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing the Portfolio's objectives in these areas.
Regulatory Limitations. The Portfolio will engage in futures contracts and options thereon only for bona fide hedging, yield enhancement, and risk management purposes, in each case in accordance with rules and regulations of the CFTC.
The Portfolio may not purchase or sell futures contracts or related options if, with respect to positions which do not qualify as bona fide hedging under applicable CFTC rules, the sum of the amounts of initial margin deposits and premiums paid on those positions would exceed 5% of the net asset value of the Portfolio after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5% limitation. For purposes of this policy options on futures contracts and foreign currency options traded on a commodities exchange will be considered "related options." This policy may be modified by the Board of Trustees of the Trust without a shareholder vote and does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage. Therefore, to the extent necessary, in instances involving the purchase of futures contracts or the writing of call or put options thereon by the Portfolio, an amount of cash or other liquid assets equal to the market value of the futures contracts and options thereon (less any related margin deposits), will be identified in an account with the Portfolio's custodian to cover the position, or alternative cover (such as owning an offsetting position) will be employed. Assets used as cover or held in an identified account cannot be sold while the position in the corresponding option or future is open, unless they are replaced with similar assets. As a result, the commitment of a large portion of the Portfolio's assets to cover or identified accounts could impede portfolio management or the Portfolio's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less stringent) or additional restrictions, the Portfolio would comply with such new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell options on the same types of futures in which it may invest. As an alternative to writing or purchasing call and put options on stock index futures, the Portfolio may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts. From time to time, a single order to purchase or sell futures contracts (or options thereon) may be made on behalf of the Portfolio and other mutual funds or portfolios of mutual funds managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such aggregated orders would be allocated among the Portfolio and such other portfolios in a fair and non-discriminatory manner. See this Statement and Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks in options and future contracts.
Additional Futures and Options Contracts. Although the Portfolio has no current intention of engaging in futures or options transactions other than those described above, it reserves the right to do so. Such futures and options trading might involve risks which differ from those involved in the futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in foreign futures and options. For a description of foreign futures and options and certain risks involved therein as well as certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated and non-U.S. dollar-denominated securities of foreign issuers. There are special risks in foreign investing. Certain of these risks are inherent in any international mutual fund while others relate more to the countries in which the Portfolio will invest. Many of the risks are more pronounced for investments in developing or emerging countries, such as many of the countries of Southeast Asia, Latin America, Eastern Europe and the Middle East. For an additional discussion of certain risks involved in investing in foreign securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. A forward foreign currency exchange contract involves 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. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades.
The Portfolio may enter into forward contracts for a variety of purposes in connection with the management of the foreign securities portion of its portfolio. The Portfolio's use of such contracts would include, but not be limited to, the following. First, when the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. Second, when the Sub-advisor believes that one currency may experience a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Alternatively, where appropriate, the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Portfolio. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However, Sub-advisor believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Portfolio will be served.
The Portfolio may enter into forward contracts for any other purpose consistent with the Portfolio's investment objective and policies. However, the Portfolio will not enter into a forward contract, or maintain exposure to any such contract(s), if the amount of foreign currency required to be delivered thereunder would exceed the Portfolio's holdings of liquid assets and currency available for cover of the forward contract(s). In determining the amount to be delivered under a contract, the Portfolio may net offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the portfolio security and make delivery of the foreign currency, or it may retain the security and either extend the maturity of the forward contract (by "rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, the Portfolio reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. Of course, the Portfolio is not required to enter into forward contracts with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of hedging against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange at a future date. Additionally, although such contracts 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 which might result from an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer. For a discussion of certain risk factors involved in foreign currency transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts. The Portfolio may enter into certain option, futures, and forward foreign exchange contracts, including options and futures on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered to have been closed at the end of the Portfolio's fiscal year and any gains or losses will be recognized for tax purposes at that time. Such gains or losses from the normal closing or settlement of such transactions will be characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of the holding period of the instrument. The Portfolio will be required to distribute net gains on such transactions to shareholders even though it may not have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and futures on currencies, which offset a foreign dollar denominated bond or currency position may be considered straddles for tax purposes, in which case a loss on any position in a straddle will be subject to deferral to the extent of unrealized gain in an offsetting position. The holding period of the securities or currencies comprising the straddle will be deemed not to begin until the straddle is terminated. For securities offsetting a purchased put, this adjustment of the holding period may increase the gain from sales of securities held less than three months. The holding period of the security offsetting an "in-the-money qualified covered call" option on an equity security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding certain "qualified covered call" options on equity securities, may be long-term capital loss, if the security covering the option was held for more than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or currencies. Pending tax regulations could limit the extent that net gain realized from option, futures or foreign forward exchange contracts on currencies is qualifying income for purposes of the 90% requirement. In addition, gains realized on the sale or other disposition of securities, including option, futures or foreign forward exchange contracts on securities or securities indexes and, in some cases, currencies, held for less than three months, must be limited to less than 30% of the Portfolio's annual gross income. In order to avoid realizing excessive gains on securities or currencies held less than three months, the Portfolio may be required to defer the closing out of option, futures or foreign forward exchange contracts) beyond the time when it would otherwise be advantageous to do so. It is anticipated that unrealized gains on Section 1256 option, futures and foreign forward exchange contracts, which have been open for less than three months as of the end of the Portfolio's fiscal year and which are recognized for tax purposes, will not be considered gains on securities or currencies held less than three months for purposes of the 30% test.
Illiquid and Restricted Securities. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Portfolio should be in a position where more than 15% of the value of its net assets is invested in illiquid assets, including restricted securities, the Portfolio will take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which, while privately placed, are eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers, such as the Portfolio, to trade in privately placed securities even though such securities are not registered under the 1933 Act. The Sub-advisor, under the supervision of the Trust's Board of Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Portfolio's restriction of investing no more than 15% of its net assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Sub-advisor will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, the Sub-advisor could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored, and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, the Portfolio's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Portfolio does not invest more than 15% of its net assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of the Portfolio's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine the elements of futures contracts, options or other financial instruments with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments). Hybrid Instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity or securities index at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. For a discussion of certain risks involved in investing in hybrid instruments see this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Board of Trustees of the Trust, the Portfolio may enter into a repurchase agreement through which an investor (such as the Portfolio) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Any such dealer or bank will be on the Sub-advisor's approved list and have a credit rating with respect to its short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by the Sub-advisor. At that time, the bank or securities dealer agrees to repurchase the underlying security at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. Repurchase agreements which do not provide for payment within seven days will be treated as illiquid securities. The Portfolio will only enter into repurchase agreements where (i) the underlying securities are of the type (excluding maturity limitations) which the Portfolio's investment guidelines would allow it to purchase directly, (ii) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (iii) payment for the underlying security is made only upon physical delivery or evidence of book- entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Portfolio could experience both delays in liquidating the underlying security and losses, including: (a) possible decline in the value of the underlying security during the period while the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Portfolio has no current intention, in the foreseeable future, of engaging in reverse repurchase agreements, the Portfolio reserves the right to do so. Reverse repurchase agreements are ordinary repurchase agreements in which a fund is the seller of, rather than the investor in, securities, and agrees to repurchase them at an agreed upon time and price. Use of a reverse repurchase agreement may be preferable to a regular sale and later repurchase of the securities because it avoids certain market risks and transaction costs. A reverse repurchase agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of certain risks involved therein, see this Statement under "Certain Risk Factor and Investment Methods."
Lending of Portfolio Securities. Securities loans are made to broker-dealers or institutional investors or other persons, pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent marked to market on a daily basis. The collateral received will consist of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under its investment program. While the securities are being lent, the Portfolio will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The Portfolio has a right to call each loan and obtain the securities on five business days' notice or, in connection with securities trading on foreign markets, within such longer period of time which coincides with the normal settlement period for purchases and sales of such securities in such foreign markets. The Portfolio will not have the right to vote securities while they are being lent, but it will call a loan in anticipation of any important vote. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to firms deemed by the Sub-advisor to be of good standing and will not be made unless, in the judgment of the Sub-advisor, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange Commission, the Portfolio may make loans to, or borrow funds from, other mutual funds sponsored or advised by the Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no current intention of engaging in these practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio may purchase securities on a "when-issued" or delayed delivery basis and may purchase securities on a forward commitment basis. Any or all of the Portfolio's investments in debt securities may be in the form of when-issueds and forwards. The price of such securities, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment take place at a later date. Normally, the settlement date occurs within 90 days of the purchase for when-issueds, but may be substantially longer for forwards. The Portfolio will cover its commitments with respect to these securities by maintaining cash and/or other liquid assets with its custodian bank equal in value to these commitments during the time between the purchase and the settlement. Such segregated securities either will mature or, if necessary, be sold on or before the settlement date. For a discussion of these securities and the risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the T. Rowe Price Small Company Value Portfolio. These limitations are not "fundamental" restrictions, and can be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of its total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to positions in futures or options on futures which do not represent bona fide hedging, the aggregate initial margin and premiums on such options would exceed 5% of the Portfolio's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its net assets would be invested in such securities. Securities eligible for resale under Rule 144A of the Securities Act of 1933 may be subject to this 15% limitation;
5. Purchase securities of open-end or closed-end investment companies except in compliance with the 1940 Act;
6. Purchase securities on margin, except (i) for use of short-term credit necessary for clearance of purchases of portfolio securities and (ii) the Portfolio may make margin deposits in connection with futures contracts or other permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any security owned by the Portfolio as security for indebtedness except as may be necessary in connection with permissible borrowings or investments and then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's total assets at the time of borrowing or investment;
8. Invest in puts, calls, straddles, spreads, or any combination thereof, except to the extent permitted by the Trust's Prospectus and this Statement;
9. Effect short sales of securities; or
10. Invest in warrants if, as a result thereof, more than 10% of the value of the net assets of the Portfolio would be invested in warrants, except that this restriction does not apply to warrants acquired as a result of the purchase of another security. For purposes of these percentage limitations, the warrants will be valued at the lower of cost or market.
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Portfolio is capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or sell a security at a specified price within a limited period of time. The Portfolio may write ("sell") covered call options on any or all of its portfolio securities. In addition, the Portfolio may purchase options on securities. The Portfolio may also purchase put and call options on stock indices.
The Portfolio may write ("sell") options on any or all of its portfolio securities and at such time and from time to time as the Sub-advisor shall determine to be appropriate. No specified percentage of the Portfolio's assets is invested in securities with respect to which options may be written. The extent of the Portfolio's option writing activities will vary from time to time depending upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Portfolio purchases a security with respect to which it intends to write an option, it is likely that the option will be written concurrently with or shortly after purchase. The Portfolio will write an option on a particular security only if the Sub-advisor believes that a liquid secondary market will exist on an exchange for options of the same series, which will permit the Portfolio to enter into a closing purchase transaction and close out its position. If the Portfolio desires to sell a particular security on which it has written an option, it will effect a closing purchase transaction prior to or concurrently with the sale of the security.
The Portfolio may enter into closing purchase transactions to reduce the percentage of its assets against which options are written, to realize a profit on a previously written option, or to enable it to write another option on the underlying security with either a different exercise price or expiration time or both.
Options written by the Portfolio will normally have expiration dates between three and nine months from the date written. The exercise prices of options may be below, equal to or above the current market values of the underlying securities at the times the options are written. From time to time for tax and other reasons, the Portfolio may purchase an underlying security for delivery in accordance with an exercise notice assigned to it, rather than delivering such security from its portfolio.
A stock index measures the movement of a certain group of stocks by assigning relative values to the stocks included in the index. The Portfolio purchases put options on stock indices to protect the portfolio against decline in value. The Portfolio purchases call options on stock indices to establish a position in equities as a temporary substitute for purchasing individual stocks that then may be acquired over the option period in a manner designed to minimize adverse price movements. Purchasing put and call options on stock indices also permits greater time for evaluation of investment alternatives. When the Sub-advisor believes that the trend of stock prices may be downward, particularly for a short period of time, the purchase of put options on stock indices may eliminate the need to sell less liquid stocks and possibly repurchase them later. The purpose of these transactions is not to generate gain, but to "hedge" against possible loss. Therefore, successful hedging activity will not produce net gain to the Portfolio. Any gain in the price of a call option is likely to be offset by higher prices the Portfolio must pay in rising markets, as cash reserves are invested. In declining markets, any increase in the price of a put option is likely to be offset by lower prices of stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are listed on a domestic exchange or quoted on the automatic quotation system of the National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on stock exchanges are either broadly based, such as the Standard & Poor's 500 Stock Index and 100 Stock Index, or involve stocks in a designated industry or group of industries. The Portfolio may utilize either broadly based or market segment indices in seeking a better correlation between the indices and the Portfolio.
Transactions in options are subject to limitations, established by each of the exchanges upon which options are traded, governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options are held in one or more accounts. Thus, the number of options the Portfolio may hold may be affected by options held by other advisory clients of the Sub-advisor. As of the date of this Statement, the Sub-advisor believes that these limitations will not affect the purchase of stock index options by the Portfolio.
One risk of holding a put or a call option is that if the option is not sold or exercised prior to its expiration, it becomes worthless. However, this risk is limited to the premium paid by the Portfolio. Other risks of purchasing options include the possibility that a liquid secondary market may not exist at a time when the Portfolio may wish to close out an option position. It is also possible that trading in options on stock indices might be halted at a time when the securities markets generally were to remain open. In cases where the market value of an issue supporting a covered call option exceeds the strike price plus the premium on the call, the Portfolio will lose the right to appreciation of the stock for the duration of the option. For an additional discussion of options on stock indices and stocks and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Portfolio may enter into futures contracts (or options thereon) for hedging purposes. U.S. futures contracts are traded on exchanges which have been designated "contract markets" by the Commodity Futures Trading Commission and must be executed through a futures commission merchant (an "FCM") or brokerage firm which is a member of the relevant contract market. Although futures contracts by their terms call for the delivery or acquisition of the underlying commodities or a cash payment based on the value of the underlying commodities, in most cases the contractual obligation is offset before the delivery date of the contract by buying, in the case of a contractual obligation to sell, or selling, in the case of a contractual obligation to buy, an identical futures contract on a commodities exchange. Such a transaction cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example, if the Portfolio held or considered purchasing equity securities and sought to protect itself from fluctuations in prices without buying or selling those securities. For example, if prices were expected to decrease, the Portfolio could sell equity index futures contracts, thereby hoping to offset a potential decline in the value of equity securities in the portfolio by a corresponding increase in the value of the futures contract position held by the Portfolio and thereby prevent the Portfolio's net asset value from declining as much as it otherwise would have. The Portfolio also could protect against potential price declines by selling portfolio securities and investing in money market instruments. However, since the futures market is more liquid than the cash market, the use of futures contracts as an investment technique would allow the Portfolio to maintain a defensive position without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase, futures contracts could be bought to attempt to hedge against the possibility of having to buy equity securities at higher prices. This technique is sometimes known as an anticipatory hedge. Since the fluctuations in the value of futures contracts should be similar to those of equity securities, the Portfolio could take advantage of the potential rise in the value of equity securities without buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio could buy equity securities on the cash market.
The Portfolio may also enter into interest rate and foreign currency futures contracts. Interest rate futures contracts currently are traded on a variety of fixed-income securities, including long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage Association modified pass-through mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit and commercial paper. Foreign currency futures contracts currently are traded on the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark and on Eurodollar deposits.
The Portfolio will not, as to any positions, whether long, short or a combination thereof, enter into futures and options thereon for which the aggregate initial margins and premiums exceed 5% of the fair market value of its total assets after taking into account unrealized profits and losses on options entered into. In the case of an option that is "in-the-money," the in-the-money amount may be excluded in computing such 5%. In general a call option on a future is "in-the-money" if the value of the future exceeds the exercise ("strike") price of the call; a put option on a future is "in-the-money" if the value of the future which is the subject of the put is exceeded by the strike price of the put. The Portfolio may use futures and options thereon solely for bona fide hedging or for other non-speculative purposes. As to long positions which are used as part of the Portfolio's strategies and are incidental to its activities in the underlying cash market, the "underlying commodity value" of the Portfolio's futures and options thereon must not exceed the sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt obligations or other dollar-denominated high-quality, short-term money instruments so set aside, plus sums deposited on margin; (ii) cash proceeds from existing investments due in 30 days; and (iii) accrued profits held at the futures commission merchant. The "underlying commodity value" of a future is computed by multiplying the size of the future by the daily settlement price of the future. For an option on a future, that value is the underlying commodity value of the future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a security, no price is paid or received by the Portfolio upon the purchase or sale of a futures contract. Instead, the Portfolio is required to deposit in a segregated asset account an amount of cash or qualifying securities (currently U.S. Treasury bills), currently in a minimum amount of $15,000. This is called "initial margin." Such initial margin is in the nature of a performance bond or good faith deposit on the contract. However, since losses on open contracts are required to be reflected in cash in the form of variation margin payments, the Portfolio may be required to make additional payments during the term of a contract to its broker. Such payments would be required, for example, where, during the term of an interest rate futures contract purchased by the Portfolio, there was a general increase in interest rates, thereby making the Portfolio's securities less valuable. In all instances involving the purchase of financial futures contracts by the Portfolio, an amount of cash together with such other securities as permitted by applicable regulatory authorities to be utilized for such purpose, at least equal to the market value of the future contracts, will be deposited in a segregated account with the Portfolio's custodian to collateralize the position. At any time prior to the expiration of a futures contract, the Portfolio may elect to close its position by taking an opposite position which will operate to terminate the Portfolio's position in the futures contract.
Because futures contracts are generally settled within a day from the date they are closed out, compared with a settlement period of three business days for most types of securities, the futures markets can provide superior liquidity to the securities markets. Nevertheless, there is no assurance a liquid secondary market will exist for any particular futures contract at any particular time. In addition, futures exchanges may establish daily price fluctuation limits for futures contracts and may halt trading if a contract's price moves upward or downward more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached, it would be impossible for the Portfolio to enter into new positions or close out existing positions. If the secondary market for a futures contract were not liquid because of price fluctuation limits or otherwise, the Portfolio would not promptly be able to liquidate unfavorable futures positions and potentially could be required to continue to hold a futures position until the delivery date, regardless of changes in its value. As a result, the Portfolio's access to other assets held to cover its futures positions also could be impaired. For an additional discussion of futures contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase put and call options on futures contracts. An option on a futures contract provides the holder with the right to enter into a "long" position in the underlying futures contract, in the case of a call option, or a "short" position in the underlying futures contract, in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, a contract market clearing house establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option. In the event that an option is exercised, the parties will be subject to all the risks associated with the trading of futures contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the purchaser or seller prior to expiration by effecting a closing purchase or sale transaction, subject to the availability of a liquid secondary market, which is the purchase or sale of an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
An option, whether based on a futures contract, a stock index or a security, becomes worthless to the holder when it expires. Upon exercise of an option, the exchange or contract market clearing house assigns exercise notices on a random basis to those of its members which have written options of the same series and with the same expiration date. A brokerage firm receiving such notices then assigns them on a random basis to those of its customers which have written options of the same series and expiration date. A writer therefore has no control over whether an option will be exercised against it, nor over the time of such exercise.
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. See "Options on Foreign Currencies" below. 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 instrument, ownership of the option may or may not be less risky than ownership of the futures contract or the underlying instrument. As with the purchase of futures contracts, when the Portfolio is not fully invested it could buy a call option on a futures contract to hedge against a market advance. 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, the Portfolio would be able to buy a put option on a futures contract to hedge its portfolio against the risk of falling prices. For an additional discussion of options on futures contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risks Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may buy and sell options on foreign currencies for hedging purposes in a manner similar to that in which futures on foreign currencies would be utilized. For example, a decline in the U.S. dollar value of a foreign currency in which portfolio securities are denominated would reduce the U.S. dollar value of such securities, even if their value in the foreign currency remained constant. In order to protect against such diminutions in the value of portfolio securities, the Portfolio could buy put options on the foreign currency. If the value of the currency declines, the Portfolio would have the right to sell such currency for a fixed amount in U.S. dollars and would thereby offset, in whole or in part, the adverse effect on the Portfolio which otherwise would have resulted. Conversely, when a rise is projected in the U.S. dollar value of a currency in which securities to be acquired are denominated, thereby increasing the cost of such securities, the Portfolio could buy call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates.
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 ("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 the 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.
Risk Factors of Investing in Futures and Options. The successful use of the investment practices described above with respect to futures contracts, options on futures contracts, and options on securities indices, securities, and foreign currencies draws upon skills and experience which are different from those needed to select the other instruments in which the Portfolio invests. Should interest or exchange rates or the prices of securities or financial indices move in an unexpected manner, the Portfolio may not achieve the desired benefits of futures and options or may realize losses and thus be in a worse position than if such strategies had not been used. Unlike many exchange-traded futures contracts and options on futures contracts, there are no daily price fluctuation limits with respect to options on currencies and negotiated or over-the-counter instruments, and adverse market movements could therefore continue to an unlimited extent over a period of time. In addition, the correlation between movements in the price of the securities and currencies hedged or used for cover will not be perfect and could produce unanticipated losses.
The Portfolio's ability to dispose of its positions in the foregoing instruments will depend on the availability of liquid markets in the instruments. Markets in a number of the instruments are relatively new and still developing and it is impossible to predict the amount of trading interest that may exist in those instruments in the future. Particular risks exist with respect to the use of each of the foregoing instruments and could result in such adverse consequences to the Portfolio as the possible loss of the entire premium paid for an option bought by the Portfolio and the possible need to defer closing out positions in certain instruments to avoid adverse tax consequences. As a result, no assurance can be given that the Portfolio will be able to use those instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts, options on futures contracts, forward contracts and options on foreign currencies may be traded on foreign exchanges and over-the-counter in foreign countries. 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 affected adversely 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) low trading volume. For an additional discussion of certain risks involved in investing in futures and options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks which are not typically associated with U.S. investments. For a discussion of certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Portfolio generally conducts its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange currency market. When the Portfolio purchases or sells a security denominated in a foreign currency, it may enter into a forward foreign currency contract ("forward contract") for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying security transaction. A forward contract involves 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. In this manner, the Portfolio may obtain protection against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the foreign currency during the period between the date the security is purchased or sold and the date upon which payment is made or received. Although such contracts tend to minimize the risk of loss due to the decline in the value of the hedged currency, at the same time they tend to limit any potential gain which might result should the value of such currency increase. The Portfolio will not speculate in forward contracts.
Forward contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Generally a forward contract has no deposit requirement, and no commissions are charged at any stage for trades. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they buy and sell various currencies. When the Sub-advisor believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar (or sometimes against another currency), the Portfolio may enter into a forward contract to sell, for a fixed dollar or other currency amount, foreign currency approximating the value of some or all of the Portfolio's securities denominated in that currency. In addition, the Portfolio may engage in "proxy-hedging," i.e., entering into forward contracts to sell a different foreign currency than the one in which the underlying investments are denominated with the expectation that the value of the hedged currency will correlate with the value of the underlying currency. The Portfolio will not enter into forward contracts or maintain a net exposure to such contracts where the fulfillment of the contracts would require the Portfolio to deliver an amount of foreign currency or a proxy currency in excess of the value of its portfolio securities or other assets denominated in the currency being hedged. Forward contracts may, from time to time, be considered illiquid, in which case they would be subject to the Portfolio's limitation on investing in illiquid securities.
At the consummation of a forward contract for delivery by the Portfolio of a foreign currency, the Portfolio may either make delivery of the foreign currency or terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract obligating it to purchase, at the same maturity date, the same amount of the foreign currency. If the Portfolio chooses to make delivery of the foreign currency, it may be required to obtain such currency through the sale of portfolio securities denominated in such currency or through conversion of other Portfolio assets into such currency.
Dealings in forward contracts by the Portfolio will be limited to the transactions described above. Of course, the Portfolio is not required to enter into such transactions with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of protecting the value of the Portfolio's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which can be achieved at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to the decline in the value of the hedged currency, at the same time they tend to limit any potential gain which might result should the value of such currency increase. For an additional discussion of forward foreign currency contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Trust's Prospectus, the Portfolio may invest up to 15% of the value of its net assets, measured at the time of investment, in investments which are not readily marketable. Restricted securities are securities that may not be resold to the public without registration under the Securities Act of 1933 (the "1933 Act"). Restricted securities (other than Rule 144A securities deemed to be liquid, discussed below) and securities which, due to their market or the nature of the security, have no readily available markets for their disposition are considered to be not readily marketable or "illiquid." These limitations on resale and marketability may have the effect of preventing the Portfolio from disposing of such a security at the time desired or at a reasonable price. In addition, in order to resell a restricted security, the Portfolio might have to bear the expense and incur the delays associated with effecting registration. In purchasing illiquid securities, the Portfolio does not intend to engage in underwriting activities, except to the extent the Portfolio may be deemed to be a statutory underwriter under the Securities Act in purchasing or selling such securities. Illiquid securities will be purchased for investment purposes only and not for the purpose of exercising control or management of other companies. For an additional discussion of illiquid or restricted securities and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has developed for certain securities that are not registered under the 1933 Act. Institutional investors generally will not seek to sell these instruments to the general public, but instead will often depend on an efficient institutional market in which such unregistered securities can readily be resold or on an issuer's ability to honor a demand for repayment. Therefore, the fact that there are contractual or legal restrictions on resale to the general public or certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. The Portfolio may invest in Rule 144A securities which, as disclosed in the Trust's Prospectus, are restricted securities which may or may not be readily marketable. Rule 144A securities are readily marketable if institutional markets for the securities develop pursuant to Rule 144A which provide both readily ascertainable values for the securities and the ability to liquidate the securities when liquidation is deemed necessary or advisable. However, an insufficient number of qualified institutional buyers interested in purchasing a Rule 144A security held by the Portfolio could affect adversely the marketability of the security. In such an instance, the Portfolio might be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any successor to such rule, and that such securities are not subject to the Portfolio's limitations on investing in securities that are not readily marketable. The Sub-advisor will consider the following factors, among others, in making this determination: (1) the unregistered nature of a Rule 144A security; (2) the frequency of trades and quotes for the security; (3) the number of dealers willing to purchase or sell the security and the number of additional potential purchasers; (4) dealer undertakings to make a market in the security; and (5) the nature of the security and the nature of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Portfolio may invest up to 5% of its total assets in fixed-income securities which are unrated or are rated below investment grade either at the time of purchase or as a result of reduction in rating after purchase. (This limitation does not apply to convertible securities and preferred stocks.) Investments in lower-rated or unrated securities are generally considered to be of high risk. These debt securities, commonly referred to as junk bonds, are generally subject to two kinds of risk, credit risk and market risk. Credit risk relates to the ability of the issuer to meet interest or principal payments, or both, as they come due. The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P") provide a generally useful guide as to such credit risk. For a description of securities ratings, see the Appendix to this Statement. The lower the rating given a security by a rating service, the greater the credit risk such rating service perceives to exist with respect to the security. Increasing the amount of the Portfolio's assets invested in unrated or lower grade securities, while intended to increase the yield produced by those assets, will also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt securities in which the Portfolio invests generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wider fluctuations in yields and market values than higher rated securities and may have speculative characteristics. In order to decrease the risk in investing in debt securities, in no event will the Portfolio ever invest in a debt security rated below B by Moody's or by S&P. Of course, relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that the securities in which they invest will decline in value, since credit ratings represent evaluations of the safety of principal, dividend, and interest payments on debt securities, and not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events.
Because investment in medium and lower-rated securities involves greater credit risk, achievement of the Portfolio's investment objective may be more dependent on the Sub-advisor's own credit analysis than is the case for funds that do not invest in such securities. In addition, the share price and yield of the Portfolio may fluctuate more than in the case of funds investing in higher quality, shorter term securities. Moreover, a significant economic downturn or major increase in interest rates may result in issuers of lower-rated securities experiencing increased financial stress, which would adversely affect their ability to service their principal, dividend, and interest obligations, meet projected business goals, and obtain additional financing. In this regard, it should be noted that while the market for high yield debt securities has been in existence for many years and from time to time has experienced economic downturns in recent years, this market has involved a significant increase in the use of high yield debt securities to fund highly leveraged corporate acquisitions and restructurings. Past experience may not, therefore, provide an accurate indication of future performance of the high yield debt securities market, particularly during periods of economic recession. Furthermore, expenses incurred in recovering an investment in a defaulted security may adversely affect the Portfolio's net asset value. Finally, while the Sub-advisor attempts to limit purchases of medium and lower-rated securities to securities having an established secondary market, the secondary market for such securities may be less liquid than the market for higher quality securities. The reduced liquidity of the secondary market for such securities may adversely affect the market price of, and ability of the Portfolio to value, particular securities at certain times, thereby making it difficult to make specific valuation determinations. The Portfolio does not invest in any medium and lower-rated securities which present special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an additional discussion of certain risks involved in lower-rated securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Sub-advisor seeks to reduce the overall risks associated with the Portfolio's investments through diversification and consideration of factors affecting the value of securities it considers relevant. No assurance can be given, however, regarding the degree of success that will be achieved in this regard or that the Portfolio will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with respect to money market instruments eligible for investment by the Portfolio with member banks of the Federal Reserve system, registered broker-dealers, and registered government securities dealers. A repurchase agreement may be considered a loan collateralized by securities. Repurchase agreements maturing in more than seven days are considered illiquid and will be subject to the Portfolio's limitation with respect to illiquid securities.
The Portfolio has not adopted any limits on the amounts of its total assets that may be invested in repurchase agreements which mature in less than seven days. The Portfolio may invest up to 15% of the market value of its net assets, measured at the time of purchase, in securities which are not readily marketable, including repurchase agreements maturing in more than seven days. For an additional discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Convertible Securities. The Portfolio may buy securities convertible into common stock if, for example, the Sub-advisor believes that a company's convertible securities are undervalued in the market. Convertible securities eligible for purchase include convertible bonds, convertible preferred stocks, and warrants. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specific amount of the corporation's capital stock at a set price for a specified period of time. Warrants do not represent ownership of the securities, but only the right to buy the securities. The prices of warrants do not necessarily move parallel to the prices of underlying securities. Warrants may be considered speculative in that they have no voting rights, pay no dividends, and have no rights with respect to the assets of a corporation issuing them. Warrant positions will not be used to increase the leverage of the Portfolio; consequently, warrant positions are generally accompanied by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Founders Capital Appreciation Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the market value of its net assets in securities which are not readily marketable, including repurchase agreements maturing in over seven days;
2. Purchase more than 10% of any class of securities of any single issuer or purchase more than 10% of the voting securities of any single issuer;
3. Purchase securities of other investment companies except in compliance with the 1940 Act;
4. Invest in companies for purposes of exercising control or management;
5. Purchase securities of any issuer (other than obligations of, or guaranteed by, the United States government, its agencies or instrumentalities) if, as a result, more than 5% of the value of the Portfolio's assets would be invested in securities of that issuer.
In addition, in periods of uncertain market and economic conditions, as determined by the Sub-advisor, the Portfolio may depart from its basic investment objective and assume a defensive position with up to 100% of its assets temporarily invested in high quality corporate bonds or notes and government issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit that results from a change in values or net assets will not be considered a violation.
Founders Passport Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or sell a security at a specified price within a limited period of time. The Portfolio may write ("sell") covered call options on any or all of its portfolio securities. In addition, the Portfolio may purchase options on securities. The Portfolio may also purchase put and call options on stock indices.
The Portfolio may write ("sell") options on any or all of its portfolio securities and at such time and from time to time as the Sub-advisor shall determine to be appropriate. No specified percentage of the Portfolio's assets is invested in securities with respect to which options may be written. The extent of the Portfolio's option writing activities will vary from time to time depending upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Portfolio purchases a security with respect to which it intends to write an option, it is likely that the option will be written concurrently with or shortly after purchase. The Portfolio will write an option on a particular security only if the Sub-advisor believes that a liquid secondary market will exist on an exchange for options of the same series, which will permit the Portfolio to enter into a closing purchase transaction and close out its position. If the Portfolio desires to sell a particular security on which it has written an option, it will effect a closing purchase transaction prior to or concurrently with the sale of the security.
The Portfolio may enter into closing purchase transactions to reduce the percentage of its assets against which options are written, to realize a profit on a previously written option, or to enable it to write another option on the underlying security with either a different exercise price or expiration time or both.
Options written by the Portfolio will normally have expiration dates between three and nine months from the date written. The exercise prices of options may be below, equal to or above the current market values of the underlying securities at the times the options are written. From time to time for tax and other reasons, the Portfolio may purchase an underlying security for delivery in accordance with an exercise notice assigned to it, rather than delivering such security from its portfolio.
A stock index measures the movement of a certain group of stocks by assigning relative values to the stocks included in the index. The Portfolio purchases put options on stock indices to protect the portfolio against decline in value. The Portfolio purchases call options on stock indices to establish a position in equities as a temporary substitute for purchasing individual stocks that then may be acquired over the option period in a manner designed to minimize adverse price movements. Purchasing put and call options on stock indices also permits greater time for evaluation of investment alternatives. When the Sub-advisor believes that the trend of stock prices may be downward, particularly for a short period of time, the purchase of put options on stock indices may eliminate the need to sell less liquid stocks and possibly repurchase them later. The purpose of these transactions is not to generate gain, but to "hedge" against possible loss. Therefore, successful hedging activity will not produce net gain to the Portfolio. Any gain in the price of a call option is likely to be offset by higher prices the Portfolio must pay in rising markets, as cash reserves are invested. In declining markets, any increase in the price of a put option is likely to be offset by lower prices of stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are listed on a domestic exchange or quoted on the automatic quotation system of the National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on stock exchanges are either broadly based, such as the Standard & Poor's 500 Stock Index and 100 Stock Index, or involve stocks in a designated industry or group of industries. The Portfolio may utilize either broadly based or market segment indices in seeking a better correlation between the indices and the portfolio.
Transactions in options are subject to limitations, established by each of the exchanges upon which options are traded, governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options are held in one or more accounts. Thus, the number of options the Portfolio may hold may be affected by options held by other advisory clients of the Sub-advisor. As of the date of this Statement, the Sub-advisor believes that these limitations will not affect the purchase of stock index options by the Portfolio.
One risk of holding a put or a call option is that if the option is not sold or exercised prior to its expiration, it becomes worthless. However, this risk is limited to the premium paid by the Portfolio. Other risks of purchasing options include the possibility that a liquid secondary market may not exist at a time when the Portfolio may wish to close out an option position. It is also possible that trading in options on stock indices might be halted at a time when the securities markets generally were to remain open. In cases where the market value of an issue supporting a covered call option exceeds the strike price plus the premium on the call, the Portfolio will lose the right to appreciation of the stock for the duration of the option. For an additional discussion of options on stock indices and stocks and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Portfolio may enter into futures contracts (or options thereon) for hedging purposes. U.S. futures contracts are traded on exchanges which have been designated "contract markets" by the Commodity Futures Trading Commission and must be executed through a futures commission merchant (an "FCM") or brokerage firm which is a member of the relevant contract market. Although futures contracts by their terms call for the delivery or acquisition of the underlying commodities or a cash payment based on the value of the underlying commodities, in most cases the contractual obligation is offset before the delivery date of the contract by buying, in the case of a contractual obligation to sell, or selling, in the case of a contractual obligation to buy, an identical futures contract on a commodities exchange. Such a transaction cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example, if the Portfolio held or considered purchasing equity securities and sought to protect itself from fluctuations in prices without buying or selling those securities. For example, if prices were expected to decrease, the Portfolio could sell equity index futures contracts, thereby hoping to offset a potential decline in the value of equity securities in the portfolio by a corresponding increase in the value of the futures contract position held by the Portfolio and thereby prevent the Portfolio's net asset value from declining as much as it otherwise would have. The Portfolio also could protect against potential price declines by selling portfolio securities and investing in money market instruments. However, since the futures market is more liquid than the cash market, the use of futures contracts as an investment technique would allow the Portfolio to maintain a defensive position without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase, futures contracts could be bought to attempt to hedge against the possibility of having to buy equity securities at higher prices. This technique is sometimes known as an anticipatory hedge. Since the fluctuations in the value of futures contracts should be similar to those of equity securities, the Portfolio could take advantage of the potential rise in the value of equity securities without buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio could buy equity securities on the cash market.
The Portfolio may also enter into interest rate and foreign currency futures contracts. Interest rate futures contracts currently are traded on a variety of fixed-income securities, including long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage Association modified pass-through mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit and commercial paper. Foreign currency futures contracts currently are traded on the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark and on Eurodollar deposits.
The Portfolio will not, as to any positions, whether long, short or a combination thereof, enter into futures and options thereon for which the aggregate initial margins and premiums exceed 5% of the fair market value of its total assets after taking into account unrealized profits and losses on options entered into. In the case of an option that is "in-the-money," the in-the-money amount may be excluded in computing such 5%. In general a call option on a future is "in-the-money" if the value of the future exceeds the exercise ("strike") price of the call; a put option on a future is "in-the-money" if the value of the future which is the subject of the put is exceeded by the strike price of the put. The Portfolio may use futures and options thereon solely for bona fide hedging or for other non-speculative purposes. As to long positions which are used as part of the Portfolio's strategies and are incidental to its activities in the underlying cash market, the "underlying commodity value" of the Portfolio's futures and options thereon must not exceed the sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt obligations or other dollar-denominated high-quality, short-term money instruments so set aside, plus sums deposited on margin; (ii) cash proceeds from existing investments due in 30 days; and (iii) accrued profits held at the futures commission merchant. The "underlying commodity value" of a future is computed by multiplying the size of the future by the daily settlement price of the future. For an option on a future, that value is the underlying commodity value of the future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a security, no price is paid or received by the Portfolio upon the purchase or sale of a futures contract. Instead, the Portfolio is required to deposit in a segregated asset account an amount of cash or qualifying securities (currently U.S. Treasury bills), currently in a minimum amount of $15,000. This is called "initial margin." Such initial margin is in the nature of a performance bond or good faith deposit on the contract. However, since losses on open contracts are required to be reflected in cash in the form of variation margin payments, the Portfolio may be required to make additional payments during the term of a contract to its broker. Such payments would be required, for example, where, during the term of an interest rate futures contract purchased by the Portfolio, there was a general increase in interest rates, thereby making the Portfolio's securities less valuable. In all instances involving the purchase of financial futures contracts by the Portfolio, an amount of cash together with such other securities as permitted by applicable regulatory authorities to be utilized for such purpose, at least equal to the market value of the future contracts, will be deposited in a segregated account with the Portfolio's custodian to collateralize the position. At any time prior to the expiration of a futures contract, the Portfolio may elect to close its position by taking an opposite position which will operate to terminate the Portfolio's position in the futures contract.
Because futures contracts are generally settled within a day from the date they are closed out, compared with a settlement period of three business days for most types of securities, the futures markets can provide superior liquidity to the securities markets. Nevertheless, there is no assurance a liquid secondary market will exist for any particular futures contract at any particular time. In addition, futures exchanges may establish daily price fluctuation limits for futures contracts and may halt trading if a contract's price moves upward or downward more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached, it would be impossible for the Portfolio to enter into new positions or close out existing positions. If the secondary market for a futures contract were not liquid because of price fluctuation limits or otherwise, the Portfolio would not promptly be able to liquidate unfavorable futures positions and potentially could be required to continue to hold a futures position until the delivery date, regardless of changes in its value. As a result, the Portfolio's access to other assets held to cover its futures positions also could be impaired. For an additional discussion of futures contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase put and call options on futures contracts. An option on a futures contract provides the holder with the right to enter into a "long" position in the underlying futures contract, in the case of a call option, or a "short" position in the underlying futures contract, in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, a contract market clearing house establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option. In the event that an option is exercised, the parties will be subject to all the risks associated with the trading of futures contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the purchaser or seller prior to expiration by effecting a closing purchase or sale transaction, subject to the availability of a liquid secondary market, which is the purchase or sale of an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction.
An option, whether based on a futures contract, a stock index or a security, becomes worthless to the holder when it expires. Upon exercise of an option, the exchange or contract market clearing house assigns exercise notices on a random basis to those of its members which have written options of the same series and with the same expiration date. A brokerage firm receiving such notices then assigns them on a random basis to those of its customers which have written options of the same series and expiration date. A writer therefore has no control over whether an option will be exercised against it, nor over the time of such exercise.
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. See "Options on Foreign Currencies" below. 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 instrument, ownership of the option may or may not be less risky than ownership of the futures contract or the underlying instrument. As with the purchase of futures contracts, when the Portfolio is not fully invested it could buy a call option on a futures contract to hedge against a market advance. 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, the Portfolio would be able to buy a put option on a futures contract to hedge the Portfolio against the risk of falling prices. For an additional discussion of options on futures contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risks Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may buy and sell options on foreign currencies for hedging purposes in a manner similar to that in which futures on foreign currencies would be utilized. For example, a decline in the U.S. dollar value of a foreign currency in which portfolio securities are denominated would reduce the U.S. dollar value of such securities, even if their value in the foreign currency remained constant. In order to protect against such diminutions in the value of portfolio securities, the Portfolio could buy put options on the foreign currency. If the value of the currency declines, the Portfolio would have the right to sell such currency for a fixed amount in U.S. dollars and would thereby offset, in whole or in part, the adverse effect on the Portfolio which otherwise would have resulted. Conversely, when a rise is projected in the U.S. dollar value of a currency in which securities to be acquired are denominated, thereby increasing the cost of such securities, the Portfolio could buy call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates.
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 ("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 the 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.
Risk Factors of Investing in Futures and Options. The successful use of the investment practices described above with respect to futures contracts, options on futures contracts, and options on securities indices, securities, and foreign currencies draws upon skills and experience which are different from those needed to select the other instruments in which the Portfolio invests. Should interest or exchange rates or the prices of securities or financial indices move in an unexpected manner, the Portfolio may not achieve the desired benefits of futures and options or may realize losses and thus be in a worse position than if such strategies had not been used. Unlike many exchange-traded futures contracts and options on futures contracts, there are no daily price fluctuation limits with respect to options on currencies and negotiated or over-the-counter instruments, and adverse market movements could therefore continue to an unlimited extent over a period of time. In addition, the correlation between movements in the price of the securities and currencies hedged or used for cover will not be perfect and could produce unanticipated losses.
The Portfolio's ability to dispose of its positions in the foregoing instruments will depend on the availability of liquid markets in the instruments. Markets in a number of the instruments are relatively new and still developing and it is impossible to predict the amount of trading interest that may exist in those instruments in the future. Particular risks exist with respect to the use of each of the foregoing instruments and could result in such adverse consequences to the Portfolio as the possible loss of the entire premium paid for an option bought by the Portfolio and the possible need to defer closing out positions in certain instruments to avoid adverse tax consequences. As a result, no assurance can be given that the Portfolio will be able to use those instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts, options on futures contracts, forward contracts and options on foreign currencies may be traded on foreign exchanges and over-the-counter in foreign countries. 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 affected adversely 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) low trading volume. For an additional discussion of certain risks involved in investing in futures and options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks which are not typically associated with U.S. investments. For a discussion of certain risks involved in foreign investing, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Portfolio generally conducts its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange currency market. When the Portfolio purchases or sells a security denominated in a foreign currency, it may enter into a forward foreign currency contract ("forward contract") for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying security transaction. A forward contract involves 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. In this manner, the Portfolio may obtain protection against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the foreign currency during the period between the date the security is purchased or sold and the date upon which payment is made or received. Although such contracts tend to minimize the risk of loss due to the decline in the value of the hedged currency, at the same time they tend to limit any potential gain which might result should the value of such currency increase. The Portfolio will not speculate in forward contracts.
Forward contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Generally a forward contract has no deposit requirement, and no commissions are charged at any stage for trades. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they buy and sell various currencies. When the Sub-advisor believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar (or sometimes against another currency), the Portfolio may enter into a forward contract to sell, for a fixed dollar or other currency amount, foreign currency approximating the value of some or all of the Portfolio's securities denominated in that currency. In addition, the Portfolio may engage in "proxy-hedging," i.e., entering into forward contracts to sell a different foreign currency than the one in which the underlying investments are denominated with the expectation that the value of the hedged currency will correlate with the value of the underlying currency. The Portfolio will not enter into forward contracts or maintain a net exposure to such contracts where the fulfillment of the contracts would require the Portfolio to deliver an amount of foreign currency or a proxy currency in excess of the value of its portfolio securities or other assets denominated in the currency being hedged. Forward contracts may, from time to time, be considered illiquid, in which case they would be subject to the Portfolio's limitation on investing in illiquid securities.
At the consummation of a forward contract for delivery by the Portfolio of a foreign currency, the Portfolio may either make delivery of the foreign currency or terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract obligating it to purchase, at the same maturity date, the same amount of the foreign currency. If the Portfolio chooses to make delivery of the foreign currency, it may be required to obtain such currency through the sale of portfolio securities denominated in such currency or through conversion of other Portfolio assets into such currency.
Dealings in forward contracts by the Portfolio will be limited to the transactions described above. Of course, the Portfolio is not required to enter into such transactions with regard to its foreign currency-denominated securities and will not do so unless deemed appropriate by the Sub-advisor. It also should be realized that this method of protecting the value of the Portfolio's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which can be achieved at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to the decline in the value of the hedged currency, at the same time they tend to limit any potential gain which might result should the value of such currency increase. For an additional discussion of forward foreign currency contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Prospectus, the Portfolio may invest up to 15% of the value of its net assets, measured at the time of investment, in investments which are not readily marketable. Restricted securities are securities that may not be resold to the public without registration under the Securities Act of 1933 (the "1933 Act"). Restricted securities (other than Rule 144A securities deemed to be liquid, discussed below) and securities which, due to their market or the nature of the security, have no readily available markets for their disposition are considered to be not readily marketable or "illiquid." These limitations on resale and marketability may have the effect of preventing the Portfolio from disposing of such a security at the time desired or at a reasonable price. In addition, in order to resell a restricted security, the Portfolio might have to bear the expense and incur the delays associated with effecting registration. In purchasing illiquid securities, the Portfolio does not intend to engage in underwriting activities, except to the extent the Portfolio may be deemed to be a statutory underwriter under the Securities Act in purchasing or selling such securities. Illiquid securities will be purchased for investment purposes only and not for the purpose of exercising control or management of other companies. For an additional discussion of illiquid or restricted securities and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with respect to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has developed for certain securities that are not registered under the 1933 Act. Institutional investors generally will not seek to sell these instruments to the general public, but instead will often depend on an efficient institutional market in which such unregistered securities can readily be resold or on an issuer's ability to honor a demand for repayment. Therefore, the fact that there are contractual or legal restrictions on resale to the general public or certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. The Portfolio may invest in Rule 144A securities which, as disclosed in the Trust's Prospectus, are restricted securities which may or may not be readily marketable. Rule 144A securities are readily marketable if institutional markets for the securities develop pursuant to Rule 144A which provide both readily ascertainable values for the securities and the ability to liquidate the securities when liquidation is deemed necessary or advisable. However, an insufficient number of qualified institutional buyers interested in purchasing a Rule 144A security held by the Portfolio could affect adversely the marketability of the security. In such an instance, the Portfolio might be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any successor to such rule, and that such securities are not subject to the Portfolio's limitations on investing in securities that are not readily marketable. The Sub-advisor will consider the following factors, among others, in making this determination: (1) the unregistered nature of a Rule 144A security; (2) the frequency of trades and quotes for the security; (3) the number of dealers willing to purchase or sell the security and the number of additional potential purchasers; (4) dealer undertakings to make a market in the security; and (5) the nature of the security and the nature of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Portfolio may invest up to 5% of its total assets in fixed-income securities which are unrated or are rated below investment grade either at the time of purchase or as a result of reduction in rating after purchase. (This limitation does not apply to convertible securities and preferred stocks.) Investments in lower-rated or unrated securities are generally considered to be of high risk. These debt securities, commonly referred to as junk bonds, are generally subject to two kinds of risk, credit risk and market risk. Credit risk relates to the ability of the issuer to meet interest or principal payments, or both, as they come due. The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P") provide a generally useful guide as to such credit risk. For a description of securities ratings, see the Appendix to this Statement. The lower the rating given a security by a rating service, the greater the credit risk such rating service perceives to exist with respect to the security. Increasing the amount of the Portfolio's assets invested in unrated or lower grade securities, while intended to increase the yield produced by those assets, will also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt securities in which the Portfolio invests generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wider fluctuations in yields and market values than higher rated securities and may have speculative characteristics. In order to decrease the risk in investing in debt securities, in no event will the Portfolio ever invest in a debt security rated below B by Moody's or by S&P. Of course, relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that the securities in which they invest will decline in value, since credit ratings represent evaluations of the safety of principal, dividend, and interest payments on debt securities, and not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events.
Because investment in medium and lower-rated securities involves greater credit risk, achievement of the Portfolio's investment objective may be more dependent on the Sub-advisor's own credit analysis than is the case for funds that do not invest in such securities. In addition, the share price and yield of the Portfolio may fluctuate more than in the case of funds investing in higher quality, shorter term securities. Moreover, a significant economic downturn or major increase in interest rates may result in issuers of lower-rated securities experiencing increased financial stress, which would adversely affect their ability to service their principal, dividend, and interest obligations, meet projected business goals, and obtain additional financing. In this regard, it should be noted that while the market for high yield debt securities has been in existence for many years and from time to time has experienced economic downturns in recent years, this market has involved a significant increase in the use of high yield debt securities to fund highly leveraged corporate acquisitions and restructurings. Past experience may not, therefore, provide an accurate indication of future performance of the high yield debt securities market, particularly during periods of economic recession. Furthermore, expenses incurred in recovering an investment in a defaulted security may adversely affect the Portfolio's net asset value. Finally, while the Sub-advisor attempts to limit purchases of medium and lower-rated securities to securities having an established secondary market, the secondary market for such securities may be less liquid than the market for higher quality securities. The reduced liquidity of the secondary market for such securities may adversely affect the market price of, and ability of the Portfolio to value, particular securities at certain times, thereby making it difficult to make specific valuation determinations. The Portfolio does not invest in any medium and lower-rated securities which present special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an additional discussion of certain risks involved in lower-rated securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Sub-advisor seeks to reduce the overall risks associated with the Portfolio's investments through diversification and consideration of factors affecting the value of securities it considers relevant. No assurance can be given, however, regarding the degree of success that will be achieved in this regard or that the Portfolio will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements with respect to money market instruments eligible for investment by the Portfolio with member banks of the Federal Reserve system, registered broker-dealers, and registered government securities dealers. A repurchase agreement may be considered a loan collateralized by securities. Repurchase agreements maturing in more than seven days are considered illiquid and will be subject to the Portfolio's limitation with respect to illiquid securities.
The Portfolio has not adopted any limits on the amounts of its total assets that may be invested in repurchase agreements which mature in less than seven days. The Portfolio may invest up to 15% of the market value of its net assets, measured at the time of purchase, in securities which are not readily marketable, including repurchase agreements maturing in more than seven days. For an additional discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Convertible Securities. The Portfolio may buy securities convertible into common stock if, for example, the Sub-advisor believes that a company's convertible securities are undervalued in the market. Convertible securities eligible for purchase include convertible bonds, convertible preferred stocks, and warrants. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specific amount of the corporation's capital stock at a set price for a specified period of time. Warrants do not represent ownership of the securities, but only the right to buy the securities. The prices of warrants do not necessarily move parallel to the prices of underlying securities. Warrants may be considered speculative in that they have no voting rights, pay no dividends, and have no rights with respect to the assets of a corporation issuing them. Warrant positions will not be used to increase the leverage of the Portfolio; consequently, warrant positions are generally accompanied by cash positions equivalent to the required exercise amount.
Investment Policies Which May be Changed Without Shareholder Approval. The following limitations are applicable to the Founders Passport Portfolio. These limitations are not "fundamental" restrictions, and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the market value of its net assets in securities which are not readily marketable, including repurchase agreements maturing in over seven days;
2. Purchase securities of other investment companies except in compliance with the 1940 Act;
3. Invest in companies for the purpose of exercising control or management.
4. Purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions (and provided that margin payments and other deposits in connection with transactions in options, futures and forward contracts shall not be deemed to constitute purchasing securities on margin); or
5. Sell securities short.
In addition, in periods of uncertain market and economic conditions, as determined by the Sub-advisor, the Portfolio may depart from its basic investment objective and assume a defensive position with up to 100% of its assets temporarily invested in high quality corporate bonds or notes and government issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit that results from a change in values or net assets will not be considered a violation.
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high current income while following sound investment practices. This is a fundamental objective of the Portfolio. Capital growth potential is an additional, but secondary, consideration in the selection of portfolio securities.
Investment Policies:
The Portfolio will pursue its objective by investing its assets in securities which will provide a relatively high-yield and stable return and which, over a period of years, may also provide capital appreciation. Capital growth potential is an additional consideration in the selection of portfolio securities. The Portfolio invests in common stocks, as well as convertible bonds and preferred stocks.
In pursuing its investment objective, the Portfolio normally invests at least 65% of its total assets in dividend paying common stocks. Up to 10% of the Portfolio's assets may be invested in equity securities that do not pay regular dividends. The remaining assets are invested in other income-producing securities, such as corporate bonds. Sometimes warrants are acquired when offered with income-producing securities, but the warrants are disposed of at the first favorable opportunity. Acquiring warrants involves a risk that the Portfolio will lose the premium it pays to acquire warrants if the Portfolio does not exercise a warrant before it expires. The major portion of the investment portfolio normally consists of common stocks, convertible bonds and debentures, and preferred stocks; however, there may also be substantial holdings of debt securities, including non-investment grade and unrated debt securities.
Debt Securities. The debt securities in which the Portfolio invests are generally subject to two kinds of risk, credit risk and market risk. The ratings given a debt security by Moody's and Standard & Poor's ("S&P") provide a generally useful guide as to such credit risk. The lower the rating given a debt security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower grade (Ba or less by Moody's, BB or less by S&P) debt securities, while intended to increase the yield produced by the Portfolio's debt securities, will also increase the credit risk to which those debt securities are subject.
Lower-rated debt securities and non-rated securities of comparable quality tend to be subject to wider fluctuations in yields and market values than higher rated debt securities and may have speculative characteristics. Although the Portfolio may invest in debt securities assigned lower grade ratings by S&P or Moody's, the Portfolio's investments have generally been limited to debt securities rated B or higher by either S&P or Moody's. Debt securities rated lower than B by either S&P or Moody's may be highly speculative. The Sub-advisor intends to limit such portfolio investments to debt securities which are not believed by the Sub-advisor to be highly speculative and which are rated at least CCC or Caa, respectively, by S&P or Moody's. In addition, a significant economic downturn or major increase in interest rates may well result in issuers of lower-rated debt securities experiencing increased financial stress which would adversely affect their ability to service their principal and interest obligations, to meet projected business goals, and to obtain additional financing. While the Sub-advisor attempts to limit purchases of lower-rated debt securities to securities having an established retail secondary market, the market for such securities may not be as liquid as the market for higher rated debt securities. For an additional discussion of certain risks involved in lower-rated or unrated securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. As discussed in the Trust's Prospectus, the Portfolio may enter into repurchase agreements with respect to debt instruments eligible for investment by the Portfolio, with member banks of the Federal Reserve System, registered broker-dealers, and registered government securities dealers. A repurchase agreement may be considered a loan collateralized by securities. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by the Portfolio and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by the Portfolio (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement, and are held by the Portfolio's Custodian Bank until repurchased. For an additional discussion of repurchase agreements and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with respect to repurchase agreements.
Lending Portfolio Securities. The Portfolio may lend its securities to qualified brokers, dealers, banks, or other financial institutions. While voting rights may pass with the loaned securities, if a material event (e.g., proposed merger, sale of assets, or liquidation) is to occur affecting an investment on loan, the loan must be called and the securities voted. Loans of securities made by the Portfolio will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange and the requirements of the 1940 Act and the Rules of the Securities and Exchange Commission thereunder.
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek to maximize total return, consistent with preservation of capital. The Sub-advisor will seek to employ prudent investment management techniques, especially in light of the broad range of investment instruments in which the Portfolio may invest.
Investment Policies:
Borrowing. The Portfolio may borrow for temporary administrative purposes. This borrowing may be unsecured. The 1940 Act requires the Portfolio to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Portfolio may be required to sell some of its holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. The Portfolio also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
In addition to the above, the Portfolio may enter into reverse
repurchase agreements and "mortgage dollar rolls." A reverse repurchase
agreement involves the sale of a portfolio-eligible security by the Portfolio,
coupled with its agreement to repurchase the instrument at a specified time and
price. In a "dollar roll" transaction the Portfolio sells a mortgage-related
security (such as a GNMA security) to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the future at a
pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase
agreement, as a collateralized borrowing in which the Portfolio pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which the Portfolio enters into a
dollar roll transaction is not obligated to return the same securities as those
originally sold by the Portfolio, but only securities which are "substantially
identical." To be considered "substantially identical," the securities returned
to the Portfolio generally must: (1) be collateralized by the same types of
underlying mortgages; (2) be issued by the same agency and be part of the same
program; (3) have a similar original stated maturity; (4) have identical net
coupon rates; (5) have similar maturity: (4) have identical net coupon rates;
(5) have similar market yields (and therefore price); and (6) satisfy "good
delivery" requirements, meaning that the aggregate principal amounts of the
securities delivered and received back must be within 2.5% of the initial amount
delivered. The Portfolio's obligations under a dollar roll agreement must be
covered by cash or other liquid assets equal in value to the securities subject
to repurchase by the Portfolio, maintained in a segregated account.
Both dollar roll and reverse repurchase agreements will be subject to the 1940 Act's limitations on borrowing, as discussed above. Furthermore, because dollar roll transactions may be for terms ranging between one and six months, dollar roll transactions may be deemed "illiquid" and subject to the Portfolio's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar- or foreign currency-denominated corporate debt securities of domestic or foreign issuers are limited to corporate debt securities (corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities) which meet the minimum ratings criteria set forth for the Portfolio, or, if unrated, are in the Sub-advisor's opinion comparable in quality to corporate debt securities in which the Portfolio may invest. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
Among the corporate bonds in which the Portfolio may invest are convertible securities. A convertible security is a bond, debenture, note, or other security that entitles the holder to acquire common stock or other equity securities of the same or a different issuer. A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities. Convertible securities rank senior to common stock in a corporation's capital structure and, therefore, generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed-income security.
A convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by the Portfolio is called for redemption, the Portfolio will be required to permit the issuer to redeem the security and convert it to underlying common stock, or will sell the convertible security to a third party. The Portfolio generally would invest in convertible securities for their favorable price characteristics and total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or S&P) are described as "speculative" by both Moody's and S&P. Investment in lower-rated corporate debt securities ("high yield securities") generally provides greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk. These high yield securities are regarded as high risk and predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. The market for these securities is relatively new, and many of the outstanding high yield securities have not endured a major business recession. A long-term track record on default rates, such as that for investment grade corporate bonds, does not exist for this market. Analysis of the creditworthiness of issuers of debt securities that are high yield may be more complex than for issuers of higher quality debt securities.
High yield, high risk securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The price of high yield securities have been found to be less sensitive to interest-rate adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield security prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high yield securities defaults, in addition to risking payment of all or a portion of interest and principal, the Portfolio may incur additional expenses to seek recovery. In the case of high yield securities structured as zero-coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are traded may be less liquid than the market for higher grade securities. Less liquidity in the secondary trading market could adversely affect the price at which the Portfolio could sell a high yield security, and could adversely affect the daily net asset value of the shares. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities especially in a thinly-traded market. When secondary markets for high yield securities are less liquid than the market for higher grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. The Sub-advisor seeks to minimize the risks of investing in all securities through diversification, in-depth credit analysis and attention to current developments in interest rates and market conditions. For an additional discussion of certain risks involved in lower-rated debt securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Objectives."
Participation on Creditors Committees. The Portfolio may from time to time participate on committees formed by creditors to negotiate with the management of financially troubled issuers of securities held by the Portfolio. Such participation may subject the Portfolio to expenses such as legal fees and may make the Portfolio an "insider" of the issuer for purposes of the federal securities laws, and therefore may restrict the Portfolio's ability to trade in or acquire additional positions in a particular security when it might otherwise desire to do so. Participation by the Portfolio on such committees also may expose the Portfolio to potential liabilities under the federal bankruptcy laws or other laws governing the rights of creditors and debtors. The Portfolio will participate on such committees only when the Sub-advisor believes that such participation is necessary or desirable to enforce the Portfolio's rights as a creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related Securities. The Portfolio may invest in mortgage-backed securities. Mortgage-related securities are interests in pools of mortgage loans made to residential home buyers, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations (see "Mortgage Pass-Through Securities"). The Portfolio may also invest in debt securities which are secured with collateral consisting of mortgage-related securities (see "Collateralized Mortgage Obligations"), and in other types of mortgage-related securities.
Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the Government National Mortgage Association) are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owned on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and credit of the United States Government) include the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates ("PC's") which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-though pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such nongovernmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Trust's investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. The Portfolio may buy mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers, the Sub-advisor determines that the securities meet the Trust's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Portfolio will not purchase mortgage-related securities or any other assets which in the Sub-advisor's opinion are illiquid if, as a result, more than 15% of the value of the Portfolio's total assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Portfolio's industry concentration restrictions, set forth in this Statement under "Investment Restrictions," by virtue of the exclusion from that test available to all U.S. Government securities. In the case of privately issued mortgage-related securities, the Portfolio takes the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. The assets underlying such securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default that other comparable securities in the event of adverse economic, political or business developments that may affect such region and ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Similar to a bond, interest and prepaid principal is paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. An investor is partially guarded against a sooner than desired return or principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the Bond offering are used to purchase mortgages or mortgage pass-through certificates ("Collateral"). The Collateral is pledged to a third party trustee as security for the Bonds. Principal and interest payments from the Collateral are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest. Interest on the Series Z Bond is accrued and added to principal and a like amount is paid as principal on the Series A, B, or C Bond currently being paid off. When the Series A, B, and C Bonds are paid in full, interest and principal on the Series Z Bond begins to be paid currently. With some CMOs, the issuer serves as a conduit to allow loan originators (primarily builders or savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having different maturity dates which are secured by the pledge of a pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made semiannually, as opposed to monthly. The amount of principal payable on each semiannual payment date is determined in accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to approximately 100% of FHA prepayment experience applied to the mortgage collateral pool. All sinking fund payments in the CMOs are allocated to the retirement of the individual classes of bonds in the order of their stated maturities. Payment of principal on the mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum sinking fund obligation for any payment date are paid to the holders of the CMOs as additional sinking fund payments. Because of the "pass-through" nature of all principal payments received on the collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate at which principal of the CMOs is actually repaid is likely to be such that each class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans during any semiannual payment period is not sufficient to meet FHLMC's minimum sinking fund obligation on the next sinking fund payment date, FHLMC agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of delinquencies and/or defaults.
For an additional discussion of mortgage-backed securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, including CMO residuals or stripped mortgage-backed securities. Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only ("IO") class of stripped mortgage-backed securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances the Portfolio may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has only very recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may or, pursuant to an exemption therefrom, may not have been registered under the Securities Act of 1933, as amended. CMO residuals, whether or not registered under such Act, may be subject to certain restrictions on transferability, and may be deemed "illiquid" and subject to the Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, which the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the IO class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Portfolio's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may fail to fully recoup its initial investment in these securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed "illiquid" and subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that other asset-backed securities (unrelated to mortgage loans) will be offered to investors in the future. Several types of asset-backed securities may be offered to investors, including Certificates for Automobile Receivables. For a discussion of automobile receivables, see this Statement under "Certain Risk Factors and Investment Methods." Consistent with the Portfolio's investment objectives and policies, the Sub-advisor also may invest in other types of asset-backed securities.
Foreign Securities. The Portfolio may invest in corporate debt securities of foreign issuers (including preferred or preference stock), certain foreign bank obligations (see "Bank Obligations") and U.S. dollar- or foreign currency-denominated obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies and supranational entities. The Portfolio may invest up to 20% of its assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. The Portfolio may invest up to 10% of its assets in securities of issuers based in emerging market countries. Investing in the securities of foreign issuers involves special risks and considerations not typically associated with investing in U.S. companies. For a discussion of certain risks involved in foreign investments, in general, and the special risks of investing in developing countries, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase and sell foreign currency options and foreign currency futures contracts and related options (see ""Derivative Instruments"), and enter into forward foreign currency exchange contracts in order to protect against uncertainty in the level of future foreign exchange rates in the purchase and sale of securities.
A forward foreign currency contract involves 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 tine of the contract. These contracts may be bought or sold to protect the Portfolio against a possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar or to increase exposure to a particular foreign currency. Open positions in forward contracts are covered by the segregation with the Trust's custodian of cash or other liquid assets and are marked to market daily. Although such contracts are intended to minimize the risk of loss due to a decline on the value of the hedged currencies, at the same time, they tend to limit any potential gain which might result should the value of such currencies increase.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been implemented in a number of countries, including in Argentina, Bolivia, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil has concluded a Brady-like plan. It is expected that other countries will undertake a Brady Plan in the future.
Brady Bonds have been issued only recently, and accordingly do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year's interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have principal repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no assurance that Brady Bonds in which the Portfolio may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolio to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Portfolios invest
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank obligations to obligations of United States bank (including foreign branches) which have more than $1 billion in total assets at the time of investment and are member of the Federal Reserve System, are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation. The Portfolio also may invest in certificates of deposit of savings and loan associations (federally or state chartered and federally insured) having total assets in excess $1 billion.
The Portfolio will limit its investments in foreign bank obligations to United States dollar- or foreign currency-denominated obligations of foreign banks (including United States branches of foreign banks) which at the time of investment (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest foreign banks in the world; (iii) have branches or agencies (limited purpose offices which do not offer all banking services) in the United States; and (iv) in the opinion of the Sub-advisor, are of an investment quality comparable to obligations of United States banks in which the Portfolio may invest. Subject to the Portfolio's limitation on concentration of no more than 25% of its assets in the securities of issuers in particular industry, there is no limitation on the amount of the Portfolio's assets which may be invested in obligations of foreign banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks than those affecting obligations of United States banks, including the possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of United States banks, that a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to United States banks. Foreign banks are not generally subject to examination by any United States Government agency or instrumentality.
Short Sales. The Portfolio may make short sales of securities as part of their overall portfolio management strategies involving the use of derivative instruments and to offset potential declines in long positions in similar securities. A short sale is a transaction in which the Portfolio sells a security it does not own in anticipation that the market price of that security will decline.
When the Portfolio makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Portfolio may have to pay a fee to borrow particular securities and is often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of the short sale and the time and the Portfolio replaces the borrowed security, the Portfolio will incur a loss; conversely, if the price declines, the Portfolio will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
To the extent that the Portfolio engages in short sales, it will provide collateral to the broker-dealer and (except in the case of short sales "against the box") will maintain additional asset coverage in the form of cash or other liquid assets in a segregated account. The Portfolio does not intend to enter into short sales (other than those "against the box") if immediately after such sale the aggregate of the value of all collateral plus the amount in such segregated account exceeds one-third of the value of the Portfolio's net assets. This percentage may be varied by action of the Trust's Board of Trustees. A short sale is "against the box" to the extent that the Portfolio contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short.
Derivative Instruments. In pursuing its individual objective, the Portfolio may, as described in the Prospectus, purchase and sell (write) both put options and call options on securities, securities indexes, and foreign currencies, and enter into interest rate, foreign currency and index futures contracts and purchase and sell options on such futures contracts ("future options") for hedging purposes. The Portfolio also may enter into swap agreements with respect to foreign currencies, interest rates and indexes of securities. If other types of financial instruments, including other types of options, futures contracts, or futures options are traded in the future, the Portfolio may also use those instruments, provided that the Trust's Board of Trustees determines that their use is consistent with the Portfolio's investment objective, and provided that their use is consistent with restrictions applicable to options and futures contracts currently eligible for use by the Trust (i.e., that written call or put options will be "covered" or "secured" and that futures and futures options will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell both put and call options on debt or other securities or indexes in standardized contracts traded on foreign or national securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a regulated foreign over-the-counter market, and agreements sometimes called cash puts, which may accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by the Portfolio expires unexercised, the Portfolio realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or if it is more, the Portfolio will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Portfolio will realize a capital gain or, if it is less, the Portfolio will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is an asset of the Portfolio. The premium received for a option written by the Portfolio is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices. For a discussion of certain risks involved in options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Portfolio to reduce foreign currency risk using such options. Over-the-counter options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may use interest rate, foreign currency or index futures contracts, as specified in the Trust's Prospectus. An interest rate, foreign currency or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, foreign currency or the cash value of an index at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made.
The Portfolio may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission under which the Trust and the Portfolio avoid being deemed a "commodity pool" or a "commodity pool operator," the Portfolio intends generally to limit its use of futures contracts and futures options to "bona fide hedging" transactions, as such term is defined in applicable regulations, interpretations and practice. For example, the Portfolio might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Portfolio's securities or the price of the securities which the Portfolio intends to purchase. The Portfolio's hedging activities may include sales of futures contracts as an offset against the effect or expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce that Portfolio's exposure to interest rate fluctuations, the Portfolio may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio, the Portfolio is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. Government securities ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Portfolio upon termination of the contract, assuming all contractual obligations have been satisfied. The Portfolio expects to earn interest income on its initial margin deposits. A futures contract held by the Portfolio is valued daily at the official settlement price of the exchange on which it is traded. Each day the Portfolio pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Portfolio but is instead a settlement between the Portfolio and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, each Portfolio will mark to market its open futures positions.
The Portfolio is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Portfolio realizes a capital gain, or if it is more, the Portfolio realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Portfolio realizes a capital gain, or if it is less, the Portfolio realizes a capital loss. The transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options. In general, the Portfolio intends to enter into positions in futures contracts and related options only for "bona fide hedging" purposes. With respect to positions in futures and related options that do not constitute bona fide hedging positions, the Portfolio will not enter into a futures contract or futures option contract if, immediately thereafter, the aggregate initial margin deposits relating to such positions plus premiums paid by it for open futures option positions, less the amount by which any such options are "in-the-money," would exceed 5% of the Portfolio's total assets. A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the-money" if the exercise price exceeds the value of the futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) cash or other liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Portfolio may "cover" its position by purchasing a put option on the same futures contract with a strike price as high or higher than the price of the contract held by the Portfolio.
When selling a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) liquid assets that, when added to the amount deposited with a futures commission merchant as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Portfolio may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Portfolio to purchase the same futures contract at a price no higher than the price of the contract written by the Portfolio (or at a higher price if the difference is maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) cash or other liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Portfolio may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Portfolio to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will maintain with its custodian (and mark-to market on a daily basis) cash or other liquid assets that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Portfolio may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Portfolio.
Swap Agreements. The Portfolio may enter into interest rate, index and currency exchange rate swap agreements for purposes of attempting to obtain a particular desired return at a lower cost to the Portfolio than if the Portfolio had invested directly in an instrument that yielded that desired return. For a discussion of swap agreements, see the Trust's Prospectus under "Investment Objectives and Policies." The Portfolio's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash or other liquid assets to avoid any potential leveraging of the Portfolio's portfolio. The Portfolio will not enter into a swap agreement with any single party if the net amount owned or to be received under existing contracts with that party would exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in furthering its investment objective of total return will depend on the Sub-advisor's ability correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of longer than seven days, swap agreements may be considered to be illiquid. Moreover, the 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. The Sub-advisor will cause the Portfolio to 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 Portfolio by the Internal Revenue Code may limit the Portfolio's 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 the 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 ("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. To qualify for this exemption, a swap agreement must be entered into by "eligible participants." To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have assets 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 partnerships 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 (1) have individual tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the interest rate or principal of which is related to another economic indicator or financial market index. Indexed securities include structured notes as well as securities other than debt securities, the interest rate or principal of which is determined by such an unrelated indicator. Indexed securities may include a multiplier that multiplies the indexed element by a specified factor and, therefore, the value of such securities may be very volatile. To the extent the Portfolio invests in these securities, however, the Sub-advisor analyzes these securities in its overall assessment of the effective duration of the Portfolio's portfolio in an effort to monitor the Portfolio's interest rate risk.
Foreign Currency Exchange-Related Securities. The Portfolio may invest in foreign currency warrants, principal exchange rate linked securities and performance indexed paper. For a description of these instruments, see this Statement under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire warrants to purchase equity or fixed-income securities. Bonds with warrants attached to purchase equity securities have many characteristics of convertible bonds and their prices may, to some degree, reflect the performance of the underlying stock. Bonds also may be issued with warrants attached to purchase additional fixed-income securities at the same coupon rate. A decline in interest rates would permit the Portfolio to buy additional bonds at the favorable rate or to sell the warrants at a profit. If interest rates rise, the warrants would generally expire with no value.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the PIMCO Total Return Bond Portfolio. These limitations are not "fundamental" restrictions, and may be changed by the Trustees without shareholder approval.
1. The Portfolio will not invest more than 15% of the assets of the Portfolio (taken at market value at the time of the investment) in "illiquid securities," illiquid securities being defined to include securities subject to legal or contractual restrictions on resale (which may include private placements), repurchase agreements maturing in more than seven days, certain options traded over the counter that the Portfolio has purchased, securities being used to cover options a Portfolio has written, securities for which market quotations are not readily available, or other securities which legally or in the Sub-advisor's option may be deemed illiquid.
2. The Portfolio will not purchase securities for the Portfolio from, or sell portfolio securities to, any of the officers and directors or Trustees of the Trust or of the Investment Manager or of the Sub-advisor.
3. The Portfolio will not invest more than 5% of the assets of the Portfolio (taken at market value at the time of investment) in any combination of interest only, principal only, or inverse floating rate securities.
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek to maximize total return, consistent with preservation of capital and prudent investment management. This is a fundamental objective of the Portfolio.
Investment Policies:
Borrowing. The Portfolio may borrow for temporary administrative purposes. This borrowing may be unsecured. The 1940 Act requires the Portfolio to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Portfolio may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Portfolio's securities. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. The Portfolio also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
Among the forms of borrowing in which the Portfolio may engage is the entry into reverse repurchase agreements. A reverse repurchase agreement involves the sale of the Portfolio-eligible security by the Portfolio, coupled with its agreement to repurchase the instrument at a specified time and price. The Portfolio will maintain a segregated account with its Custodian consisting of cash or other liquid assets equal (on a daily mark-to-market basis) to its obligations under reverse repurchase agreements with broker-dealers (but not banks). However, reverse repurchase agreements involve the risk that the market value of securities retained by the Portfolio may decline below the repurchase price of the securities sold by the Portfolio which it is obligated to repurchase. To the extent that the Portfolio collateralizes its obligations under a reverse repurchase agreement, the asset coverage requirements of the 1940 Act will not apply.
In addition to the above, the Portfolio may enter into reverse repurchase agreements and "mortgage dollar rolls." A reverse repurchase agreement involves the sale of a portfolio-eligible security by the Portfolio, coupled with its agreement to repurchase the instrument at a specified time and price. In a "dollar roll" transaction the Portfolio sells a mortgage-related security (such as a GNMA security) to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase agreement, as a collateralized borrowing in which the Portfolio pledges a mortgage-related security to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements, the dealer with which the Portfolio enters into a dollar roll transaction is not obligated to return the same securities as those originally sold by the Portfolio, but only securities which are "substantially identical." To be considered "substantially identical," the securities returned to the Portfolio generally must: (1) be collateralized by the same types of underlying mortgages; (2) be issued by the same agency and be part of the same program; (3) have a similar original stated maturity; (4) have identical net coupon rates; (5) have similar market yields (and therefore price); and (6) satisfy "good delivery" requirements, meaning that the aggregate principal amounts of the securities delivered and received back must be within 2.5% of the initial amount delivered. The Portfolio's obligations under a dollar roll agreement must be covered by cash or other liquid assets equal in value to the securities subject to repurchase by the Portfolio, maintained in a segregated account.
Both dollar roll and reverse repurchase agreements will be subject to the 1940 Act's limitations on borrowing, as discussed above. Furthermore, because dollar roll transactions may be for terms ranging between one and six months, dollar roll transactions may be deemed "illiquid" and subject to the Portfolio's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar- or foreign currency-denominated corporate debt securities of domestic or foreign issuers are limited to corporate debt securities (corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities) which meet the minimum ratings criteria set forth for the Portfolio, or, if unrated, are in the Sub-advisor's opinion comparable in quality to corporate debt securities in which the Portfolio may invest. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
Among the corporate bonds in which the Portfolio may invest are convertible securities. A convertible security is a bond, debenture, note, or other security that entitles the holder to acquire common stock or other equity securities of the same or a different issuer. A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities. Convertible securities rank senior to common stock in a corporation's capital structure and, therefore, generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed-income security.
A convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by the Portfolio is called for redemption, the Portfolio would be required to permit the issuer to redeem the security and convert it to underlying common stock, or would sell the convertible security to a third party. The Portfolio generally would invest in convertible securities for their favorable price characteristics and total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or S&P), are described as "speculative" by both Moody's and S&P. Investment in lower-rated corporate debt securities ("high yield securities") generally provides greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk. These high yield securities are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. The market for these securities is relatively new, and many of the outstanding high yield securities have not endured a major business recession. A long-term track record on default rates, such as that for investment grade corporate bonds, does not exist for this market. Analysis of the creditworthiness of issuers of debt securities that are high yield may be more complex than for issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of high yield securities have been found to be less sensitive to interest-rate changes than higher-rated investments, but more sensitive to adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield security prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high yield securities defaults, in addition to risking payment of all or a portion of interest and principal, the Portfolio may incur additional expenses to seek recovery. In the case of high yield securities structured as zero-coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be less liquid than the market for higher grade securities. Less liquidity in the secondary trading market could adversely affect the price at which the Portfolio could sell a high yield security, and could adversely affect the daily net asset value of the shares. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities especially in a thinly-traded market. When secondary markets for high yield securities are less liquid than the market for higher grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. The Sub-advisor seeks to minimize the risks of investing in all securities through diversification, in-depth credit analysis and attention to current developments in interest rates and market conditions. For a discussion of the risks involved in lower-rated debt securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Participation on Creditors Committees. The Portfolio may from time to time participate on committees formed by creditors to negotiate with the management of financially troubled issuers of securities held by the Portfolio. Such participation may subject the Portfolio to expenses such as legal fees and may make the Portfolio an "insider" of the issuer for purposes of the federal securities laws, and therefore may restrict the Portfolio's ability to trade in or acquire additional positions in a particular security when it might otherwise desire to do so. Participation by the Portfolio on such committees also may expose the Portfolio to potential liabilities under the federal bankruptcy laws or other laws governing the rights of creditors and debtors. The Portfolio would participate on such committees only when the Adviser believed that such participation was necessary or desirable to enforce the Portfolio's rights as a creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related Securities. The Portfolio may invest in mortgage-backed securities. Mortgage-related securities are interests in pools of residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations (see "Mortgage Pass-Through Securities"). The Portfolio may also invest in debt securities which are secured with collateral consisting of mortgage-related securities (see "Collateralized Mortgage Obligations"), and in other types of mortgage-related securities.
Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the Government National Mortgage Association) are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and credit of the United States Government) include the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates ("PCs") which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Trust's investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. The Fixed-Income Portfolio may buy mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers, the Adviser determines that the securities meet the Trust's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. No Portfolio will purchase mortgage-related securities or any other assets which in the Adviser's opinion are illiquid if, as a result, more than 15% of the value of the Portfolio's total assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Portfolio' industry concentration restrictions, set forth in this Statement under "Investment Restrictions," by virtue of the exclusion from that test available to all U.S. Government securities. In the case of privately issued mortgage-related securities, the Portfolio takes the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. The assets underlying such securities may be represented by the Portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Similar to a bond, interest and prepaid principal is paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. An investor is partially guarded against a sooner than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to purchase mortgages or mortgage pass-through certificates ("Collateral"). The Collateral is pledged to a third party trustee as security for the Bonds. Principal and interest payments from the Collateral are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest. Interest on the Series Z Bond is accrued and added to principal and a like amount is paid as principal on the Series A, B, or C Bond currently being paid off. When the Series A, B, and C Bonds are paid in full, interest and principal on the Series Z Bond begins to be paid currently. With some CMOs, the issuer serves as a conduit to allow loan originators (primarily builders or savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having different maturity dates which are secured by the pledge of a pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made semiannually, as opposed to monthly. The amount of principal payable on each semiannual payment date is determined in accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to approximately 100% of FHA prepayment experience applied to the mortgage collateral pool. All sinking fund payments in the CMOs are allocated to the retirement of the individual classes of bonds in the order of their stated maturities. Payment of principal on the mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum sinking fund obligation for any payment date are paid to the holders of the CMOs as additional sinking fund payments. Because of the "pass-through" nature of all principal payments received on the collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate at which principal of the CMOs is actually repaid is likely to be such that each class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans during any semiannual payment period is not sufficient to meet FHLMC's minimum sinking fund obligation on the next sinking fund payment date, FHLMC agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of delinquencies and/or defaults. For an additional discussion of mortgage-backed securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, including CMO residuals or stripped mortgage-backed securities. Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only ("IO") class of stripped mortgage-backed securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances the Portfolio may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has only very recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may or, pursuant to an exemption therefrom, may not have been registered under the Securities Act of 1933, as amended. CMO residuals, whether or not registered under such Act, may be subject to certain restrictions on transferability, and may be deemed "illiquid" and subject to the Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the IO class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Portfolio's yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may fail to fully recoup its initial investment in these securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed "illiquid" and subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that other asset-backed securities (unrelated to mortgage loans) will be offered to investors in the future. Several types of asset-backed securities maybe offered to investors, including Certificates for Automobile Receivables. For a discussion of automobile receivables, see this Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in corporate debt securities of foreign issuers (including preferred or preference stock), certain foreign bank obligations (see "Bank Obligations") and U.S. dollar- or foreign currency-denominated obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies and supranational entities. The Portfolio may invest up to 20% of its assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. The Portfolio will concentrate its foreign investments in securities of issuers based in developed countries. The Portfolio may invest up to 5% of its assets in securities of issuers based in emerging market countries. Investing in the securities of foreign issuers involves special risks and considerations not typically associated with investing in U.S. companies. For a discussion of certain risks involved in foreign investments, in general, and the special risks of investing in developing countries, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase and sell foreign currency options and foreign currency futures contracts and related options (see "Derivative Instruments"), and enter into forward foreign currency exchange contracts in order to protect against uncertainty in the level of future foreign exchange rates in the purchase and sale of securities.
A forward foreign currency contract involves 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. These contracts may be bought or sold to protect the Portfolio against a possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar or to increase exposure to a particular foreign currency. Open positions in forward contracts are covered by the segregation with the Trust's custodian of cash or other liquid assets and are marked to market daily. Although such contracts are intended to minimize the risk of loss due to a decline in the value of the hedged currencies, at the same time, they tend to limit any potential gain which might result should the value of such currencies increase.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been implemented in a number of countries, including in Argentina, Bolivia, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil has concluded a Brady-like plan. It is expected that other countries will undertake a Brady Plan in the future.
Brady Bonds have been issued only recently, and accordingly do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year's interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have principal repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no assurance that Brady Bonds in which the Portfolio may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolio to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Portfolio invests
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank obligations to obligations of United States banks (including foreign branches) which have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System, are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation. The Portfolio also may invest in certificates of deposit of savings and loan associations (federally or state chartered and federally insured) having total assets in excess of $1 billion.
The Portfolio will limit its investments in foreign bank obligations to United States dollar- or foreign currency-denominated obligations of foreign banks (including United States branches of foreign banks) which at the time of investment (I) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest foreign banks in the world; (iii) have branches or agencies (limited purpose offices which do not offer all banking services) in the United States; and (iv) in the opinion of the Sub-advisor, are of an investment quality comparable to obligations of United States banks in which the Portfolio may invest. Subject to the Trust's limitation on concentration of no more than 25% of its assets in the securities of issuers in a particular industry, there is no limitation on the amount of the Portfolio's assets which may be invested in obligations of foreign banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks than those affecting obligations of United States banks, including the possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of United States banks, that a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or because the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to United States banks. Foreign banks are not generally subject to examination by any United States Government agency or instrumentality.
Short Sales. The Portfolio may make short sales of securities as part of their overall portfolio management strategies involving the use of derivative instruments and to offset potential declines in long positions in similar securities. A short sale is a transaction in which the Portfolio sells a security it does not own in anticipation that the market price of that security will decline.
When the Portfolio makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Portfolio may have to pay a fee to borrow particular securities and is often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of the short sale and the time and the Portfolio replaces the borrowed security, the Portfolio will incur a loss; conversely, if the price declines, the Portfolio will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
To the extent that the Portfolio engages in short sales, it will provide collateral to the broker-dealer and (except in the case of short sales "against the box") will maintain additional asset coverage in the form of cash or other liquid assets in a segregated account. The Portfolio does not intend to enter into short sales (other than those "against the box") if immediately after such sale the aggregate of the value of all collateral plus the amount in such segregated account exceeds one-third of the value of the Portfolio's net assets. This percentage may be varied by action of the Trust's Board of Trustees. A short sale is "against the box" to the extent that the Portfolio contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short.
Derivative Instruments. In pursuing its objective, the Portfolio may, as described in the Prospectus, purchase and sell (write) both put options and call options on securities, securities indexes, and foreign currencies, and enter into interest rate, foreign currency and index futures contracts and purchase and sell options on such futures contracts ("futures options") for hedging purposes. The Portfolio also may purchase and sell foreign currency options for purposes of increasing exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. The Portfolio also may enter into swap agreements with respect to foreign currencies, interest rates and indexes of securities. If other types of financial instruments, including other types of options, futures contracts, or futures options are traded in the future, the Portfolio may also use those instruments, provided that the Trust's Board of Trustees determines that their use is consistent with the Portfolio's investment objective, and provided that their use is consistent with restrictions applicable to options and futures contracts currently eligible for use by the Trust (i.e., that written call or put options will be "covered" or "secured" and that futures and futures options will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell both put and call options on debt or other securities or indexes in standardized contracts traded on foreign or national securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a regulated foreign over-the-counter market, and agreements, sometimes called cash puts, which may accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (I) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by the Portfolio expires unexercised, the Portfolio realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Portfolio will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Portfolio will realize a capital gain or, if it is less, the Portfolio will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is an asset of the Portfolio. The premium received for an option written by the Portfolio is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices. For a discussion of certain risks involved in options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Portfolio to reduce foreign currency risk using such options. Over-the-counter options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may use interest rate, foreign currency or index futures contracts, as specified in the Trust's Prospectus. An interest rate, foreign currency or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, foreign currency or the cash value of an index at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made.
The Portfolio may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission under which the Trust and the Portfolio avoid being deemed a "commodity pool" or a "commodity pool operator," the Portfolio intends generally to limit its use of futures contracts and futures options to "bona fide hedging" transactions, as such term is defined in applicable regulations, interpretations and practice. For example, the Portfolio might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Portfolio's securities or the price of the securities which the Portfolio intends to purchase. The Portfolio's hedging activities may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce that Portfolio's exposure to interest rate fluctuations, the Portfolio may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio, the Portfolio is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. Government securities ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Portfolio upon termination of the contract, assuming all contractual obligations have been satisfied. The Portfolio expects to earn interest income on its initial margin deposits. A futures contract held by the Portfolio is valued daily at the official settlement price of the exchange on which it is traded. Each day the Portfolio pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Portfolio but is instead a settlement between the Portfolio and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, the Portfolio will mark to market its open futures positions.
The Portfolio is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Portfolio realizes a capital gain, or if it is more, the Portfolio realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Portfolio realizes a capital gain, or if it is less, the Portfolio realizes a capital loss. The transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options. In general, the Portfolio intends to enter into positions in futures contracts and related options only for "bona fide hedging" purposes. With respect to positions in futures and related options that do not constitute bona fide hedging positions, the Portfolio will not enter into a futures contract or futures option contract if, immediately thereafter, the aggregate initial margin deposits relating to such positions plus premiums paid by it for open futures option positions, less the amount by which any such options are "in-the-money," would exceed 5% of the Portfolio's total net assets. A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the-money" if the exercise price exceeds the value of the futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) cash or other liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Portfolio may "cover" its position by purchasing a put option on the same futures contract with a strike price as high or higher than the price of the contract held by the Portfolio.
When selling a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) liquid assets that, when added to the amount deposited with a futures commission merchant as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Portfolio may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Portfolio to purchase the same futures contract at a price no higher than the price of the contract written by the Portfolio (or at a higher price if the difference is maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) cash or other liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Portfolio may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Portfolio to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will maintain with its custodian (and mark-to-market on a daily basis) cash or other liquid assets that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Portfolio may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Portfolio. For a discussion of the risks involved in futures contracts and related options, see the Trust's Prospectus and this Statement under "Certain Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and currency exchange rate swap agreements for purposes of attempting to obtain a particular desired return at a lower cost to the Portfolio than if the Portfolio had invested directly in an instrument that yielded that desired return. For a discussion of swap agreements, see the Trust's Prospectus under "Investment Objectives and Policies." The 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"). The Portfolio's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash or other liquid assets to avoid any potential leveraging of the Portfolio's portfolio. The Portfolio will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in furthering its investment objective of total return will depend on the Sub-advisor's ability correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of longer than seven days, swap agreements may be considered to be illiquid. Moreover, the 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. The Sub-advisor will cause the Portfolio to 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 Portfolio by the Internal Revenue Code may limit the Portfolio's 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 the 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 ("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. To qualify for this exemption, a swap agreement must be entered into by "eligible participants," which includes the following, provided the participants' total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under 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 assets 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 (1) have individually tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the interest rate or principal of which is related to another economic indicator or financial market index. Indexed securities include structured notes as well as securities other than debt securities, the interest rate or principal of which is determined by such an unrelated indicator. Indexed securities may include a multiplier that multiplies the indexed element by a specified factor and, therefore, the value of such securities may be very volatile. To the extent the Portfolio invests in these securities, however, the Sub-advisor analyzes these securities in its overall assessment of the effective duration of the Portfolio's portfolio in an effort to monitor the Portfolio's interest rate risk.
Foreign Currency Exchange Related Securities. The Portfolio may also invest in foreign currency warrants, principal exchange rate linked securities and performance indexed paper. For a discussion of these, see this Statement under "Certain Risk Factors and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire warrants to purchase equity or fixed-income securities. Bonds with warrants attached to purchase equity securities have many characteristics of convertible bonds and their prices may, to some degree, reflect the performance of the underlying stock. Bonds also may be issued with warrants attached to purchase additional fixed-income securities at the same coupon rate. A decline in interest rates would permit the Portfolio to buy additional bonds at the favorable rate or to sell the warrants at a profit. If interest rates rise, the warrants would generally expire with no value.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the PIMCO Limited Maturity Bond Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the assets of the Portfolio (taken at market value at the time of the investment) in "illiquid securities," illiquid securities being defined to include securities subject to legal or contractual restrictions on resale (which may include private placements), repurchase agreements maturing in more than seven days, certain options traded over the counter that a Portfolio has purchased, securities being used to cover such options a Portfolio has written, securities for which market quotations are not readily available, or other securities which legally or in the Sub-advisor's opinion may be deemed illiquid.
2. Invest more than 5% of the assets of the Portfolio (taken at market value at the time of investment) in any combination of interest only, principal only, or inverse floating rate securities.
The Staff of the Securities and Exchange Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Portfolio has adopted an investment policy pursuant to which the Portfolio will not purchase or sell OTC options if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Portfolio, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Portfolio and margin deposits on the Portfolio's existing OTC options on futures contracts exceeds 15% of the total assets of the Portfolio, taken at market value, together with all other assets of the Portfolio which are illiquid or are otherwise not readily marketable. However, if an OTC option is sold by the Portfolio to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Portfolio has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Portfolio will treat as illiquid such amount of the underlying securities equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying securities minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money."
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
Options. The Portfolio may purchase and sell put and call options on its securities to enhance performance and to protect against changes in market prices.
Covered Call Options. The Portfolio may write covered call options on its securities to realize a greater current return through the receipt of premiums than it would realize on its securities alone. Such option transactions may also be used as a limited form of hedging against a decline in the price of securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the writer to sell, a security at the exercise price at any time before the expiration date. A call option is "covered" if the writer, at all times while obligated as a writer, either owns the underlying securities (or comparable securities satisfying the cover requirements of the securities exchanges), or has the right to acquire such securities through immediate conversion of securities.
In return for the premium received when it writes a covered call option, the Portfolio gives up some or all of the opportunity to profit from an increase in the market price of the securities covering the call option during the life of the option. The Portfolio retains the risk of loss should the price of such securities decline. If the option expires unexercised, the Portfolio realizes a gain equal to the premium, which may be offset by a decline in price of the underlying security. If the option is exercised, the Portfolio realizes a gain or loss equal to the difference between the Portfolio's cost for the underlying security and the proceeds of sale (exercise price minus commissions) plus the amount of the premium.
The Portfolio may terminate a call option that it has written before it expires by entering into a closing purchase transaction. The Portfolio may enter into closing purchase transactions in order to free itself to sell the underlying security or to write another call on the security, realize a profit on a previously written call option, or protect a security from being called in an unexpected market rise. Any profits from a closing purchase transaction may be offset by a decline in the value of the underlying security. Conversely, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from a closing purchase transaction is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by the Portfolio.
Covered Put Options. The Portfolio may write covered put options in order to enhance its current return. Such options transactions may also be used as a limited form of hedging against an increase in the price of securities that the Portfolio plans to purchase. A put option gives the holder the right to sell, and obligates the writer to buy, a security at the exercise price at any time before the expiration date. A put option is "covered" if the writer segregates cash and high-grade short-term debt obligations or other permissible collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from terminating such options in closing purchase transactions, the Portfolio also receives interest on the cash and debt securities maintained to cover the exercise price of the option. By writing a put option, the Portfolio assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss unless the security later appreciates in value.
The Portfolio may terminate a put option that it has written before it expires by a closing purchase transaction. Any loss from this transaction may be partially or entirely offset by the premium received on the terminated option.
Purchasing Put and Call Options. The Portfolio may also purchase put options to protect portfolio holdings against a decline in market value. This protection lasts for the life of the put option because the Portfolio, as a holder of the option, may sell the underlying security at the exercise price regardless of any decline in its market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs that the Portfolio must pay. These costs will reduce any profit the Portfolio might have realized had it sold the underlying security instead of buying the put option.
The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit the Portfolio might have realized had it bought the underlying security at the time it purchased the call option.
The Portfolio may also purchase put and call options to attempt to enhance its current return.
Options on Foreign Securities. The Portfolio may purchase and sell options on foreign securities if the Sub-advisor believes that the investment characteristics of such options, including the risks of investing in such options, are consistent with the Portfolio's investment objectives. It is expected that risks related to such options will not differ materially from risks related to options on U.S. securities. However, position limits and other rules of foreign exchanges may differ from those in the U.S. In addition, options markets in some countries, many of which are relatively new, may be less liquid than comparable markets in the U.S.
Risks Associated with Options. See this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks involved in options transactions.
Special Expiration Price Options. The Portfolio may purchase over-the-counter ("OTC") puts and calls with respect to specified securities ("special expiration price options") pursuant to which the Portfolio in effect may create a custom index relating to a particular industry or sector that the Sub-advisor believes will increase or decrease in value generally as a group. In exchange for a premium, the counterparty, whose performance is guaranteed by a broker-dealer, agrees to purchase (or sell) a specified number of shares of a particular stock at a specified price and further agrees to cancel the option at a specified price that decreases straight line over the term of the option. Thus, the value of the special expiration price option is comprised of the market value of the applicable underlying security relative to the option exercise price and the value of the remaining premium. However, if the value of the underlying security increases (or decreases) by a prenegotiated amount, the special expiration price option is canceled and becomes worthless. A portion of the dividends during the term of the option are applied to reduce the exercise price if the options are exercised. Brokerage commissions and other transaction costs will reduce the Portfolio's profits if the special expiration price options are exercised. The Portfolio will not purchase special expiration price options with respect to more than 25% of the value of its net assets.
LEAPs and BOUNDs. The Portfolio may purchase certain long-term exchange-traded equity options called Long-Term Equity Anticipation Securities ("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the opportunity to participate in the underlying securities' appreciation in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to retain dividends on the underlying security while potentially participating in the underlying securities' capital appreciation up to a fixed dollar amount. The Portfolio will not purchase these options with respect to more than 25% of the value of its net assets.
LEAPs are long-term call options that allow holders the opportunity to participate in the underlying securities' appreciation in excess of a specified strike price, without receiving payments equivalent to any cash dividends declared on the underlying securities. A LEAP holder will be entitled to receive a specified number of shares of the underlying stock upon payment of the exercise price, and therefore the LEAP will be exercisable at any time the price of the underlying stock is above the strike price. However, if at expiration the price of the underlying stock is at or below the strike price, the LEAP will expire worthless.
BOUNDs are long-term options which are expected to have the same economic characteristics as covered call options, with the added benefits that BOUNDs can be traded in a single transaction and are not subject to early exercise. Covered call writing is a strategy by which an investor sells a call option while simultaneously owning the number of shares of the stock underlying the call. BOUND holders are able to participate in a stock's price appreciation up to but not exceeding a specified strike price while receiving payments equivalent to any cash dividends declared on the underlying stock. At expiration, a BOUND holder will receive a specified number of shares of the underlying stock for each BOUND held if, on the last day of trading, the underlying stock closes at or below the strike price. However, if at expiration the underlying stock closes above the strike price, the BOUND holder will receive a payment equal to a multiple of the BOUND's strike price for each BOUND held. The terms of a BOUND are not adjusted because of cash distributions to the shareholders of the underlying security. BOUNDs are subject to the position limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that of the corresponding LEAPs. For example, if at expiration the underlying stock closes at or below the strike price, the LEAP will expire worthless, and the holder of a corresponding BOUND will receive a specified number of shares of stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the money" at expiration, the holder of the LEAP is entitled to receive a specified number of shares of the underlying stock from the LEAP writer upon payment of the strike price, and the holder of a BOUND on such stock is entitled to the cash equivalent of a multiple of the strike price from the writer of the BOUND. An investor holding both a LEAP and a corresponding BOUND, where the underlying stock closes above the strike price at expiration, would be entitled to receive a multiple of the strike price from the writer of the BOUND and, upon exercise of the LEAP, would be obligated to pay the same amount to receive shares of the underlying stock. LEAPs are American-style options (exercisable at any time prior to expiration), whereas BOUNDs are European-style options (exercisable only on the expiration date).
Futures Contracts.
Index Futures Contracts and Options. The Portfolio may buy and sell futures contracts and related options for hedging purposes or to attempt to increase investment return. The Portfolio currently expects that it will only purchase and sell stock index futures contracts and related options. A stock index futures contract is a contract to buy or sell units of a stock index at a specified future date at a price agreed upon when the contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100 Index") is composed of 100 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 100 Index assigns relative weightings to the common stocks included in the Index, and the Index fluctuates with changes in the market values of those common stocks. In the case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one contract would be worth $18,000 (100 units x $180). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if the Portfolio enters into a futures contract to buy 100 units of the S&P 100 Index at a specified future date at a contract price of $180 and the S&P 100 Index is at $184 on that future date, the Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters into a futures contract to sell 100 units of the stock index at a specified future date at a contract price of $180 and the S&P 100 Index is at $182 on that future date, the Portfolio will lose $200 (100 units x loss of $2).
The Portfolio may purchase or sell futures contracts with respect to any securities indexes. Positions in index futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures.
In order to hedge its investments successfully using futures contracts and related options, the Portfolio must invest in futures contracts with respect to indexes or sub-indexes the movements of which will, in its judgment, have a significant correlation with movements in the prices of the Portfolio's securities.
Options on index futures contracts give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the holder would assume the underlying futures position and would receive a variation margin payment of cash or securities approximating the increase in the value of the holder's option position. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash based on the difference between the exercise price of the option and the closing level of the index on which the futures contract is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing and selling call and put options on index futures contracts, the Portfolio may purchase and sell call and put options on the underlying indexes themselves to the extent that such options are traded on national securities exchanges. Index options are similar to options on individual securities in that the purchaser of an index option acquires the right to buy (in the case of a call) or sell (in the case of a put), and the writer undertakes the obligation to sell or buy (as the case may be), units of an index at a stated exercise price during the term of the option. Instead of giving the right to take or make actual delivery of securities, the holder of an index option has the right to receive a cash "exercise settlement amount." This amount is equal to the amount by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of the exercise, multiplied by a fixed "index multiplier."
The Portfolio may purchase or sell options on stock indices in order to close out its outstanding positions in options on stock indices which it has purchased. The Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or put options on an index involves less potential risk to the Portfolio because the maximum amount at risk is the premium paid for the options plus transactions costs. The writing of a put or call option on an index involves risks similar to those risks relating to the purchase or sale of index futures contracts.
Margin Payments. When the Portfolio purchases or sells a futures contract, it is required to deposit with its custodian an amount of cash, U.S. Treasury bills, or other permissible collateral equal to a small percentage of the amount of the futures contract. This amount is known as "initial margin." The nature of initial margin is different from that of margin in security transactions in that it does not involve borrowing money to finance transactions. Rather, initial margin is similar to a performance bond or good faith deposit that is returned to the Portfolio upon termination of the contract, assuming the Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process known as "marking to market." These payments are called "variation margin" and are made as the value of the underlying futures contract fluctuates. For example, when the Portfolio sells a futures contract and the price of the underlying index rises above the delivery price, the Portfolio's position declines in value. The Portfolio then pays the broker a variation margin payment equal to the difference between the delivery price of the futures contract and the value of the index underlying the futures contract. Conversely, if the price of the underlying index falls below the delivery price of the contract, the Portfolio's futures position increases in value. The broker then must make a variation margin payment equal to the difference between the delivery price of the futures contract and the value of the index underlying the futures contract.
When the Portfolio terminates a position in a futures contract, a final determination of variation margin is made, additional cash is paid by or to the Portfolio, and the Portfolio realizes a loss or a gain. Such closing transactions involve additional commission costs.
See this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a description of certain risks involved in transactions in futures contracts and related options.
Indexed Securities. The Portfolio may purchase securities whose prices are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. Indexed securities typically, but not always, are debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Gold-indexed securities, for example, typically provide for a maturity value that depends on the price of gold, resulting in a security whose price tends to rise and fall together with gold prices. Currency-indexed securities typically are short-term to intermediate-term debt securities whose maturity values or interest rates are determined by reference to the values of one or more specified foreign currencies, and may offer higher yields than U.S. dollar-denominated securities of equivalent issuers. Currency-indexed securities may be positively or negatively indexed; that is, their maturity value may increase when the specified currency value increases, resulting in a security whose price characteristics are similar to a put option on the underlying currency. Currency-indexed securities also may have prices that depend on the values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the performance of the security, currency, commodity or other instrument to which they are indexed, and also may be influenced by interest rate changes in the U.S. and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Recent issuers of indexed securities have included banks, corporations, and certain U.S. Government agencies.
Repurchase Agreements. Subject to guidelines adopted by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. A repurchase agreement is a contract under which the Portfolio acquires a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Portfolio to resell such security at a fixed time and price (representing the Portfolio's cost plus interest). It is the Portfolio's present intention to enter into repurchase agreements only with member banks of the Federal Reserve System and securities dealers which the Sub-advisor deems to be creditworthy, pursuant to guidelines established by the Trust's Board of Trustees, and only with respect to obligations of the U.S. government or its agencies or instrumentalities or other high-quality, short-term debt obligations. Repurchase agreements may also be viewed as loans made by the Portfolio which are collateralized by the securities subject to repurchase. The Sub-advisor will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. For a discussion of repurchase agreements and the risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Securities Lending. The Portfolio may lend its securities,
provided: (1) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash, or cash equivalents adjusted daily to have market
value at least equal to the current market value of the securities loaned; (2)
the Portfolio may at any time call the loan and regain the securities loaned;
(3) the Portfolio will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third (or such other limit as the Trust's Board of Trustees
may establish) of the total assets of the Portfolio. In addition, it is
anticipated that the Portfolio may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan.
Before the Portfolio enters into a loan, the Sub-advisor considers all relevant facts and circumstances, including the creditworthiness of the borrower. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, the Portfolio retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities may be voted by the Portfolio if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. The Portfolio will not lend portfolio securities to borrowers affiliated with the Portfolio.
Short Sales. The Portfolio may seek to hedge investments or realize additional gains through short sales. Short sales are transactions in which the Portfolio sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at or prior to the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to repay the lender any dividends or interest that accrue during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker (or by the Portfolio's custodian in a special custody account), to the extent necessary to meet margin requirements, until the short position is closed out. The Portfolio also will incur transaction costs in effecting short sales.
The Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. The Portfolio will realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest or expenses the Portfolio may be required to pay in connection with a short sale.
Foreign Investments. The Portfolio may invest in foreign securities, securities denominated in or indexed to foreign currencies, and certificates of deposit issued by United States branches of foreign banks and foreign branches of United States banks. For a discussion of the risks involved in foreign currency fluctuations and investing in foreign securities, in general, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The considerations associated with foreign investments generally are intensified for investments in developing countries. For a discussion of the risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in currency exchange transactions to protect against uncertainty in the level of future foreign currency exchange rates and to increase current return. The Portfolio may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Portfolio enters into foreign currency transactions with respect to specific receivables or payables of the Portfolio generally arising in connection with the purchase or sale of its portfolio securities. The Portfolio will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging, the Portfolio will attempt to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (i.e., cash) basis at the prevailing spot rate in connection with transaction hedging. The Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes, the Portfolio may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Portfolio the right to assume a short position in the futures contract until expiration of the option. A put option on currency gives the Portfolio the right to sell a currency at a specified exercise price until the expiration of the option. A call option on a futures contract gives the Portfolio the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives the Portfolio the right to purchase a currency at the exercise price until the expiration of the option. The Portfolio will engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of the Sub-advisor, the pricing mechanism and liquidity are satisfactory and the participants are responsible parties likely to meet their contractual obligations.
When it engages in position hedging, the Portfolio enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which securities held by the Portfolio are denominated or are quoted in their principle trading markets or an increase in the value of currency for securities which the Portfolio expects to purchase. In connection with position hedging, the Portfolio may purchase put or call options on foreign currency and foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. The Portfolio may also purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the values of those securities between the dates the currency exchange transactions are entered into and the dates they mature.
It is impossible to forecast with precision the market value of the Portfolio's securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities of the Portfolio if the market value of such security or securities exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against fluctuations in currency exchange rates, the Portfolio may write covered call options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Portfolio owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in the value of such currency.
The Portfolio may also seek to increase its current return by purchasing and selling foreign currency on a spot basis, by purchasing and selling options on foreign currencies and on foreign currency futures contracts, and by purchasing and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. A forward foreign currency exchange contract involves 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 as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a future date at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts and related options may be closed out only on an exchange or board of trade which provides a secondary market in such contracts or options. Although the Portfolio will normally purchase or sell foreign currency futures contracts and related options only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or option or at any particular time. In such event, it may not be possible to close a futures or related option position and, in the event of adverse price movements, the Portfolio would continue to be required to make daily cash payments of variation margin on its futures positions.
Foreign Currency Options. Options on foreign currencies operate similarly to options on securities, and are traded primarily in the over-the-counter market, although options on foreign currencies have recently been listed on several exchanges. Such options will be purchased or written only when the Sub-advisor believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of the foreign currency and the U.S. dollar, and may have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the U.S. options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer.
Zero-Coupon Debt Securities and Pay-in-Kind Securities. The Portfolio may invest in zero-coupon securities. Zero-coupon securities allow an issuer to avoid the need to generate cash to meet current interest payments. For a discussion of zero-coupon debt securities and the risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase pay-in-kind securities. Pay-in-kind securities pay all or a portion of their interest or dividends in the form of additional securities.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Robertson Stephens Value + Growth Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale, and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would then be invested in the aggregate in securities described in (a), (b), and (c) above;
2. Purchase or sell commodities or commodity contracts, except that the Portfolio may purchase or sell financial futures contracts, options on financial futures contracts, and futures contracts, forward contracts, and options with respect to foreign currencies, and may enter into swap transactions;
3. Invest in securities of other registered investment companies, except in compliance with the 1940 Act;
4. Invest in real estate limited partnerships;
5. Acquire more than 10% of the voting securities of any issuer;
6. Purchase or sell real estate or interests in real estate, including real estate mortgage loans, although it may purchase and sell securities which are secured by real estate and securities of companies, including limited partnership interests, that invest or deal in real estate and it may purchase interests in real estate investment trusts. (For purposes of this restriction, investments by the Portfolio in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans.);
7. Make investments for the purpose of exercising control or management;
8. Invest in interests in oil, gas or other mineral exploration or development programs or leases, although it may invest in the common stocks of companies that invest in or sponsor such programs.
In addition, the Portfolio will only sell short securities that are traded on a national securities exchange in the U.S. (including the National Association of Securities Dealers' Automated Quotation National Market System) or in the country where the principal trading market in the securities is located. (This limitation does not apply to short sales against the box).
All percentage limitations on investments will apply at the time of investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
Twentieth Century International Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth. This is a fundamental objective of the Portfolio.
Investment Policies:
In general, within the restrictions outlined herein, the Portfolio has broad powers with respect to investing funds or holding them uninvested. Investments are varied according to what is judged advantageous under changing economic conditions. It will be the Sub-advisor's policy to retain maximum flexibility in management without restrictive provisions as to the proportion of one or another class of securities that may be held, subject to the investment restrictions described below. It is the Sub-advisor's intention that the Portfolio will generally consist of common stocks. However, the Sub-advisor may invest the assets of the Portfolio in varying amounts in other instruments and in senior securities, such as bonds, debentures, preferred stocks and convertible issues, when such a course is deemed appropriate in order to attempt to attain its financial objective.
Forward Currency Exchange Contracts. The Portfolio conducts its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward currency exchange contracts to purchase or sell foreign currencies.
The Portfolio expects to use forward contracts under two circumstances:
(1) when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Portfolio is purchasing or selling a security denominated in a foreign
currency, the Portfolio would be able to enter into a forward contract to do so;
(2) when the Sub-advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Portfolio
would be able to enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of the
Portfolio's securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when the Portfolio enters into a trade for the purchase or sale of a security denominated in a foreign currency, it may be desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering into forward contracts in U.S. dollars for the purchase or sale of a foreign currency involved in an underlying security transaction, the Portfolio will be able to protect itself against a possible loss between trade and settlement dates resulting from the adverse change in the relationship between the U.S. dollar and the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the currency of a particular country may suffer a substantial decline relative to the U.S. dollar, the Portfolio could enter into a forward contract to sell for a fixed dollar amount the amount in foreign currencies approximating the value of some or all of its portfolio securities either denominated in, or whose value is tied to, such foreign currency. The Portfolio will place cash or high-grade liquid securities in a separate account with its custodian in an amount sufficient to cover its obligation under the contract entered into under the second circumstance. If the value of the securities placed in the separate account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account equals the amount of the Portfolio's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of securities involved would not generally be possible since the future values of such foreign currencies will change as a consequence of market movements in the values of those securities between the date the forward contract is entered into and the date it matures. Predicting short-term currency market movements is extremely difficult, and the successful execution of short-term hedging strategy is highly uncertain. Normally, consideration of the prospect for currency parities will be incorporated into the long-term investment decisions made with respect to overall diversification strategies. However, the Sub-advisor believes that it is important to have flexibility to enter into such forward contracts when it determines that the Portfolio's best interests may be served.
Generally, the Portfolio will not enter into a forward contract with a term of greater than one year. At the maturity of the forward contract, the Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate the obligation to deliver the foreign currency by purchasing an "offsetting" forward contract with the same currency trader obligating the Portfolio to purchase, on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the forward contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency the Portfolio is obligated to deliver. For an additional discussion of forward currency exchange contracts and the risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of the short sale, the Portfolio owns or has the right to acquire an equal amount of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. To make delivery to the purchaser, the executing broker borrows the securities being sold short on behalf of the seller. While the short position is maintained, the seller collateralizes its obligation to deliver the securities sold short in an amount equal to the proceeds of the short sale plus an additional margin amount established by the Board of Governors of the Federal Reserve. If the Portfolio engages in a short sale the collateral account will be maintained by the Portfolio's custodian. While the short sale is open the Portfolio will maintain in a segregated custodial account an amount of securities convertible into or exchangeable for such equivalent securities at no additional cost. These securities would constitute the Portfolio's long position.
If the Portfolio sells short securities that it owns, any future gains or losses in the Portfolio's long position should be reduced by a gain or loss in the short position. The extent to which such gains or losses are reduced would depend upon the amount of the security sold short relative to the amount the Portfolio owns. There will be certain additional transaction costs associated with short sales, but the Portfolio will endeavor to offset these costs with income from the investment of the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities without regard to the length of time the security has been held and, accordingly, it can be expected that the rate of portfolio turnover may be substantial.
The Sub-advisor intends to purchase a given security whenever the Sub-advisor believes it will contribute to the stated objective of the Portfolio, even if the same security has only recently been sold. The Portfolio will sell a given security, no matter for how long or for how short a period it has been held, and no matter whether the sale is at a gain or at a loss, if the Sub-advisor believes that such security is not fulfilling its purpose, either because, among other things, it did not live up to the Sub-advisor's expectations, or because it may be replaced with another security holding greater promise, or because it has reached its optimum potential, or because of a change in the circumstances of a particular company or industry or in general economic conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the Portfolio may decrease or eliminate entirely its equity position and increase its cash position, and when a rise in price levels is anticipated, the Portfolio may increase its equity position and decrease its cash position. However, it should be expected that the Portfolio will, under most circumstances, be essentially fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Portfolio's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Portfolio's annual portfolio turnover rate
cannot be anticipated and may be comparatively high. Since the Sub-advisor does
not take portfolio turnover rate into account in making investment decisions,
(1) the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates
should not be considered as a representation of the rates that will be attained
in the future.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Twentieth Century International Growth Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of its assets in illiquid investments;
2. Invest in the securities of other investment companies except in compliance with the 1940 Act;
3. Buy securities on margin or sell short (unless it owns or by virtue of its ownership of other securities has the right to obtain securities equivalent in kind and amount to the securities sold); however, the Portfolio may make margin deposits in connection with the use of any financial instrument or any transaction in securities permitted under its investment policies;
4. Invest in oil, gas or other mineral leases;
5. Invest for control or for management.
Twentieth Century Strategic Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth and current income. This is a fundamental objective of the Portfolio.
Investment Policies:
In general, within the restrictions outlined herein, the Sub-advisor has broad powers with respect to investing funds or holding them uninvested. Investments are varied according to what is judged advantageous under changing economic conditions. It will be the policy of the Sub-advisor to retain maximum flexibility in management without restrictive provisions as to the proportion of one or another class of securities that may be held subject to the investment restrictions described below. However, the Sub-advisor may invest the assets of the Portfolio in varying amounts in other instruments and in senior securities, such as bonds, debentures, preferred stocks and convertible issues, when such a course is deemed appropriate in order to attempt to attain its financial objectives. Senior securities that, in the opinion of the Sub-advisor, are high-grade issues may also be purchased for defensive purposes.
The above statement of investment policy gives the Sub-advisor authority to invest in securities other than common stocks and traditional debt and convertible issues. The Sub-advisor may invest in master limited partnerships (other than real estate partnerships) and royalty trusts which are traded on domestic stock exchanges when such investments are deemed appropriate for the attainment of the Portfolio's investment objectives.
The Sub-advisor will invest approximately 60% of the Portfolio in common stocks and the balance in fixed income securities. Common stock investments are described above. The fixed income assets will be invested primarily in investment grade securities. The Portfolio may invest in securities of the United States government and its agencies and instrumentalities, corporate, sovereign government, municipal, mortgage-backed, and other asset-backed securities. It can be expected that the Sub-advisor will invest from time to time in bonds and preferred stock convertible into common stock.
Forward Currency Exchange Contracts. The Portfolio conducts its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward foreign currency exchange contracts to purchase or sell foreign currencies.
The Portfolio expects to use forward contracts under two circumstances:
(1) when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Portfolio is purchasing or selling a security denominated in a foreign
currency, the Portfolio would be able to enter into a forward contract to do so;
(2) when the Sub-advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Portfolio
would be able to enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of the
Portfolio's securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when the Portfolio enters into a trade for the purchase or sale of a security denominated in a foreign currency, it may be desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering into forward contracts in U.S. dollars for the purchase or sale of a foreign currency involved in an underlying security transaction, the Portfolio will be able to protect itself against a possible loss between trade and settlement dates resulting from the adverse change in the relationship between the U.S. dollar at the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the currency of a particular country may suffer a substantial decline relative to the U.S. dollar, the Portfolio could enter into a foreign contract to sell for a fixed dollar amount the amount in foreign currencies approximating the value of some or all of its portfolio securities either denominated in, or whose value is tied to, such foreign currency. The Portfolio will place cash or high-grade liquid securities in a separate account with its custodian in an amount sufficient to cover its obligation under the contract. If the value of the securities placed in the separate account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account equals the amount of the Portfolio's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of securities involved would not generally be possible since the future values of such foreign currencies will change as a consequence of market movements in the values of those securities between the date the forward contract is entered into and the date it matures. Predicting short-term currency market movements is extremely difficult, and the successful execution of short-term hedging strategy is highly uncertain. The Sub-advisor does not intend to enter into such contracts on a regular basis. Normally, consideration of the prospect for currency parities will be incorporated into the long-term investment decisions made with respect to overall diversification strategies. However, the Sub-advisor believes that it is important to have flexibility to enter into such forward contracts when it determines that the Portfolio 's best interests may be served.
Generally, the Portfolio will not enter into a forward contract with a term of greater than one year. At the maturity of the forward contract, the Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate the obligation to deliver the foreign currency by purchasing an "offsetting" forward contract with the same currency trader obligating the Portfolio to purchase, on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of the Portfolio's securities at the expiration of the forward contract. Accordingly, it may be necessary for the Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency the Portfolio is obligated to deliver. For an additional discussion of forward currency exchange contracts and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. As described in the Prospectus, the Portfolio may enter into futures contracts. Unlike when the Portfolio purchases securities, no purchase price for the underlying securities is paid by the Portfolio at the time it purchases a futures contract. When a futures contract is entered into, both the buyer and seller of the contract are required to deposit with a futures commission merchant ("FCM") cash or high-grade debt securities in an amount equal to a percentage of the contract's value, as set by the exchange on which the contract is traded. This amount is known as "initial margin" and is held by the Portfolio's custodian for the benefit of the FCM in the event of any default by the Portfolio in the payment of any future obligations.
The value of a futures contract is adjusted daily to reflect the fluctuation of the value of the underlying securities. This is a process known as marking the contract to market. If the value of a party's position declines, that party is required to make additional "variation margin" payments to the FCM to settle the change in value. The party that has a gain is generally entitled to receive all or a portion of this amount.
The Portfolio maintains from time to time a percentage of its assets in cash or high-grade liquid securities to provide for redemptions or to hold for future investment in securities consistent with the Portfolio's investment objectives. The Portfolio may enter into index futures contracts as an efficient means to expose the Portfolio's cash position to the domestic equity market. The Sub-advisor believes that the purchase of futures contracts is an efficient means to effectively be fully invested in equity securities.
The principal risks generally associated with the use of futures include: (i) the possible absence of a liquid secondary market for any particular instrument may make it difficult or impossible to close out a position when desired (liquidity risk); (ii) the risk that the counter party to the contract may fail to perform its obligations or the risk of bankruptcy of the FCM holding margin deposits (counter-party risk); (iii) the risk that the securities to which the futures contract relates may go down in value (market risk); and (iv) adverse price movements in the underlying securities can result in losses substantially greater than the value of the Portfolio's investment in that instrument because only a fraction of a contract's value is required to be deposited as initial margin (leverage risk); provided, however, that the Portfolio may not purchase leveraged futures, so there is no leverage risk involved in the Portfolio's use of futures.
A liquid secondary market is necessary to close out a contract. The Portfolio may seek to manage liquidity risk by investing in exchange-traded futures. Exchange-traded futures pose less risk that there will not be a liquid secondary market than privately negotiated instruments. Through their clearing corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they are closed out, as compared to three days for most types of equity securities. As a result, futures contracts can provide more liquidity than an investment in the actual underlying securities. Nevertheless, there is no assurance that a liquid secondary market will exist for any particular futures contract at any particular time. Liquidity may also be influenced by an exchange-imposed daily price fluctuation limit, which halts trading if a contract's price moves up or down more than the established limit on any given day. On volatile trading days when the price fluctuation limit is reached, it may be impossible for the Portfolio to enter into new positions or close out existing positions. If the secondary market for a futures contract is not liquid because of price fluctuation limits or otherwise, the Portfolio may not be able to promptly liquidate unfavorable futures positions and potentially could be required to continue to hold a futures position until liquidity in the market is re-established. As a result, the Portfolio's access to other assets held to cover its futures positions also could be impaired until liquidity in the market is re-established.
The Portfolio manages counter-party risk by investing in exchange-traded index futures. In the event of the bankruptcy of the FCM that holds margin on behalf of the Portfolio, the Portfolio may be entitled to the return of margin owed to the Portfolio only in proportion to the amount received by the FCM's other customers. The Sub-advisor will attempt to minimize the risk by monitoring the creditworthiness of the FCMs with which the Portfolio does business.
Short Sales. The Portfolio may engage in short sales if, at the time of the short sale, the Portfolio owns or has the right to acquire an equal amount of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. To make delivery to the purchaser, the executing broker borrows the securities being sold short on behalf of the seller. While the short position is maintained, the seller collateralizes its obligation to deliver the securities sold short in an amount equal to the proceeds of the short sale plus an additional margin amount established by the Board of Governors of the Federal Reserve. If the Portfolio engages in a short sale, the collateral account will be maintained by the Portfolio's custodian. While the short sale is open, the Portfolio will maintain in a segregated custodial account an amount of securities convertible into, or exchangeable for, such equivalent securities at no additional cost. These securities would constitute the Portfolio's long position.
If the Portfolio sells short securities that it owns, any future gains or losses in the Portfolio's long position should be reduced by a gain or loss in the short position. The extent to which such gains or losses are reduced would depend upon the amount of the security sold short relative to the amount the Portfolio owns. There will be certain additional transaction costs associated with short sales, but the Portfolio will endeavor to offset these costs with income from the investment of the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities without regard to the length of time the security has been held and, accordingly, it can be expected that the rate of portfolio turnover may be substantial.
The Sub-advisor intends to purchase a given security whenever the Sub-advisor believes it will contribute to the stated objective of the Portfolio, even if the same security has only recently been sold. The Portfolio will sell a given security, no matter for how long or for how short a period it has been held, and no matter whether the sale is at a gain or at a loss, if the Sub-advisor believes that it is not fulfilling its purpose, either because, among other things, it did not live up to the Sub-advisor's expectations, or because it may be replaced with another security holding greater promise, or because it has reached its optimum potential, or because of a change in the circumstances of a particular company or industry or in general economic conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the equity portion of the Portfolio may decrease or eliminate entirely its equity position and increase its cash position, and when a rise in price levels is anticipated, it may increase its equity position and decrease its cash position. However, it should be expected that the Portfolio will, under most circumstances, be essentially fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Portfolio's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Portfolio's annual portfolio turnover rate
cannot be anticipated and may be comparatively high. Since the Sub-advisor does
not take portfolio turnover rate into account in making investment decisions,
(1) the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates in
the past should not be considered as a representation of the rates which will be
attained in the future.
Interest Rate Futures Contracts and Related Options. The Portfolio may
buy and sell interest rate futures contracts relating to debt securities ("debt
futures," i.e., futures relating to debt securities, and "bond index futures,"
i.e., futures relating to indexes on types or groups of bonds) and write and buy
put and call options relating to interest rate futures contracts.
The Portfolio will not purchase or sell futures contracts and options thereon for speculative purposes but rather only for the purpose of hedging against changes in the market value of its portfolio securities or changes in the market value of securities that the Sub-advisor anticipates it may wish to include in the Portfolio. The Portfolio may sell a future or write a call or purchase a put on a future if the Sub-advisor anticipates that a general market or market sector decline may adversely affect the market value of any or all of the Portfolio's holdings. The Portfolio may buy a future or purchase a call or sell a put on a future if the Sub-advisor anticipates a significant market advance in the type of securities it intends to purchase for the Portfolio at a time when the Portfolio is not invested in debt securities to the extent permitted by its investment policies. The Portfolio may purchase a future or a call option thereon as a temporary substitute for the purchase of individual securities which may then be purchased in an orderly fashion. As securities are purchased, corresponding futures positions would be terminated by offsetting sales.
The "sale" of a debt future means the acquisition by the Portfolio of an obligation to deliver the related debt securities (i.e., those called for by the contract) at a specified price on a specified date. The "purchase" of a debt future means the acquisition by the Portfolio of an obligation to acquire the related debt securities at a specified time on a specified date. The "sale" of a bond index future means the acquisition by the Portfolio of an obligation to deliver an amount of cash equal to a specified dollar amount times the difference between the index value at the close of the last trading day of the future and the price at which the future is originally struck. No physical delivery of the bonds making up the index is expected to be made. The "purchase" of a bond index future means the acquisition by the Portfolio of an obligation to take delivery of such an amount of cash.
Unlike when the Portfolio purchases or sells a bond, no price is paid or received by the Portfolio upon the purchase or sale of the future. Initially, the Portfolio will be required to deposit an amount of cash or securities equal to a varying specified percentage of the contract amount. This amount is known as initial margin. Cash held in the margin account is not income producing. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying debt securities or index fluctuates, making the future more or less valuable, a process known as mark to the market. Changes in variation margin are recorded by the Portfolio as unrealized gains or losses. At any time prior to expiration of the future, the Portfolio may elect to close the position by taking an opposite position that will operate to terminate its position in the future. A final determination of variation margin is then made; additional cash is required to be paid by or released to the Portfolio and the Portfolio realizes a loss or a gain.
When the Portfolio writes an option on a futures contract it becomes obligated, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time during the term of the option. If the Portfolio has written a call, it becomes obligated to assume a "long" position in a futures contract, which means that it is required to take delivery of the underlying securities. If it has written a put, it is obligated to assume a "short" position in a futures contract, which means that it is required to deliver the underlying securities. When the Portfolio purchases an option on a futures contract it acquires a right in return for the premium it pays to assume a position in a futures contract.
If the Portfolio writes an option on a futures contract it will be required to deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option on a future are included in the initial margin deposit. For options sold, the Portfolio will segregate cash or high-quality debt securities equal to the value of securities underlying the option unless the option is otherwise covered. The Portfolio will deposit in a segregated account with its custodian bank cash or other liquid assets in an amount equal to the fluctuating market value of long futures contracts it has purchased less any margin deposited on its long position. It may hold cash or acquire such other assets for the purpose of making these deposits.
Changes in variation margin are recorded by the Portfolio as unrealized gains or losses. Initial margin payments will be deposited in the Portfolio's custodian bank in an account registered in the broker's name; access to the assets in that account may be made by the broker only under specified conditions. At any time prior to expiration of a futures contract or an option thereon, the Portfolio may elect to close the position by taking an opposite position that will operate to terminate its position in the futures contract or option. A final determination of variation margin is made at that time; additional cash is required to be paid by or released to it and it realizes a loss or gain.
Although futures contracts by their terms call for the actual delivery or acquisition of the underlying securities or cash, in most cases the contractual obligation is so fulfilled without having to make or take delivery. The Sub-advisor does not intend to make or take delivery of the underlying obligation. All transactions in futures contracts and options thereon are made, offset or fulfilled through a clearinghouse associated with the exchange on which the instruments are traded. Although the Sub-advisor intends to buy and sell futures contracts only on exchanges where there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular future at any particular time. In such event, it may not be possible to close a futures contract position. Similar market liquidity risks occur with respect to options.
The use of futures contracts and options thereon to attempt to protect against the market risk of a decline in the value of portfolio securities is referred to as having a "short futures position." The use of futures contracts and options thereon to attempt to protect against the market risk that the Portfolio might not be fully invested at a time when the value of the securities in which it invests is increasing is referred to as having a "long futures position." The Portfolio must operate within certain restrictions as to long and short positions in futures contracts and options thereon under a rule (CFTC Rule) adopted by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) to be eligible for the exclusion provided by the CFTC Rule from registration by the Portfolio with the CFTC as a "commodity pool operator" (as defined under the CEA), and must represent to the CFTC that it will operate within such restrictions. Under these restrictions the Portfolio will not, as to any positions that do not qualify as "bona fide hedging" under the CFTC Rule, whether long, short or a combination thereof, enter into futures contracts and options thereon for which the aggregate initial margins and premiums exceed 5% of the fair market value of the Portfolio's assets after taking into account unrealized profits and losses on options the Portfolio has entered into; in the case of an option that is "in-the-money" (as defined under the CEA), the in-the-money amount may be excluded in computing such 5%. (In general, a call option on a futures contract is in-the-money if the value of the future exceeds the strike, i.e., exercise, price of the call; a put option on a futures contract is in-the-money if the value of the futures contract that is the subject of the put is exceeded by the strike price of the put.) As to its long positions that are used as part of the Portfolio's strategy and are incidental to the Portfolio's activities in the underlying cash market, the "underlying commodity value" (see below) of the Portfolio's futures contract and options thereon must not exceed the sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt obligations or other U.S. dollar-denominated, high-quality, short-term money market instruments so set aside, plus any funds deposited as margin; (ii) cash proceeds from existing investments due in 30 days; and (iii) accrued profits held at the futures commission merchant.
There are described above the segregated accounts that the Portfolio must maintain with its custodian bank as to its options and futures contracts activities due to Securities and Exchange Commission (SEC) requirements. The Portfolio will, as to its long positions, be required to abide by the more restrictive of these SEC and CFTC requirements. The underlying commodity value of a futures contract is computed by multiplying the size (dollar amount) of the futures contract by the daily settlement price of the futures contract. For an option on a futures contract, that value is the underlying commodity value of the future underlying the option.
Since futures contracts and options thereon can replicate movements in the cash markets for the securities in which the Portfolio invests without the large cash investments required for dealing in such markets, they may subject the Portfolio to greater and more volatile risks than might otherwise be the case. The principal risks related to the use of such instruments are (i) the offsetting correlation between movements in the market price of the portfolio investments (held or intended) being hedged and in the price of the futures contract or option may be imperfect; (ii) possible lack of a liquid secondary market for closing out futures or options positions; (iii) the need for additional portfolio management skills and techniques; (iv) losses due to unanticipated market price movements; and (v) the bankruptcy or failure of a futures commission merchant holding margin deposits made by the Portfolio and the Portfolio's inability to obtain repayment of all or part of such deposits. For a hedge to be completely effective, the price change of the hedging instrument should equal the price change of the security being hedged. Such equal price changes are not always possible because the investment underlying the hedging instrument may not be the same investment that is being hedged. The Sub-advisor will attempt to create a closely correlated hedge, but hedging activity may not be completely successful in eliminating market value fluctuation. The ordinary spreads between prices in the cash and futures markets, due to the differences in the natures of those markets, are subject to the following factors which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into off-setting 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 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 trends by the Sub-advisor may still not result in a successful transaction. The Sub-advisor may be incorrect in its expectations as to the extent of various interest rate movements or the time span within which the movements take place.
The risk of imperfect correlation between movements in the price of a bond index future and movements in the price of the securities that are the subject of the hedge increases as the composition of the Portfolio diverges from the securities included in the applicable index. The price of the bond index future may move more than or less than the price of the securities being hedged. If the price of the bond index future moves less than the price of the securities that are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, the Portfolio would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the futures contract. If the price of the futures contract moves more than the price of the security, the Portfolio will experience either a loss or a gain on the futures contract that will not be completely offset by movements in the price of the securities that are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of the bond index futures, the Portfolio may buy or sell bond index futures in a greater dollar amount than the dollar amount of securities being hedged if the historical volatility of the prices of such securities being hedged is less than the historical volatility of the bond index. It is also possible that, where the Portfolio has sold futures contracts to hedge its securities against a decline in the market, the market may advance and the value of securities held in the Portfolio may decline. If this occurred, the Portfolio would lose money on the futures contract and also experience a decline in value in its portfolio securities. However, while this could occur for a brief period or to a very small degree, over time the value of a portfolio of debt securities will tend to move in the same direction as the market indexes upon which the futures contracts are based.
Where bond index futures are purchased to hedge against a possible increase in the price of bonds before the Portfolio is able to invest in securities in an orderly fashion, it is possible that the market may decline instead; if the Portfolio then concludes not to invest in securities at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of the securities it had anticipated purchasing.
The risks of investment in options on bond indexes may be greater than options on securities. Because exercises of bond index options are settled in cash, when the Portfolio writes a call on a bond index it cannot provide in advance for its potential settlement obligations by acquiring and holding the underlying securities. The Portfolio can offset some of the risk of its writing position by holding a portfolio of bonds similar to those on which the underlying index is based. However, the Portfolio cannot, as a practical matter, acquire and hold a portfolio containing exactly the same securities as the underlying index and, as a result, bears a risk that the value of the securities held will vary from the value of the index. Even if the Portfolio could assemble a portfolio that exactly reproduced the composition of the underlying index, it still would not be fully covered from a risk standpoint because of the "timing risk" inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, the Portfolio, as the call writer, will not learn that it has been assigned until the next business day at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying security because there, the writer's obligation is to deliver the underlying security, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying security, it can satisfy its settlement obligations by simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds securities that exactly match the composition of the underlying index, it will not be able to satisfy its assignment obligations by delivering those securities against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value of the exercise date; and by the time it learns that it has been assigned, the index may have declined with a corresponding decline in the value of its portfolio. This "timing risk" is an inherent limitation on the ability of index call writers to cover their risk exposure by holding securities positions.
If the Portfolio has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, the Portfolio must pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Twentieth Century Strategic Balanced Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of its assets in illiquid investments;
2. Invest in the securities of other investment companies except in compliance with the 1940 Act;
3. Buy securities on margin or sell short (unless it owns, or by virtue of its ownership of, other securities has the right to obtain securities equivalent in kind and amount to the securities sold); however, the Portfolio may make margin deposits in connection with the use of any financial instrument or any transaction in securities permitted under its investment policies; or
4. Invest for control or for management.
AST Putnam Value Growth & Income Portfolio:
Investment Objective: The primary investment objective of the Portfolio is to seek capital growth. Current income is a secondary investment objective. These are fundamental objectives of the Portfolio.
Investment Policies:
Short-Term Trading. In seeking the Portfolio's objectives, the Sub-advisor will buy or sell portfolio securities whenever the Sub-advisor believes it appropriate to do so. In deciding whether to sell a portfolio security, the Sub-advisor does not consider how long the Portfolio has owned the security. From time to time the Sub-advisor will buy securities intending to seek short-term trading profits. A change in the securities held by the Portfolio is known as "portfolio turnover" and generally involves some expense to the Portfolio. This expense may include brokerage commissions or dealer markups and other transaction costs on both the sale of securities and the reinvestment of the proceeds in other securities. As a result of the Portfolio's investment policies, under certain market conditions the Portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover rate for a fiscal year is the ratio of the lesser of purchases or sales of portfolio securities to the monthly average of the value of portfolio securities excluding securities whose maturities at acquisition were one year or less. The Portfolio turnover rate is not a limiting factor when the Sub-advisor considers a change in the Portfolio.
Lower-Rated Fixed-Income Securities. The Portfolio may invest in lower-rated fixed-income securities (commonly known as "junk bonds"). The lower ratings of certain securities held by the Portfolio reflect a greater possibility that adverse changes in the financial condition of the issuer or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by the Portfolio more volatile and could limit the Portfolio's ability to sell its securities at prices approximating the values the Portfolio had placed on such securities. In the absence of a liquid trading market for securities held by it, the Portfolio at times may be unable to establish the fair value of such securities. For an additional discussion of certain risks involved in lower-rated securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Portfolio will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, the Sub-advisor will monitor the investment to determine whether its retention will assist in meeting the Portfolio's investment objective. At times, a substantial portion of the Portfolio's assets may be invested in securities as to which the Portfolio, by itself or together with other mutual funds and accounts managed by the Sub-advisor and its affiliates, holds all or a major portion. Although the Sub-advisor generally considers such securities to be liquid because of the availability of an institutional market for such securities, it is possible that, under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the Portfolio could find it more difficult to sell these securities when the Sub-advisor believes it advisable to do so or may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the Portfolio's net asset value. In order to enforce its rights in the event of a default under such securities, the Portfolio may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on such securities. This could increase the Portfolio's operating expenses and adversely affect the Portfolio's net asset value.
To the extent the Portfolio invests in securities in the lower rating categories, the achievement of the Portfolio's goals is more dependent on the Sub-advisor's investment analysis than would be the case if the Portfolio were investing in securities in the higher rating categories.
Zero Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may invest without limit in zero coupon and payment-in-kind bonds. Zero coupon bonds are issued at a significant discount from their principal amount in lieu of paying interest periodically. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Because zero coupon and payment-in-kind bonds do not pay current interest in cash, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Both zero coupon and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently in cash. For an additional discussion of zero coupon bonds and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may invest in restricted securities. For a discussion of restricted securities and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage Related Securities. The Portfolio may invest in mortgage-backed securities, including collateralized mortgage obligations ("CMOs") and certain stripped mortgage-backed securities. CMOs and other mortgage-backed securities represent a participation in, or are secured by, mortgage loans.
Mortgage-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed securities include both interest and a partial repayment of principal. Besides the scheduled repayment of principal, repayments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will result in early payment of the applicable mortgage-related securities. In that event the Portfolio may be unable to invest the proceeds from the early payment of the mortgage-related securities in an investment that provides as high a yield as the mortgage-related securities. Consequently, early payment associated with mortgage-related securities may cause these securities to experience significantly greater price and yield volatility than that experienced by traditional fixed-income securities. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of mortgage-related securities. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-related securities. If the life of a mortgage-related security is inaccurately predicted, the Portfolio may not be able to realize the rate of return it expected.
Mortgage-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates.
CMOs may be issued by a U.S. government agency or instrumentality or by a private issuer. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. government or its agencies or instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. government, its agencies or instrumentalities or any other person or entity.
Prepayments could cause early retirement of CMOs. CMOs are designed to reduce the risk of prepayment for investors by issuing multiple classes of securities, each having different maturities, interest rates and payment schedules, and with the principal and interest on the underlying mortgages allocated among the several classes in various ways. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO held by the Portfolio would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities.
The secondary market for stripped mortgage-backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the Portfolio's ability to buy or sell those securities at any particular time. For an additional discussion of mortgage related securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of its securities, on either a short-term or long-term basis, thereby realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. As a matter of policy, securities loans are made to broker-dealers pursuant to agreements requiring that the loans be continuously secured by collateral consisting of cash or short-term debt obligations at least equal at all times to the value of the securities on loan, "marked-to-market" daily. The borrower pays to the Portfolio an amount equal to any dividends or interest received on securities lent. The Portfolio retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. Although voting rights, or rights to consent, with respect to the loaned securities may pass to the borrower, the Portfolio retains the right to call the loans at any time on reasonable notice, and it will do so to enable the Portfolio to exercise voting rights on any matters materially affecting the investment. The Portfolio may also call such loans in order to sell the securities.
Forward Commitments. The Portfolio may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") if the Portfolio holds, and maintains until the settlement date in a segregated account, cash or liquid securities in an amount sufficient to meet the purchase price, or if the Portfolio enters into offsetting contracts for the forward sale of other securities it owns. In the case of to-be-announced ("TBA") purchase commitments, the unit price and the estimated principal amount are established when the Portfolio enters into a contract, with the actual principal amount being within a specified range of the estimate. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made through dealers, the Portfolio relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price. Although the Portfolio will generally enter into forward commitments with the intention of acquiring securities for the Portfolio or for delivery pursuant to options contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement if the Sub-advisor deems it appropriate to do so. The Portfolio may realize short-term profits or losses upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its portfolio positions or to sell securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or loss from the sale of the securities based upon the unit price established at the date the commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. A repurchase agreement is a contract under which the Portfolio acquires a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Portfolio to resell such security at a fixed time and price (representing the Portfolio's cost plus interest). It is the Portfolio's present intention to enter into repurchase agreements only with commercial banks and registered broker-dealers and only with respect to obligations of the U.S. government or its agencies or instrumentalities. Repurchase agreements may also be viewed as loans made by the Portfolio which are collateralized by the securities subject to repurchase. The Sub-advisor will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. For an additional discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options and covered put options on optionable securities held in the portfolio, when in the opinion of the Sub-advisor such transactions are consistent with the Portfolio's investment objective and policies. Call options written by the Portfolio give the purchaser the right to buy the underlying securities from the Portfolio at a stated exercise price; put options give the purchaser the right to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long as the Portfolio is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, the Portfolio will hold cash or other liquid assets equal to the price to be paid if the option is exercised. In addition, the Portfolio will be considered to have covered a put or call option if and to the extent that it holds an option that offsets some or all of the risk of the option it has written. The Portfolio may write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying security, and when it writes a put option, the Portfolio may be required to deposit cash or securities with its broker as "margin," or collateral, for its obligation to buy or sell the underlying security. As the value of the underlying security varies, the Portfolio may have to deposit additional margin with the broker. Margin requirements are complex and are fixed by individual brokers, subject to minimum requirements currently imposed by the Federal Reserve Board and by stock exchanges and other self-regulatory organizations. For an additional discussion of options transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to protect its holdings in an underlying security against a decline in market value. Such protection is provided during the life of the put option since the Portfolio, as holder of the option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, the Portfolio will reduce any profit it might otherwise have realized from appreciation of the underlying security by the premium paid for the put option and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the Portfolio's options strategies depends on the ability of the Sub-advisor to forecast correctly interest rate and market movements. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Sub-advisor deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price.
A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unavailable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, the Options Clearing Corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If the Options Clearing Corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration.
Foreign-traded options are subject to many of the same risks presented by internationally-traded securities. In addition, because of time differences between the United States and various foreign countries, and because different holidays are observed in different countries, foreign options markets may be open for trading during hours or on days when U.S. markets are closed. As a result, option premiums may not reflect the current prices of the underlying interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets held to cover OTC options written by the Portfolio may, under certain circumstances, be considered illiquid securities for purposes of any limitation on the Portfolio's ability to invest in illiquid securities. For an additional discussion of certain risks involved in options transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the Portfolio may invest without limit in the types of futures contracts and related options identified in the Prospectus for hedging and non-hedging purposes. The use of futures and options transactions for purposes other than hedging entails greater risks. A financial futures contract sale creates an obligation by the seller to deliver the type of financial instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of financial instrument called for in the contract in a specified delivery month at a stated price. The specific instruments delivered or taken, respectively, at settlement date are not determined until on or near that date. The determination is made in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Futures contracts are traded in the United States only on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions at any time prior to their expiration in order to reduce or eliminate a hedge position then currently held by the Portfolio. The Portfolio may close its positions by taking opposite positions which will operate to terminate the Portfolio's position in the futures contracts. Final determinations of variation margin are then made, additional cash is required to be paid by or released to the Portfolio, and the Portfolio realizes a loss or a gain. Such closing transactions involve additional commission costs. For an additional discussion of futures contracts and related options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call and put options on futures contracts it may buy or sell and enter into closing transactions with respect to such options to terminate existing positions. Options on future contracts give the purchaser the right in return for the premium paid to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The Portfolio may use options on futures contracts in lieu of writing or buying options directly on the underlying securities or purchasing and selling the underlying futures contracts. For example, to hedge against a possible decrease in the value of its securities, the Portfolio may purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, the Portfolio may purchase call options or write put options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the Portfolio expects to purchase. Such options generally operate in the same manner as options purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an offsetting option. There is no guarantee that such closing transactions can be effected. For an additional discussion of options on futures contracts, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options. Successful use of futures contracts by the Portfolio is subject to the Sub-advisor's ability to predict movements in various factors affecting securities markets, including interest rates. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the Portfolio because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to the Portfolio when the purchase or sale of a futures contract would not, such as when there is no movement in the prices of the hedged investments. The writing of an option on a futures contract involves risks similar to those risks relating to the sale of futures contracts. For an additional discussion of certain risks involved in futures contracts and related options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Index Futures Contracts. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of an index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of an index is commonly referred to as selling a contract or holding a short position. A unit is the current value of the index. The Portfolio may enter into stock index futures contracts, debt index futures contracts, or other index futures contracts appropriate to its objective. The Portfolio may also purchase and sell options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index ("S&P 500") is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500 assigns relative weightings to the common stocks included in the Index, and the value fluctuates with changes in the market values of those common stocks. In the case of the S&P 500, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one contract would be worth $75,000 (500 units x $150). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if the Portfolio enters into a futures contract to buy 500 units of the S&P 500 at a specified future date at a contract price of $150 and the S&P 500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x gain of $4). If the Portfolio enters into a futures contract to sell 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500 units x loss of $2).
There are several risks in connection with the use by the Portfolio of index futures. One risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedge. The Sub-advisor will, however, attempt to reduce this risk by buying or selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Portfolio is also subject to the Sub-advisor's ability to predict movements in the direction of the market. For example, it is possible that, where the Portfolio has sold futures to hedge its portfolio against a decline in the market, the index on which the futures are written may advance and the value of securities held in the Portfolio may decline. If this occurred, the Portfolio would lose money on the futures and also experience a decline in value in its portfolio securities. It is also possible that, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of those securities it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements at a time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the index futures and the portion of the Portfolio being hedged, the prices of index futures may not correlate perfectly with movements in the underlying index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the index and futures markets. Second, margin requirements in the futures market are less onerous than margin requirements in the securities market, and as a result the futures market may attract more speculators than the securities market does. Increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market and also because of the imperfect correlation between movements in the index and movements in the prices of index futures, even a correct forecast of general market trends by the Sub-advisor may still not result in a profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to options on securities except that options on index futures give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the index futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the index future. If an option is exercised on the last trading day prior to its expiration date, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
Options on Indices. As an alternative to purchasing call and put options on index futures, the Portfolio may purchase and sell call and put options on the underlying indices themselves. Such options would be used in a manner identical to the use of options on index futures. For an additional discussion of options on indices and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 20% of its total assets in securities traded in foreign securities markets. American depositary receipts and Eurodollar certificates of deposit are not included in this limitation. For a discussion of certain risks involved in foreign investing, in general, and the special risks involved in investing in developing countries or "emerging markets," see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit in currency exchange transactions, including purchasing and selling foreign currency, foreign currency options, foreign currency forward contracts and foreign currency futures contracts and related options, to protect against uncertainty in the level of future currency exchange rates. In addition, the Portfolio may write covered call and put options on foreign currencies for the purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and "position hedging." When it engages in transaction hedging, the Portfolio enters into foreign currency transactions with respect to specific receivables or payables, generally arising in connection with the purchase or sale of portfolio securities. The Portfolio will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging the Portfolio will attempt to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is earned, and the date on which such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. The Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the Portfolio may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Portfolio the right to assume a short position in the futures contract until the expiration of the option. A put option on a currency gives the Portfolio the right to sell the currency at an exercise price until the expiration of the option. A call option on a futures contract gives the Portfolio the right to assume a long position in the futures contract until the expiration of the option. A call option on a currency gives the Portfolio the right to purchase the currency at the exercise price until the expiration of the option.
When it engages in position hedging, the Portfolio enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which its portfolio securities are denominated (or an increase in the value of currency for securities which the Portfolio expects to purchase). In connection with position hedging, the Portfolio may purchase put or call options on foreign currency and on foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. The Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Portfolio owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some of the costs of hedging against fluctuations in current exchange rates by writing covered call options and covered put options on foreign currencies. The Portfolio receives a premium from writing a call or put option, which increases the Portfolio's current return if the option expires unexercised or is closed out at a net profit. The Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. The Sub-advisor will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the Portfolio. Cross hedging transactions by the Portfolio involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign currencies, may be affected by complex political and economic factors applicable to the issuing country. In addition, the exchange rates of foreign currencies (and therefore the values of foreign currency options, forward contracts and futures contracts) may be affected significantly, fixed, or supported directly or indirectly by U.S. and foreign government actions. Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures contract reflects the value of an exchange rate, which in turn reflects relative values of two currencies, the U.S. dollar and the foreign currency in question. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the exercise of foreign currency options, forward contracts and futures contracts, investors may be disadvantaged by having to deal in an odd-lot market for the underlying foreign currencies in connection with options at prices that are less favorable than for round lots. Foreign governmental restrictions or taxes could result in adverse changes in the cost of acquiring or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large round-lot transactions in the interbank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. For an additional discussion of foreign currency transactions and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency contract involves 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 as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either may accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in the foreign currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. Although the Portfolio intends to purchase or sell foreign currency futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position and, in the event of adverse price movements, the Portfolio would continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies operate similarly to options on securities and are subject to many of the risks described above. Foreign currency options are traded primarily in the over-the-counter market, although options on foreign currencies are also listed on several exchanges. Options are traded not only on the currencies of individual nations, but also on the European Currency Unit ("ECU"). The ECU is composed of amounts of a number of currencies, and is the official medium of exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when the Sub-advisor believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally.
Settlement Procedures. Settlement procedures relating to the Portfolio's investments in foreign securities and to the Portfolio's foreign currency exchange transactions may be more complex than settlements with respect to investments in debt or equity securities of U.S. issuers, and may involve certain risks not present in the Portfolio's domestic investments. For example, settlement of transactions involving foreign securities or foreign currencies may occur within a foreign country, and the Portfolio may be required to accept or make delivery of the underlying securities or currency in conformity with any applicable U.S. or foreign restrictions or regulations, and may be required to pay any fees, taxes or charges associated with such delivery. Such investments may also involve the risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the AST Putnam Value Growth & Income Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale, excluding securities determined by the Trustees of the Trust (or the person designated by the Trustees of the Trust to make such determinations) to be readily marketable, and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would be invested in securities described in (a), (b) and (c) above;
2. Invest in the securities of other investment companies except in compliance with the 1940 Act;
3. Make short sales of securities or maintain a short position for the account of the Portfolio unless at all times when a short position is open it owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and in equal amount to, the securities sold short.
All percentage limitations on investments will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
AST Putnam International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio is designed for investors seeking capital appreciation through a diversified portfolio of equity securities of companies located in a country other than the United States.
Short-Term Trading. In seeking the Portfolio's objectives, the Sub-advisor will buy or sell portfolio securities whenever the Sub-advisor believes it appropriate to do so. In deciding whether to sell a portfolio security, the Sub-advisor does not consider how long the Portfolio has owned the security. From time to time the Sub-advisor will buy securities intending to seek short-term trading profits. A change in the securities held by the Portfolio is known as "portfolio turnover" and generally involves some expense to the Portfolio. This expense may include brokerage commissions or dealer markups and other transaction costs on both the sale of securities and the reinvestment of the proceeds in other securities. As a result of the Portfolio's investment policies, under certain market conditions the Portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover rate for a fiscal year is the ratio of the lesser of purchases or sales of portfolio securities to the monthly average of the value of portfolio securities -excluding securities whose maturities at acquisition were one year or less. The Portfolio turnover rate is not a limiting factor when the Sub-advisor considers a change in the Portfolio.
Restricted Securities. The Portfolio may invest in restricted securities. For a discussion of restricted securities and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of its securities, on either a short-term or long-term basis, thereby realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. As a matter of policy, securities loans are made to broker-dealers pursuant to agreements requiring that the loans be continuously secured by collateral consisting of cash or short-term debt obligations at least equal at all times to the value of the securities on loan, "marked-to-market" daily. The borrower pays to the Portfolio an amount equal to any dividends or interest received on securities lent. The Portfolio retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. Although voting rights, or rights to consent, with respect to the loaned securities may pass to the borrower, the Portfolio retains the right to call the loans at any time on reasonable notice, and it will do so to enable the Portfolio to exercise voting rights on any matters materially affecting the investment. The Portfolio may also call such loans in order to sell the securities.
Forward Commitments. The Portfolio may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") if the Portfolio holds, and maintains until the settlement date in a segregated account, cash or liquid securities in an amount sufficient to meet the purchase price, or if the Portfolio enters into offsetting contracts for the forward sale of other securities it owns. In the case of to-be-announced ("TBA") purchase commitments, the unit price and the estimated principal amount are established when the Portfolio enters into a contract, with the actual principal amount being within a specified range of the estimate. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made through dealers, the Portfolio relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price. Although the Portfolio will generally enter into forward commitments with the intention of acquiring securities for the Portfolio or for delivery pursuant to options contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement if the Sub-advisor deems it appropriate to do so. The Portfolio may realize short-term profits or losses upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its portfolio positions or to sell securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or loss from the sale of the securities based upon the unit price established at the date the commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. A repurchase agreement is a contract under which the Portfolio acquires a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Portfolio to resell such security at a fixed time and price (representing the Portfolio's cost plus interest). It is the Portfolio's present intention to enter into repurchase agreements only with commercial banks and registered broker-dealers and only with respect to obligations of the U.S. government or its agencies or instrumentalities. Repurchase agreements may also be viewed as loans made by the Portfolio which are collateralized by the securities subject to repurchase. The Sub-advisor will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. For an additional discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options and covered put options on optionable securities held in the portfolio, when in the opinion of the Sub-advisor such transactions are consistent with the Portfolio's investment objective and policies. Call options written by the Portfolio give the purchaser the right to buy the underlying securities from the Portfolio at a stated exercise price; put options give the purchaser the right to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long as the Portfolio is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, the Portfolio will hold cash or other liquid assets equal to the price to be paid if the option is exercised. In addition, the Portfolio will be considered to have covered a put or call option if and to the extent that it holds an option that offsets some or all of the risk of the option it has written. The Portfolio may write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying security, and when it writes a put option, the Portfolio may be required to deposit cash or securities with its broker as "margin," or collateral, for its obligation to buy or sell the underlying security. As the value of the underlying security varies, the Portfolio may have to deposit additional margin with the broker. Margin requirements are complex and are fixed by individual brokers, subject to minimum requirements currently imposed by the Federal Reserve Board and by stock exchanges and other self-regulatory organizations. For an additional discussion of options transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to protect its holdings in an underlying security against a decline in market value. Such protection is provided during the life of the put option since the Portfolio, as holder of the option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, the Portfolio will reduce any profit it might otherwise have realized from appreciation of the underlying security by the premium paid for the put option and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the Portfolio's options strategies depends on the ability of the Sub-advisor to forecast correctly interest rate and market movements. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Sub-advisor deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price.
A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unavailable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, the Options Clearing Corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If the Options Clearing Corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration.
Foreign-traded options are subject to many of the same risks presented by internationally-traded securities. In addition, because of time differences between the United States and various foreign countries, and because different holidays are observed in different countries, foreign options markets may be open for trading during hours or on days when U.S. markets are closed. As a result, option premiums may not reflect the current prices of the underlying interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets held to cover OTC options written by the Portfolio may, under certain circumstances, be considered illiquid securities for purposes of any limitation on the Portfolio's ability to invest in illiquid securities. For an additional discussion of certain risks involved in options transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the Portfolio may invest without limit in the types of futures contracts and related options identified in the Prospectus for hedging and non-hedging purposes. The use of futures and options transactions for purposes other than hedging entails greater risks. A financial futures contract sale creates an obligation by the seller to deliver the type of financial instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of financial instrument called for in the contract in a specified delivery month at a stated price. The specific instruments delivered or taken, respectively, at settlement date are not determined until on or near that date. The determination is made in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Futures contracts are traded in the United States only on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions at any time prior to their expiration in order to reduce or eliminate a position then currently held by the Portfolio. The Portfolio may close its positions by taking opposite positions which will operate to terminate the Portfolio's position in the futures contracts. Final determinations of variation margin are then made, additional cash is required to be paid by or released to the Portfolio, and the Portfolio realizes a loss or a gain. Such closing transactions involve additional commission costs. For an additional discussion of futures contracts and related options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call and put options on futures contracts it may buy or sell and enter into closing transactions with respect to such options to terminate existing positions. Options on future contracts give the purchaser the right in return for the premium paid to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The Portfolio may use options on futures contracts in lieu of writing or buying options directly on the underlying securities or purchasing and selling the underlying futures contracts. For example, to hedge against a possible decrease in the value of its securities, the Portfolio may purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, the Portfolio may purchase call options or write put options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the Portfolio expects to purchase. Such options generally operate in the same manner as options purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an offsetting option. There is no guarantee that such closing transactions can be effected. For an additional discussion of options on futures contracts, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options. Successful use of futures contracts by the Portfolio is subject to the Sub-advisor's ability to predict movements in various factors affecting securities markets, including interest rates. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the Portfolio because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to the Portfolio when the purchase or sale of a futures contract would not, such as when there is no movement in the prices of the hedged investments. The writing of an option on a futures contract involves risks similar to those risks relating to the sale of futures contracts. For an additional discussion of certain risks involved in futures contracts and related options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Index Futures Contracts. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of an index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of an index is commonly referred to as selling a contract or holding a short position. A unit is the current value of the index. The Portfolio may enter into stock index futures contracts, debt index futures contracts, or other index futures contracts appropriate to its objective. The Portfolio may also purchase and sell options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index ("S&P 500") is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500 assigns relative weightings to the common stocks included in the Index, and the value fluctuates with changes in the market values of those common stocks. In the case of the S&P 500, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one contract would be worth $75,000 (500 units x $150). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if the Portfolio enters into a futures contract to buy 500 units of the S&P 500 at a specified future date at a contract price of $150 and the S&P 500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x gain of $4). If the Portfolio enters into a futures contract to sell 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500 units x loss of $2).
There are several risks in connection with the use by the Portfolio of index futures. One risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedge. The Sub-advisor will, however, attempt to reduce this risk by buying or selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Portfolio is also subject to the Sub-advisor's ability to predict movements in the direction of the market. For example, it is possible that, where the Portfolio has sold futures to hedge its portfolio against a decline in the market, the index on which the futures are written may advance and the value of securities held in the Portfolio may decline. If this occurred, the Portfolio would lose money on the futures and also experience a decline in value in its portfolio securities. It is also possible that, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of those securities it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements at a time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the index futures and the portion of the Portfolio being hedged, the prices of index futures may not correlate perfectly with movements in the underlying index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the index and futures markets. Second, margin requirements in the futures market are less onerous than margin requirements in the securities market, and as a result the futures market may attract more speculators than the securities market does. Increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market and also because of the imperfect correlation between movements in the index and movements in the prices of index futures, even a correct forecast of general market trends by the Sub-advisor may still not result in a profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to options on securities except that options on index futures give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the index futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the index future. If an option is exercised on the last trading day prior to its expiration date, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
Options on Indices. As an alternative to purchasing call and put options on index futures, the Portfolio may purchase and sell call and put options on the underlying indices themselves. Such options would be used in a manner identical to the use of options on index futures. For an additional discussion of options on indices and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Index Warrants. The Portfolio may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices ("index warrants"). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at any time when, in the case of a call warrant, the exercise price is greater than the value of the underlying index, or, in the case of a put warrant, the exercise price is less than the value of the underlying index. If the Portfolio were not to exercise an index warrant prior to its expiration, then the Portfolio would lose the amount of the purchase price paid by it for the warrant.
The Portfolio will normally use index warrants in a manner similar to its use of options on securities indices. The risks of the Portfolio's use of index warrants are generally similar to those relating to its use of index options. Unlike most index options, however, index warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution which issues the warrant. Also, index warrants generally have longer terms than index options. Although the Portfolio will normally invest only in exchange-listed warrants, index warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In addition, the terms of index warrants may limit the Portfolio's ability to exercise the warrants at such time, or in such quantities, as the Portfolio would otherwise wish to do.
Foreign Securities. The Portfolio will, under normal circumstances, invest at least 65% of its total assets in issuers located in at least three different countries other than the United States. Eurodollar certificates of deposit are excluded for purposes of this limitation. For a discussion of certain risks involved in foreign investing, in general, and the special risks involved in investing in developing countries or "emerging markets," see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit in currency exchange transactions, including purchasing and selling foreign currency, foreign currency options, foreign currency forward contracts and foreign currency futures contracts and related options, to protect against uncertainty in the level of future currency exchange rates. In addition, the Portfolio may write covered call and put options on foreign currencies for the purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and "position hedging." When it engages in transaction hedging, the Portfolio enters into foreign currency transactions with respect to specific receivables or payables, generally arising in connection with the purchase or sale of portfolio securities. The Portfolio will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging the Portfolio will attempt to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is earned, and the date on which such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. The Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the Portfolio may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Portfolio the right to assume a short position in the futures contract until the expiration of the option. A put option on a currency gives the Portfolio the right to sell the currency at an exercise price until the expiration of the option. A call option on a futures contract gives the Portfolio the right to assume a long position in the futures contract until the expiration of the option. A call option on a currency gives the Portfolio the right to purchase the currency at the exercise price until the expiration of the option.
When it engages in position hedging, the Portfolio enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which its portfolio securities are denominated (or an increase in the value of currency for securities which the Portfolio expects to purchase). In connection with position hedging, the Portfolio may purchase put or call options on foreign currency and on foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. The Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Portfolio owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some of the costs of hedging against fluctuations in current exchange rates by writing covered call options and covered put options on foreign currencies. The Portfolio receives a premium from writing a call or put option, which increases the Portfolio's current return if the option expires unexercised or is closed out at a net profit. The Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. The Sub-advisor will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the Portfolio. Cross hedging transactions by the Portfolio involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign currencies, may be affected by complex political and economic factors applicable to the issuing country. In addition, the exchange rates of foreign currencies (and therefore the values of foreign currency options, forward contracts and futures contracts) may be affected significantly, fixed, or supported directly or indirectly by U.S. and foreign government actions. Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures contract reflects the value of an exchange rate, which in turn reflects relative values of two currencies, the U.S. dollar and the foreign currency in question. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the exercise of foreign currency options, forward contracts and futures contracts, investors may be disadvantaged by having to deal in an odd-lot market for the underlying foreign currencies in connection with options at prices that are less favorable than for round lots. Foreign governmental restrictions or taxes could result in adverse changes in the cost of acquiring or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large round-lot transactions in the interbank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. For an additional discussion of foreign currency transactions and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency contract involves 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 as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either may accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in the foreign currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. Although the Portfolio intends to purchase or sell foreign currency futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position and, in the event of adverse price movements, the Portfolio would continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies operate similarly to options on securities and are subject to many of the risks described above. Foreign currency options are traded primarily in the over-the-counter market, although options on foreign currencies are also listed on several exchanges. Options are traded not only on the currencies of individual nations, but also on the European Currency Unit ("ECU"). The ECU is composed of amounts of a number of currencies, and is the official medium of exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when the Sub-advisor believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally.
Settlement Procedures. Settlement procedures relating to the Portfolio's investments in foreign securities and to the Portfolio's foreign currency exchange transactions may be more complex than settlements with respect to investments in debt or equity securities of U.S. issuers, and may involve certain risks not present in the Portfolio's domestic investments. For example, settlement of transactions involving foreign securities or foreign currencies may occur within a foreign country, and the Portfolio may be required to accept or make delivery of the underlying securities or currency in conformity with any applicable U.S. or foreign restrictions or regulations, and may be required to pay any fees, taxes or charges associated with such delivery. Such investments may also involve the risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the AST Putnam International Equity Portfolio. These limitations are not "fundamental" restrictions, and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale, excluding securities determined by the Trustees of the Trust (or the person designated by the Trustees of the Trust to make such determinations) to be readily marketable, and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would be invested in securities described in (a), (b) and (c) above;
2. Purchase securities on margin, except such short-term credits as may be necessary for the clearance of purchases and sales of securities, and except that it may make margin payments in connection with futures contracts and options;
3, Make short sales of securities or maintain a short sale position for the account of the Portfolio unless at all times when a short position is open it owns an equal amount of such securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and at least equal in amount to, the securities sold short;
4. Invest in the securities of other investment companies except in compliance with the 1940 Act;
5. Make investments for the purpose of gaining control of a company's management.
All percentage limitations on investments will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
AST Putnam Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide a balanced investment composed of a well-diversified portfolio of stocks and bonds which will produce both capital growth and current income. This is a fundamental objective of the Portfolio.
Investment Policies:
Lower-Rated Fixed-Income Securities. The Portfolio may invest in lower-rated fixed-income securities (commonly known as "junk bonds"). The lower ratings of certain securities held by the Portfolio reflect a greater possibility that adverse changes in the financial condition of the issuer or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by the Portfolio more volatile and could limit the Portfolio's ability to sell its securities at prices approximating the values the Portfolio had placed on such securities. In the absence of a liquid trading market for securities held by it, the Portfolio at times may be unable to establish the fair value of such securities. For an additional discussion of certain risks involved in lower-rated securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
The Portfolio will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, the Sub-advisor will monitor the investment to determine whether its retention will assist in meeting the Portfolio's investment objective. At times, a substantial portion of the Portfolio's assets may be invested in securities as to which the Portfolio, by itself or together with other mutual funds and accounts managed by the Sub-advisor and its affiliates, holds all or a major portion. Although the Sub-advisor generally considers such securities to be liquid because of the availability of an institutional market for such securities, it is possible that, under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the Portfolio could find it more difficult to sell these securities when the Sub-advisor believes it advisable to do so or may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the Portfolio's net asset value. In order to enforce its rights in the event of a default under such securities, the Portfolio may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on such securities. This could increase the Portfolio's operating expenses and adversely affect the Portfolio's net asset value.
To the extent the Portfolio invests in securities in the lower rating categories, the achievement of the Portfolio's goals is more dependent on the Sub-advisor's investment analysis than would be the case if the Portfolio were investing in securities in the higher rating categories
Zero Coupon Bonds. The Portfolio may invest without limit in zero coupon bonds. Zero coupon bonds are issued at a significant discount from their principal amount in lieu of paying interest periodically. Because zero coupon bonds do not pay current interest in cash, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Zero coupon bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently in cash. For an additional discussion of zero coupon bonds and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may invest in restricted securities. For a discussion of restricted securities and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage Related Securities. The Portfolio may invest in mortgage-backed securities, including collateralized mortgage obligations ("CMOs") and certain stripped mortgage-backed securities. CMOs and other mortgage-backed securities represent a participation in, or are secured by, mortgage loans.
Mortgage-backed securities have yield and maturity characteristics corresponding to the underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain mortgage-backed securities include both interest and a partial repayment of principal. Besides the scheduled repayment of principal, repayments of principal may result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans. If property owners make unscheduled prepayments of their mortgage loans, these prepayments will result in early payment of the applicable mortgage-related securities. In that event the Portfolio may be unable to invest the proceeds from the early payment of the mortgage-related securities in an investment that provides as high a yield as the mortgage-related securities. Consequently, early payment associated with mortgage-related securities may cause these securities to experience significantly greater price and yield volatility than that experienced by traditional fixed-income securities. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of mortgage-related securities. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of mortgage-related securities. If the life of a mortgage-related security is inaccurately predicted, the Portfolio may not be able to realize the rate of return it expected.
Mortgage-backed securities are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates.
CMOs may be issued by a U.S. government agency or instrumentality or by a private issuer. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. government or its agencies or instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. government, its agencies or instrumentalities or any other person or entity.
Prepayments could cause early retirement of CMOs. CMOs are designed to reduce the risk of prepayment for investors by issuing multiple classes of securities, each having different maturities, interest rates and payment schedules, and with the principal and interest on the underlying mortgages allocated among the several classes in various ways. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO held by the Portfolio would have the same effect as the prepayment of mortgages underlying other mortgage-backed securities.
The secondary market for stripped mortgage-backed securities may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting the Portfolio's ability to buy or sell those securities at any particular time. For an additional discussion of mortgage related securities and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of its securities, on either a short-term or long-term basis, thereby realizing additional income. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. As a matter of policy, securities loans are made to broker-dealers pursuant to agreements requiring that the loans be continuously secured by collateral consisting of cash or short-term debt obligations at least equal at all times to the value of the securities on loan, "marked-to-market" daily. The borrower pays to the Portfolio an amount equal to any dividends or interest received on securities lent. The Portfolio retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. Although voting rights, or rights to consent, with respect to the loaned securities may pass to the borrower, the Portfolio retains the right to call the loans at any time on reasonable notice, and it will do so to enable the Portfolio to exercise voting rights on any matters materially affecting the investment. The Portfolio may also call such loans in order to sell the securities.
Forward Commitments. The Portfolio may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") if the Portfolio holds, and maintains until the settlement date in a segregated account, cash or liquid securities in an amount sufficient to meet the purchase price, or if the Portfolio enters into offsetting contracts for the forward sale of other securities it owns. In the case of to-be-announced ("TBA") purchase commitments, the unit price and the estimated principal amount are established when the Portfolio enters into a contract, with the actual principal amount being within a specified range of the estimate. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Portfolio's other assets. Where such purchases are made through dealers, the Portfolio relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Portfolio of an advantageous yield or price. Although the Portfolio will generally enter into forward commitments with the intention of acquiring securities for the Portfolio or for delivery pursuant to options contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement if the Sub-advisor deems it appropriate to do so. The Portfolio may realize short-term profits or losses upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its portfolio positions or to sell securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or loss from the sale of the securities based upon the unit price established at the date the commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. A repurchase agreement is a contract under which the Portfolio acquires a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Portfolio to resell such security at a fixed time and price (representing the Portfolio's cost plus interest). It is the Portfolio's present intention to enter into repurchase agreements only with commercial banks and registered broker-dealers and only with respect to obligations of the U.S. government or its agencies or instrumentalities. Repurchase agreements may also be viewed as loans made by the Portfolio which are collateralized by the securities subject to repurchase. The Sub-advisor will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. For an additional discussion of repurchase agreements and certain risks involved therein, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options and covered put options on optionable securities held in its portfolio, when in the opinion of the Sub-advisor such transactions are consistent with the Portfolio's investment objective and policies. Call options written by the Portfolio give the purchaser the right to buy the underlying securities from the Portfolio at a stated exercise price; put options give the purchaser the right to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long as the Portfolio is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, the Portfolio will hold cash or other liquid assets equal to the price to be paid if the option is exercised. In addition, the Portfolio will be considered to have covered a put or call option if and to the extent that it holds an option that offsets some or all of the risk of the option it has written. The Portfolio may write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying security, and when it writes a put option, the Portfolio may be required to deposit cash or securities with its broker as "margin," or collateral, for its obligation to buy or sell the underlying security. As the value of the underlying security varies, the Portfolio may have to deposit additional margin with the broker. Margin requirements are complex and are fixed by individual brokers, subject to minimum requirements currently imposed by the Federal Reserve Board and by stock exchanges and other self-regulatory organizations. For an additional discussion of options transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to protect its holdings in an underlying security against a decline in market value. Such protection is provided during the life of the put option since the Portfolio, as holder of the option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, the Portfolio will reduce any profit it might otherwise have realized from appreciation of the underlying security by the premium paid for the put option and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the Portfolio's options strategies depends on the ability of the Sub-advisor to forecast correctly interest rate and market movements. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Sub-advisor deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price.
A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unavailable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, the Options Clearing Corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If the Options Clearing Corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration.
Foreign-traded options are subject to many of the same risks presented by internationally-traded securities. In addition, because of time differences between the United States and various foreign countries, and because different holidays are observed in different countries, foreign options markets may be open for trading during hours or on days when U.S. markets are closed. As a result, option premiums may not reflect the current prices of the underlying interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets held to cover OTC options written by the Portfolio may, under certain circumstances, be considered illiquid securities for purposes of any limitation on the Portfolio's ability to invest in illiquid securities. For an additional discussion of certain risks involved in options transactions, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the Portfolio may invest without limit in the types of futures contracts and related options identified in the Prospectus for hedging and non-hedging purposes. The use of futures and options transactions for purposes other than hedging entails greater risks. A financial futures contract sale creates an obligation by the seller to deliver the type of financial instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of financial instrument called for in the contract in a specified delivery month at a stated price. The specific instruments delivered or taken, respectively, at settlement date are not determined until on or near that date. The determination is made in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Futures contracts are traded in the United States only on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions at any time prior to their expiration in order to reduce or eliminate a hedge position then currently held by the Portfolio. The Portfolio may close its positions by taking opposite positions which will operate to terminate the Portfolio's position in the futures contracts. Final determinations of variation margin are then made, additional cash is required to be paid by or released to the Portfolio, and the Portfolio realizes a loss or a gain. Such closing transactions involve additional commission costs. For an additional discussion of futures contracts and related options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call and put options on futures contracts it may buy or sell and enter into closing transactions with respect to such options to terminate existing positions. Options on future contracts give the purchaser the right in return for the premium paid to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The Portfolio may use options on futures contracts in lieu of writing or buying options directly on the underlying securities or purchasing and selling the underlying futures contracts. For example, to hedge against a possible decrease in the value of its securities, the Portfolio may purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, the Portfolio may purchase call options or write put options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the Portfolio expects to purchase. Such options generally operate in the same manner as options purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an offsetting option. There is no guarantee that such closing transactions can be effected. For an additional discussion of options on futures contracts, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options. Successful use of futures contracts by the Portfolio is subject to the Sub-advisor's ability to predict movements in various factors affecting securities markets, including interest rates. Compared to the purchase or sale of futures contracts, the purchase of call or put options on futures contracts involves less potential risk to the Portfolio because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to the Portfolio when the purchase or sale of a futures contract would not, such as when there is no movement in the prices of the hedged investments. The writing of an option on a futures contract involves risks similar to those risks relating to the sale of futures contracts. For an additional discussion of certain risks involved in futures contracts and related options, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
U.S. Treasury Security Futures Contracts and Options. U.S. Treasury security futures contracts require the seller to deliver, or the purchaser to take delivery of, the type of U.S. Treasury security called for in the contract at a specified date and price. Options on U.S. Treasury security futures contracts give the purchaser the right in return for the premium paid to assume a position in a U.S. Treasury security futures contract at the specified option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Portfolio is subject to the Sub-advisor's ability to predict movements in the direction of interest rates and other factors affecting markets for debt securities. For example, if the Portfolio has sold U.S. Treasury security futures contracts in order to hedge against the possibility of an increase in interest rates which would adversely affect securities held by the Portfolio, and the prices of the Portfolio's securities increase instead as a result of a decline in interest rates, the Portfolio will lose part or all of the benefit of the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily maintenance margin requirements at a time when it may be disadvantageous to do so. There is also a risk that price movements in U.S. Treasury security futures contracts and related options will not correlate closely with price movements in markets for particular securities.
Index Futures Contracts. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of an index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of an index is commonly referred to as selling a contract or holding a short position. A unit is the current value of the index. The Portfolio may enter into stock index futures contracts, debt index futures contracts, or other index futures contracts appropriate to its objective. The Portfolio may also purchase and sell options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index ("S&P 500") is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500 assigns relative weightings to the common stocks included in the Index, and the value fluctuates with changes in the market values of those common stocks. In the case of the S&P 500, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one contract would be worth $75,000 (500 units x $150). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if the Portfolio enters into a futures contract to buy 500 units of the S&P 500 at a specified future date at a contract price of $150 and the S&P 500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x gain of $4). If the Portfolio enters into a futures contract to sell 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500 units x loss of $2).
There are several risks in connection with the use by the Portfolio of index futures. One risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedge. The Sub-advisor will, however, attempt to reduce this risk by buying or selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Portfolio is also subject to the Sub-advisor's ability to predict movements in the direction of the market. For example, it is possible that, where the Portfolio has sold futures to hedge its portfolio against a decline in the market, the index on which the futures are written may advance and the value of securities held in the Portfolio may decline. If this occurred, the Portfolio would lose money on the futures and also experience a decline in value in its portfolio securities. It is also possible that, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of those securities it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements at a time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the index futures and the portion of the Portfolio being hedged, the prices of index futures may not correlate perfectly with movements in the underlying index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the index and futures markets. Second, margin requirements in the futures market are less onerous than margin requirements in the securities market, and as a result the futures market may attract more speculators than the securities market does. Increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market and also because of the imperfect correlation between movements in the index and movements in the prices of index futures, even a correct forecast of general market trends by the Sub-advisor may still not result in a profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to options on securities except that options on index futures give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the index futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the index future. If an option is exercised on the last trading day prior to its expiration date, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
Options on Indices. As an alternative to purchasing call and put options on index futures, the Portfolio may purchase and sell call and put options on the underlying indices themselves. Such options would be used in a manner identical to the use of options on index futures. For an additional discussion of options on indices and certain risks involved therein, see this Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 20% of its total assets in securities traded in foreign securities markets. American depositary receipts and Eurodollar certificates of deposit are not included in this limitation. For a discussion of certain risks involved in foreign investing, in general, and the special risks involved in investing in developing countries or "emerging markets," see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit in currency exchange transactions, including purchasing and selling foreign currency, foreign currency options, foreign currency forward contracts and foreign currency futures contracts and related options, to protect against uncertainty in the level of future currency exchange rates. In addition, the Portfolio may write covered call and put options on foreign currencies for the purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and "position hedging." When it engages in transaction hedging, the Portfolio enters into foreign currency transactions with respect to specific receivables or payables, generally arising in connection with the purchase or sale of portfolio securities. The Portfolio will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging the Portfolio will attempt to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is earned, and the date on which such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. The Portfolio may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the Portfolio may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Portfolio the right to assume a short position in the futures contract until the expiration of the option. A put option on a currency gives the Portfolio the right to sell the currency at an exercise price until the expiration of the option. A call option on a futures contract gives the Portfolio the right to assume a long position in the futures contract until the expiration of the option. A call option on a currency gives the Portfolio the right to purchase the currency at the exercise price until the expiration of the option.
When it engages in position hedging, the Portfolio enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which its portfolio securities are denominated (or an increase in the value of currency for securities which the Portfolio expects to purchase). In connection with position hedging, the Portfolio may purchase put or call options on foreign currency and on foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. The Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Portfolio owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some of the costs of hedging against fluctuations in current exchange rates by writing covered call options and covered put options on foreign currencies. The Portfolio receives a premium from writing a call or put option, which increases the Portfolio's current return if the option expires unexercised or is closed out at a net profit. The Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. The Sub-advisor will engage in such "cross hedging" activities when it believes that such transactions provide significant hedging opportunities for the Portfolio. Cross hedging transactions by the Portfolio involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign currencies, may be affected by complex political and economic factors applicable to the issuing country. In addition, the exchange rates of foreign currencies (and therefore the values of foreign currency options, forward contracts and futures contracts) may be affected significantly, fixed, or supported directly or indirectly by U.S. and foreign government actions. Government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures contract reflects the value of an exchange rate, which in turn reflects relative values of two currencies, the U.S. dollar and the foreign currency in question. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the exercise of foreign currency options, forward contracts and futures contracts, investors may be disadvantaged by having to deal in an odd-lot market for the underlying foreign currencies in connection with options at prices that are less favorable than for round lots. Foreign governmental restrictions or taxes could result in adverse changes in the cost of acquiring or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large round-lot transactions in the interbank market and thus may not reflect exchange rates for smaller odd-lot transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets. For an additional discussion of foreign currency transactions and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency contract involves 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 as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either may accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in the foreign currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. Although the Portfolio intends to purchase or sell foreign currency futures contracts only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position and, in the event of adverse price movements, the Portfolio would continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies operate similarly to options on securities and are subject to many of the risks described above. Foreign currency options are traded primarily in the over-the-counter market, although options on foreign currencies are also listed on several exchanges. Options are traded not only on the currencies of individual nations, but also on the European Currency Unit ("ECU"). The ECU is composed of amounts of a number of currencies, and is the official medium of exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when the Sub-advisor believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments generally.
Settlement Procedures. Settlement procedures relating to the Portfolio's investments in foreign securities and to the Portfolio's foreign currency exchange transactions may be more complex than settlements with respect to investments in debt or equity securities of U.S. issuers, and may involve certain risks not present in the Portfolio's domestic investments. For example, settlement of transactions involving foreign securities or foreign currencies may occur within a foreign country, and the Portfolio may be required to accept or make delivery of the underlying securities or currency in conformity with any applicable U.S. or foreign restrictions or regulations, and may be required to pay any fees, taxes or charges associated with such delivery. Such investments may also involve the risk that an entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the AST Putnam Balanced Portfolio. These limitations are not "fundamental" restrictions, and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest for the purpose of exercising control or management;
2. Invest in the securities of other investment companies except in compliance with the 1940 Act;
3. Invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale, excluding securities determined by the Trustees of the Trust (or the person designated by the Trustees of the Trust to make such determinations) to be readily marketable, and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Portfolio's net assets (taken at current value) would be invested in securities described in (a), (b) and (c) above;
4. Purchase securities on margin, except such short-term credits as may be necessary for the clearance of purchases and sales of securities, and except that it may make margin payments in connection with financial futures contracts or options;
5. Make short sales of securities or maintain a short position for the account of the Portfolio unless at all times when a short position is open it owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and in equal amount to, the securities sold short.
All percentage limitations on investments will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
Cohen & Steers Realty Portfolio:
Investment Objective: The investment objective of Cohen & Steers Realty Portfolio. (the "Portfolio") is to maximize total return through investment in real estate securities. This is a fundamental objective of the Portfolio.
Investment Policies:
Illiquid Securities. The Portfolio will not invest in illiquid securities if immediately after such investment more than 15% of the Portfolio's net assets (taken at market value) would be invested in such securities. For this purpose, illiquid securities include, among others, securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. Securities that have legal or contractual restrictions on resale but have a readily available market are not deemed illiquid for purposes of this limitation.
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 "Securities Act") and securities which are otherwise not readily marketable. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities. Restricted or other illiquid securities may be subject to the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Portfolio 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. The Portfolio 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, a large institutional market has developed for certain securities that are not registered under the Securities Act, including commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Specifically, the Securities and Exchange Commission (the "SEC") has adopted Rule 144A which allows a broader institutional trading market for securities otherwise subject to restrictions on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. The market for certain restricted securities has expanded, and the Sub-advisor anticipates that it 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.
Subject to the guidelines promulgated by the Board of Trustees of the Trust, the Sub-advisor will determine and monitor the liquidity of Rule 144A securities acquired or held by the Portfolio. In reaching liquidity decisions, the Sub-advisor will consider, among other things, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature 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).
Repurchase Agreements. Subject to the guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may also enter into repurchase agreements. A repurchase agreement is an instrument under which an investor such as the Portfolio purchases a U.S. Government security from a vendor, with an agreement by the vendor to repurchase the security at the same price, plus interest at a specified rate. In such a case, the security is held by the Portfolio, in effect, as collateral for the repurchase obligation. Repurchase agreements may be entered into only with certain well-established banks and securities dealers. Among other requirements, a bank must be a member of the Federal Reserve System and a securities dealer must be recognized by the Federal Reserve Bank within its reporting district as a reporting government securities dealer. In entering into the repurchase agreement for the Portfolio, the Sub-advisor will evaluate and monitor the creditworthiness of the vendor. For an additional discussion of repurchase agreements and the risks associated with them, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Techniques. The following sections provide expanded discussion of several of the types of investments and investment techniques which may be used by the Portfolio.
Real Estate Investment Trusts. REITs are sometimes informally characterized as equity REITs, mortgage REITs and hybrid REITs. An equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings and derives its income primarily from rental income. An equity REIT may also realize capital gains (or losses) by selling real estate properties in its portfolio that have appreciated (or depreciated) in value. A mortgage REIT invests primarily in mortgages on real estate, which may secure construction, development or long-term loans. A mortgage REIT generally derives its income primarily from interest payments on the credit it has extended. A hybrid REIT combines the characteristics of equity REITs and mortgage REITs, generally by holding both ownership interests and mortgage interests in real estate. It is anticipated, although not required, that under normal circumstances a majority of the Portfolio's investments in REITs will consist of equity REITs.
Futures Contracts. The Portfolio may purchase and sell financial futures contracts. A futures contract is an agreement to buy or sell a specific security or financial instrument at a particular price on a stipulated future date. Although some financial futures contracts call for making or taking delivery of the underlying securities, in most cases these obligations are closed out before the settlement date. The closing of a contractual obligation is accomplished by purchasing or selling an identical offsetting futures contract. Other financial futures contracts by their terms call for cash settlements.
The Portfolio may also buy and sell index futures contracts with respect to any stock or bond index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract.
At the time the Portfolio purchases a futures contract, an amount of cash or other liquid assets equal to the market value of the futures contract will be deposited in a segregated account with the Portfolio's custodian. When writing a futures contract, the Portfolio will maintain with its custodian similar liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Portfolio may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or holding a call option permitting the Portfolio to purchase the same futures contract at a price no higher than the price of the contract written by the Portfolio (or at a higher price if the difference is maintained in liquid assets with the Portfolio's custodian). For an additional discussion of futures contracts and the risks associated with them, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Securities and Stock Indices. The Portfolio may write covered call and put options and purchase call and put options on securities or stock indices that are traded on United States exchanges.
An option on a security is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security (in the case of a call option) or to sell a specified security (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option.
The Portfolio may write a call or put option only if the option is "covered." A call option on a security written by the Portfolio is covered if the Portfolio owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option on a security is also covered if the Portfolio holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Portfolio in cash or other liquid assets in a segregated account with its custodian. A put option on a security written by the Portfolio is "covered" if the Portfolio maintains similar liquid assets with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written.
The Portfolio will cover call options on stock indices by owning securities whose price changes, in the opinion of the Sub-advisor are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where the Portfolio covers a call option on a stock index through ownership of securities, such securities may not match the composition of the index. In that event, the Portfolio will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. The Portfolio will cover put options on stock indices by segregating assets equal to the option's exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations.
The Portfolio will receive a premium from writing a put or call option, which increases the Portfolio's gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security or an index on which the Portfolio has written a call option falls or remains the same, the Portfolio will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the portfolio securities being hedged. If the value of the underlying security or index rises, however, the Portfolio will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in the Portfolio's stock investments. By writing a put option, the Portfolio assumes the risk of a decline in the underlying security or index. To the extent that the price changes of the portfolio securities being hedged correlate with changes in the value of the underlying security or index, writing covered put options on securities or indices will increase the Portfolio's losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option.
The Portfolio may also purchase put options to hedge its investments against a decline in value. By purchasing a put option, the Portfolio will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of the Portfolio's investments does not decline as anticipated, or if the value of the option does not increase, the Portfolio's loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security or index and the changes in value of the Portfolio's security holdings being hedged.
The Portfolio may purchase call options on individual securities to hedge against an increase in the price of securities that the Portfolio anticipates purchasing in the future. Similarly, the Portfolio may purchase call options to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Portfolio holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, the Portfolio will bear the risk of losing all or a portion of the premium paid if the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the Portfolio seeks to close out an option position. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Portfolio may be able to offset to some extent any adverse effects of being unable to liquidate an option position, the Portfolio may experience losses in some cases as a result of such inability.
Foreign Currency Contracts and Currency Hedging Transaction. In order to hedge against foreign currency exchange rate risks, the Portfolio may enter into forward foreign currency exchange contracts and foreign currency futures contracts, as well as purchase put or call options on foreign currencies, as described below. The Portfolio may also conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market.
The Portfolio may enter into forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Portfolio from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. The Portfolio may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security. In addition, for example, when the Portfolio believes that a foreign currency may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell an amount of the former foreign currency (or another currency which acts as a proxy for that currency) approximating the value of some or all of the Portfolio's portfolio securities denominated in such foreign currency. This second investment practice is generally referred to as "cross-hedging." Because in connection with the Portfolio's foreign currency forward transactions an amount of the Portfolio's assets equal to the amount of the purchase will be held aside or segregated to be used to pay for the commitment, the Portfolio will always have cash or other liquid assets available sufficient to cover any commitments under these contracts or to limit any potential risk. The segregated account will be marked-to-market on a daily basis. In addition, the Portfolio will not enter into such forward contracts if, as a result, the Portfolio will have more than 15% of the value of its total assets committed to such contracts. 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 above may be restricted. Forward contracts may limit 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 engaged in such contracts.
The Portfolio may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As is the case with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Portfolio could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates although, in the event of rate movements adverse to the Portfolio's position, the Portfolio may forfeit the entire amount of the premium plus related transaction costs.
The Portfolio may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies ("foreign currency futures"). This investment technique will be used only to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of the Portfolio's portfolio securities or adversely affect the prices of securities that the Portfolio intends to purchase at a later date. The successful use of currency futures will usually depend on the Sub-advisor's ability to forecast currency exchange rate movements correctly. Should exchange rates move in an unexpected manner, the Portfolio may not achieve the anticipated benefits of foreign currency futures or may realize losses.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Cohen & Steers Realty Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in illiquid securities, as defined in the prospectus under "Investment Objective and Policies, Cohen & Steers Realty Portfolio" if immediately after such investment more than 15% of the Portfolio's net assets (taken at market value) would be invested in such securities;
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure permitted borrowings;
3. Participate on a joint or joint and several basis in any securities trading account;
4. Invest in companies for the purpose of exercising control;
5. Purchase securities of investment companies except in compliance with the 1940 Act; or
6. (a) invest in interests in oil, gas, or other mineral exploration or development programs; or (b) purchase securities on margin, except for such short-term credits as may be necessary for the clearance of transactions and except for borrowings in an amount not exceeding 10% of the value of the Portfolio's total assets.
Stein Roe Venture Portfolio:
Investment Objective: The investment objective of the Stein Roe Venture Portfolio is long-term capital appreciation.
Investment Policies:
Derivatives. Consistent with its objective, the Portfolio may invest in a broad array of financial instruments and securities, including conventional exchange-traded and non-exchange-traded options, futures contracts, futures options, securities collateralized by underlying pools of mortgages or other receivables, floating rate instruments, and other instruments that securitize assets of various types ("Derivatives"). In each case, the value of the instrument or security is "derived" from the performance of an underlying asset or a "benchmark" such as a security index, an interest rate, or a currency.
Derivatives are most often used to manage investment risk or to create an investment position indirectly because it is more efficient or less costly than direct investment or because investment cannot be readily established directly due to portfolio size, cash availability, or other factors. They also may be used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Sub-advisor's ability to correctly predict changes in the levels and directions of movements in security prices, interest rates and other market factors affecting the Derivative itself or the value of the underlying asset or benchmark. In addition, correlations in the performance of an underlying asset to a Derivative may not be well established. Finally, privately negotiated and over-the-counter Derivatives may not be as well regulated and may be less marketable than exchange-traded Derivatives.
The Portfolio does not currently intend to invest more than 5% of its net assets in any type of Derivative except for options, futures contracts, and futures options.
Some mortgage-backed debt securities are of the "modified pass-through type," which means the interest and principal payments on mortgages in the pool are "passed through" to investors. During periods of declining interest rates, there is increased likelihood that mortgages will be prepaid, with a resulting loss of the full-term benefit of any premium paid by the Portfolio on purchase of such securities; in addition, the proceeds of prepayment would likely be invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in underlying mortgages or an interest in collateralized mortgage obligations ("CMOs") that represent a right to interest and/or principal payments from an underlying mortgage pool. CMOs are not guaranteed by either the U.S. Government or by its agencies or instrumentalities, and are usually issued in multiple classes each of which has different payment rights, prepayment risks, and yield characteristics. Mortgage-backed securities involve the risk of prepayment on the underlying mortgages at a faster or slower rate than the established schedule. Prepayments generally increase with falling interest rates and decrease with rising rates but they also are influenced by economic, social, and market factors. If mortgages are pre-paid during periods of declining interest rates, there would be a resulting loss of the full-term benefit of any premium paid by the Fund on purchase of the CMO, and the proceeds of prepayment would likely be invested at lower interest rates.
Non-mortgage asset-backed securities usually have less prepayment risk than mortgage-backed securities, but have the risk that the collateral will not be available to support payments on the underlying loans that finance payments on the securities themselves.
Floating rate instruments provide for periodic adjustments in coupon interest rates that are automatically reset based on changes in amount and direction of specified market interest rates. In addition, the adjusted duration of some of these instruments may be materially shorter than their stated maturities. To the extent such instruments are subject to lifetime or periodic interest rate caps or floors, such instruments may experience greater price volatility than debt instruments without such features. Adjusted duration is an inverse relationship between market price and interest rates and refers to the approximate percentage change in price for a 1% change in yield. For example, if interest rates decrease by 1%, a market price of a security with an adjusted duration of 2 would increase by approximately 2%.
Foreign Securities. The Portfolio may invest up to 25% of its total assets in foreign securities, which may entail a greater degree of risk (including risks relating to exchange rate fluctuations, tax provisions, or expropriation of assets) than investment in securities of domestic issuers. For this purpose, foreign securities do not include American Depositary Receipts (ADRs) or securities guaranteed by a United States person. ADRs are receipts typically issued by an American bank or trust company evidencing ownership of the underlying securities. The Portfolio may invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the Portfolio is likely to bear its proportionate share of the expenses of the depositary and it may have greater difficulty in receiving shareholder communications than it would have with a sponsored ADR. The Portfolio does not intend to invest more than 5% of its net assets in unsponsored ADRs. Positions in these securities are not necessarily denominated in the same currency as the common stocks into which they may be converted. EDRs are European receipts evidencing a similar arrangement. Generally, ADRs, in registered form, are designed for the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets.
With respect to portfolio securities that are issued by foreign issuers or denominated in foreign currencies, the Portfolio's investment performance is affected by the strength or weakness of the U.S. dollar against these currencies. For example, if the dollar falls in value relative to the Japanese yen, the dollar value of a yen-denominated stock held in the portfolio will rise even though the price of the stock remains unchanged. Conversely, if the dollar rises in value relative to the yen, the dollar value of the yen-denominated stock will fall.
Investors should understand and consider carefully the risks involved in foreign investing. Investing in foreign securities, positions in which are generally denominated in foreign currencies, and utilization of forward foreign currency exchange contracts involve certain considerations comprising both risks and opportunities not typically associated with investing in U.S. securities.
Although the Portfolio will try to invest in companies and governments of countries having stable political environments, there is the possibility of expropriation or confiscatory taxation, seizure or nationalization of foreign bank deposits or other assets, establishment of exchange controls, the adoption of foreign government restrictions, or other adverse political, social or diplomatic developments that could affect investment in these nations.
For a further discussion of the risks involved in investing in foreign securities, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Currency Exchange Transactions. Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through forward currency exchange contracts ("forward contracts"). Forward contracts are contractual agreements to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks and broker-dealers, are not exchange traded, and are usually for less than one year, but may be renewed.
The Portfolio's foreign currency exchange transactions are limited to transaction and portfolio hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward contracts with respect to specific receivables or payables of the Portfolio arising in connection with the purchase and sale of its portfolio securities. Portfolio hedging is the use of forward contracts with respect to portfolio security positions denominated or quoted in a particular foreign currency. Portfolio hedging allows the Portfolio to limit or reduce its exposure in a foreign currency by entering into a forward contract to sell such foreign currency (or another foreign currency that acts as a proxy for that currency) at a future date for a price payable in U.S. dollars so that the value of the foreign-denominated portfolio securities can be approximately matched by a foreign-denominated liability. The Portfolio may not engage in portfolio hedging with respect to the currency of a particular country to an extent greater than the aggregate market value (at the time of making such sale) of the securities held in its portfolio denominated or quoted in that particular currency, except that the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currencies or currency act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in a Fund. The Portfolio may not engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency, the Portfolio may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency.
Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Portfolio to hedge against a devaluation that is so generally anticipated that the Portfolio is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Portfolio of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved.
For a further discussion of forward foreign currency exchange contracts, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. The Portfolio may invest in repurchase agreements, provided that it will not invest more than 15% of net assets in repurchase agreements maturing in more than seven days and any other illiquid securities. A repurchase agreement is a sale of securities to the Portfolio in which the seller agrees to repurchase the securities at a higher price, which includes an amount representing interest on the purchase price, within a specified time. In the event of bankruptcy of the seller, the Portfolio could experience both losses and delays in liquidating its collateral.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase Agreements. The Portfolio may purchase securities on a when-issued or delayed-delivery basis. Although the payment and interest terms of these securities are established at the time the Portfolio enters into the commitment, the securities may be delivered and paid for a month or more after the date of purchase, when their value may have changed. The Portfolio make such commitments only with the intention of actually acquiring the securities, but may sell the securities before settlement date if the Adviser deems it advisable for investment reasons. The Portfolio does not currently intend to have commitments to purchase when-issued securities in excess of 5% of its net assets.
The Portfolio may enter into reverse repurchase agreements with banks and securities dealers. A reverse repurchase agreement is a repurchase agreement in which the Portfolio is the seller of, rather than the investor in, securities and agrees to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement may be preferable to a regular sale and later repurchase of securities because it avoids certain market risks and transaction costs.
At the time the Portfolio enters into a binding obligation to purchase securities on a when-issued basis or enters into a reverse repurchase agreement, cash or other liquid assets of the Portfolio having a value at least as great as the purchase price of the securities to be purchased will be segregated on the books of the Portfolio and held by the custodian throughout the period of the obligation. The use of these investment strategies, as well as borrowing under a line of credit as described below, may increase net asset value fluctuation.
Short Sales "Against the Box." The Portfolio may sell securities short against the box; that is, enter into short sales of securities that it currently owns or has the right to acquire through the conversion or exchange of other securities that it owns at no additional cost. The Portfolio may make short sales of securities only if at all times when a short position is open the Portfolio owns at least an equal amount of such securities or securities convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities sold short, at no additional cost.
In a short sale against the box, the Portfolio does not deliver from its portfolio the securities sold. Instead, the Portfolio borrows the securities sold short from a broker-dealer through which the short sale is executed, and the broker-dealer delivers such securities, on behalf of the Portfolio, to the purchaser of such securities. The Portfolio is required to pay to the broker-dealer the amount of any dividends paid on shares sold short. Finally, to secure its obligation to deliver to such broker-dealer the securities sold short, the Portfolio must deposit and continuously maintain in a separate account with the Trust's custodian an equivalent amount of the securities sold short or securities convertible into or exchangeable for such securities at no additional cost. The Portfolio is said to have a short position in the securities sold until it delivers to the broker-dealer the securities sold. The Portfolio may close out a short position by purchasing on the open market and delivering to the broker-dealer an equal amount of the securities sold short, rather than by delivering portfolio securities.
Short sales may protect the Portfolio against the risk of losses in the value of its portfolio securities because any unrealized losses with respect to such portfolio securities should be wholly or partially offset by a corresponding gain in the short position. However, any potential gains in such portfolio securities should be wholly or partially offset by a corresponding loss in the short position. The extent to which such gains or losses are offset will depend upon the amount of securities sold short relative to the amount the Portfolio owns, either directly or indirectly, and, in the case where the Portfolio owns convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price of the security sold short increases between the time of the short sale and the time a Fund replaces the borrowed security, the Portfolio will incur a loss and if the price declines during this period, the Portfolio will realize a short-term capital gain. Any realized short-term capital gain will be decreased, and any incurred loss increased, by the amount of transaction costs and any premium, dividend or interest which the Fund may have to pay in connection with such short sale. Certain provisions of the Internal Revenue Code may limit the degree to which the Portfolio is able to enter into short sales. There is no limitation on the amount of the Portfolio's assets that, in the aggregate, may be deposited as collateral for the obligation to replace securities borrowed to effect short sales and allocated to segregated accounts in connection with short sales. The Portfolio currently expects that no more than 5% of its total assets would be involved in short sales against the box.
Rule 144A Securities. The Portfolio may purchase securities that have been privately placed but that are eligible for purchase and sale under Rule 144A under the 1933 Act. That Rule permits certain qualified institutional buyers, such as the Portfolio, to trade in privately placed securities that have not been registered for sale under the 1933 Act. The Sub-advisor, under the supervision of the Board of Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to the Portfolio's restriction of investing no more than 15% of its net assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Sub-advisor will consider the trading markets for the specific security, taking into account the unregistered nature of a Rule 144A security. In addition, the Sub-advisor could consider, among other factors, the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored and if, as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, the Portfolio's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Portfolio does not invest more than 15% of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a Portfolio's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. The Portfolio does not expect to invest as much as 5% of its total assets in Rule 144A securities that have not been deemed to be liquid by the Sub-advisor.
Line of Credit. Subject to the Portfolio's restriction on borrowing (8) under "Investment Restrictions" in this Statement, the Portfolio may establish and maintain a line of credit with a major bank in order to permit borrowing on a temporary basis to meet share redemption requests in circumstances in which temporary borrowing may be preferable to liquidation of portfolio securities.
Portfolio Turnover. Although the Portfolio does not purchase securities with a view to rapid turnover, there are no limitations on the length of time that portfolio securities must be held. Portfolio turnover can occur for a number of reasons such as general conditions in the securities markets, more favorable investment opportunities in other securities, or other factors relating to the desirability of holding or changing a portfolio investment. For a further discussion of portfolio turnover and its effects, see the Trust's Prospectus and this Statement under "Portfolio Turnover."
Options on Securities and Indices. The Portfolio may purchase and sell put options and call options on securities, indices or foreign currencies in standardized contracts traded on recognized securities exchanges, boards of trade, or similar entities, or quoted on Nasdaq. The Portfolio may purchase agreements, sometimes called cash puts, that may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the right to buy from
(call) or sell to (put) the seller (writer) of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (normally not exceeding nine
months). The writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver the
underlying security or foreign currency upon payment of the exercise price or to
pay the exercise price upon delivery of the underlying security or foreign
currency. Upon exercise, the writer of an option on an index is obligated to pay
the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial or securities
market, a specific group of financial instruments or securities, or certain
economic indicators.)
The Portfolio will write call options and put options only if they are "covered." For example, in the case of a call option on a security, the option is "covered" if the Portfolio owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount are held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio.
If an option written by the Portfolio expires, the Portfolio realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by the Portfolio expires, the Portfolio realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Portfolio will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Portfolio will realize a capital gain or, if it is less, the Portfolio will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
A put or call option purchased by the Portfolio is an asset of the Portfolio, valued initially at the premium paid for the option. The premium received for an option written by the Portfolio is recorded as a deferred credit. The value of an option purchased or written is marked-to-market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes. There are several risks associated with transactions in options. For example, there are significant differences between the securities markets, the currency markets, and the options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
For an additional discussion of options and the risks involved therein, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options on Futures Contracts. The Portfolio may use interest rate futures contracts, index futures contracts, and foreign currency futures contracts. An interest rate, index or foreign currency futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument or the cash value of an index at a specified price and time. A public market exists in futures contracts covering a number of indexes (including, but not limited to: the Standard & Poor's 500 Index, the Value Line Composite Index, and the New York Stock Exchange Composite Index) as well as financial instruments (including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes, Eurodollar certificates of deposit, and foreign currencies). Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded.
The Portfolio may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities, indexes and foreign currencies (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. The Portfolio might, for example, use futures contracts to hedge against or gain exposure to fluctuations in the general level of stock prices, anticipated changes in interest rates or currency fluctuations that might adversely affect either the value of the Portfolio's securities or the price of the securities that the Portfolio intends to purchase. Although other techniques could be used to reduce or increase that Fund's exposure to stock price, interest rate and currency fluctuations, the Portfolio may be able to achieve its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures options that are standardized and traded on an exchange, board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio, the Portfolio is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. Government securities or other securities acceptable to the broker ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract, which is returned to the Portfolio upon termination of the contract, assuming all contractual obligations have been satisfied. The Portfolio expects to earn interest income on its initial margin deposits. A futures contract held by the Portfolio is valued daily at the official settlement price of the exchange on which it is traded. Each day the Portfolio pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking-to-market." Variation margin paid or received by the Portfolio does not represent a borrowing or loan by the Portfolio but is instead settlement between the Portfolio and the broker of the amount one would owe the other if the futures contract had expired at the close of the previous day. In computing daily net asset value, the Portfolio will mark-to-market its open futures positions.
The Portfolio is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Portfolio.
Risks Associated with Futures. There are several risks associated with the use of futures contracts and futures options. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. In trying to increase or reduce market exposure, there can be no guarantee that there will be a correlation between price movements in the futures contract and in the portfolio exposure sought. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given transaction not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options and the related securities, including technical influences in futures and futures options trading and differences between the securities market and the securities underlying the standard contracts available for trading. For example, in the case of index futures contracts, the composition of the index, including the issuers and the weighting of each issue, may differ from the composition of the Portfolio's portfolio, and, in the case of interest rate futures contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in the Portfolio's portfolio. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected stock price or interest rate trends. Should such a decision be incorrect, the Portfolio's return might have been better had the transaction not been attempted.
For an additional discussion of future contracts and options on futures contracts and the risks involved therein, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Limitations on Options and Futures. If other options, futures contracts, or futures options of types other than those described herein are traded in the future, the Portfolio may also use those investment vehicles, provided the Board of Trustees determines that their use is consistent with the Portfolio's investment objective.
When purchasing a futures contract or writing a put option on a futures contract, the Portfolio must maintain with its custodian (or broker, if legally permitted) cash or other liquid assets (including any margin) equal to the market value of such contract. When writing a call option on a futures contract, the Portfolio similarly will maintain with its custodian cash or other liquid assets (including any margin) equal to the amount by which such option is in-the-money until the option expires or is closed out by the Portfolio.
The Portfolio may not maintain open short positions in futures contracts, call options written on futures contracts or call options written on indexes if, in the aggregate, the market value of all such open positions exceeds the current value of the securities in its portfolio, plus or minus unrealized gains and losses on the open positions, adjusted for the historical relative volatility of the relationship between the portfolio and the positions. For this purpose, to the extent the Portfolio has written call options on specific securities in its portfolio, the value of those securities will be deducted from the current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," the Portfolio will use commodity futures or commodity options contracts solely for bona fide hedging purposes within the meaning and intent of Regulation 1.3(z), or, with respect to positions in commodity futures and commodity options contracts that do not come within the meaning and intent of 1.3(z), the aggregate initial margin and premiums required to establish such positions will not exceed 5% of the fair market value of the assets of the Portfolio, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into [in the case of an option that is in-the-money at the time of purchase, the in-the-money amount (as defined in Section 190.01(x) of the Commission Regulations) may be excluded in computing such 5%].
Taxation of Options and Futures. If the Portfolio exercises a call or put option that it holds, the premium paid for the option is added to the cost basis of the security purchased (call) or deducted from the proceeds of the security sold (put). For cash settlement options and futures options exercised by the Portfolio, the difference between the cash received at exercise and the premium paid is a capital gain or loss.
If a call or put option written by the Portfolio is exercised, the
premium is included in the proceeds of the sale of the underlying security
(call) or reduces the cost basis of the security purchased (put). For cash
settlement options and futures options written by the Portfolio, the difference
between the cash paid at exercise and the premium received is a capital gain or
loss.
Entry into a closing purchase transaction will result in capital gain or loss. If an option written by the Portfolio was in-the-money at the time it was written and the security covering the option was held for more than the long-term holding period prior to the writing of the option, any loss realized as a result of a closing purchase transaction will be long-term. The holding period of the securities covering an in-the-money option will not include the period of time the option is outstanding.
If the Portfolio writes an equity call option other than a "qualified covered call option," as defined in the Internal Revenue Code, any loss on such option transaction, to the extent it does not exceed the unrealized gains on the securities covering the option, may be subject to deferral until the securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss equal to the difference between the price at which the futures contract was entered into and the settlement price on the earlier of delivery notice date or expiration date. If the Portfolio delivers securities under a futures contract, the Portfolio also realizes a capital gain or loss on those securities.
For federal income tax purposes, the Portfolio generally is required to recognize as income for each taxable year its net unrealized gains and losses as of the end of the year on futures, futures options and non-equity options positions ("year-end mark-to-market"). Generally, any gain or loss recognized with respect to such positions (either by year-end mark-to-market or by actual closing of the positions) is considered to be 60% long-term and 40% short-term, without regard to the holding periods of the contracts. However, in the case of positions classified as part of a "mixed straddle," the recognition of losses on certain positions (including options, futures and futures options positions, the related securities and certain successor positions thereto) may be deferred to a later taxable year. Sale of futures contracts or writing of call options (or futures call options) or buying put options (or futures put options) that are intended to hedge against a change in the value of securities held by the Portfolio: (1) will affect the holding period of the hedged securities; and (2) may cause unrealized gain or loss on such securities to be recognized upon entry into the hedge.
If the Portfolio were to enter into a short index future, short index futures option or short index option position and the Portfolio's portfolio were deemed to "mimic" the performance of the index underlying such contract, the option or futures contract position and the Portfolio's stock positions would be deemed to be positions in a mixed straddle, subject to the above-mentioned loss deferral rules.
In order for the Portfolio to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts). Any net gain realized from futures (or futures options) contracts will be considered gain from the sale of securities and therefore be qualifying income for purposes of the 90% requirement.
Swaps, Caps, Floors and Collars. The Portfolio may enter into swaps and may purchase or sell related caps, floors and collars. The Portfolio would enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities it intends to purchase at a later date. The Portfolio intends to use these techniques as hedges and not as speculative investments.
A swap agreement is generally individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on its structure, a swap agreement may increase or decrease the Portfolio's exposure to changes in the value of an index of securities in which the Portfolio might invest, the value of a particular security or group of securities, or foreign currency values. Swap agreements can take many different forms and are known by a variety of names. The Portfolio may enter into any form of swap agreement if the Sub-advisor determines it is consistent with its investment objective and policies.
A swap agreement tends to shift the Portfolio's investment exposure from one type of investment to another. For example, if the Portfolio agrees to exchange payments in dollars at a fixed rate for payments in a foreign currency the amount of which is determined by movements of a foreign securities index, the swap agreement would tend to increase exposure to foreign stock market movements and foreign currencies. Depending on how it is used, a swap agreement may increase or decrease the overall volatility of the Portfolio's investments and its net asset value.
The performance of a swap agreement is determined by the change in the specific currency, market index, security, or other factors that determine the amounts of payments due to and from the Portfolio. If a swap agreement calls for payments by the Portfolio, the Portfolio must be prepared to make such payments when due. If the counterparty's creditworthiness declines, the value of a swap agreement would be likely to decline, potentially resulting in a loss. The Portfolio will not enter into any swap, cap, floor or collar transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least A by Standard & Poor's Corporation or Moody's or has an equivalent rating from a nationally recognized statistical rating organization or is determined to be of equivalent credit quality by the Sub-advisor.
The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling the cap to the extent that a specified index exceeds a predetermined interest rate or amount. The purchase of a floor entitles the purchaser to receive payments on a notional principal amount from the party selling such floor to the extent that a specified index falls below a predetermined interest rate or amount. A collar is a combination of a cap and floor that preserves a certain return within a predetermined range of interest rates or values.
At the time the Portfolio enters into swap arrangements or purchases or sells caps, floors or collars, liquid assets of the Portfolio having a value at least as great as the commitment underlying the obligations will be segregated on the books of the Portfolio and held by the custodian throughout the period of the obligation.
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable only to the Stein Roe Venture Portfolio. These limitations are not "fundamental" restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in interests in oil, gas, or other mineral leases or exploration or development programs (except readily marketable securities, including but not limited to master limited partnership interests, that may represent indirect interests in oil, gas, or other mineral exploration or development programs);
2. Invest in companies for the purpose of exercising control or management;
3. Purchase securities of other investment companies except in compliance with the 1940 Act;
4. Invest more than 25% of its total assets (valued at time of purchase) in securities of foreign issuers (other than securities represented by American Depositary Receipts (ADRs) or securities guaranteed by a U.S. person);
5. Purchase securities on margin (except for use of short-term credits as are necessary for the clearance of transactions), or sell securities short unless (i) it owns or has the right to obtain securities equivalent in kind and amount to those sold short at no added cost or (ii) the securities sold are "when issued" or "when distributed" securities which it expects to receive in a recapitalization, reorganization, or other exchange for securities it contemporaneously owns or has the right to obtain and provided that transactions in options, futures, and options on futures are not treated as short sales;
6. Invest more than 15% of its net assets (taken at market value at the time of a particular investment) in illiquid securities, including repurchase agreements maturing in more than seven days.
Bankers Trust Enhanced 500 Portfolio:
Investment Objective: The investment objective of the Bankers Trust Enhanced 500 Portfolio (the "Portfolio") is to outperform the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500(R) Index") through stock selection resulting in different weightings of common stocks relative to the index.
Investment Policies:
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 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.
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. Restricted or other illiquid securities may be subject to 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 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.
Specifically, the Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restrictions 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 Sub-advisor 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.
Subject to guidelines promulgated by the Board of Trustees of the Trust, the Sub-advisor will monitor the liquidity of Rule 144A securities in the Portfolio's portfolio. In reaching liquidity decisions, the Sub-advisor 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).
Short-Term Instruments. When the Portfolio experiences large cash inflows through the sale of securities and desirable equity securities that are consistent with the Fund's investment objective 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: (i) short-term obligations issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or by any of the states; (ii) other short-term debt securities rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of comparable quality in the opinion of the Sub-advisor; (iii) commercial paper; (iv) bank obligations, including negotiable certificates of deposit, time deposits and bankers' 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 the Sub-advisor.
Additional U.S. Government Obligations. The 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, the 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 the 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 Federal Farm Credit System 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.
When-Issued and Delayed Delivery Securities. The 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 the Portfolio until settlement takes place. At the time the Portfolio makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction, reflect the value of such securities in determining its net asset value each day thereafter and, if applicable, calculate the maturity for the purposes of average maturity from the commitment date. At the time of settlement a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, the Portfolio will maintain with its custodian a segregated account consisting of cash or other liquid assets in an amount at least equal to such commitments. On delivery dates for such transactions, the Portfolio will meet its obligations from maturities or sales of the securities held in the segregated account and/or from cash flow. If the 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 obligation, incur a gain or loss due to market fluctuation. It is the current policy of the 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.
Equity Investments. The Portfolio may invest in equity securities listed on any domestic 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.
Reverse Repurchase Agreements. The Portfolio 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 the Portfolio enters into a reverse repurchase agreement it will place in a segregated custodial account cash or other liquid assets 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 the Portfolio may decline below the repurchase price of those securities. Reverse repurchase agreements are considered to be borrowings by the 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 debt securities or preferred stocks that may be converted into common stock or that carry 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.
Futures Contracts and Options on Futures Contracts.
Futures Contracts. The Portfolio may enter into securities index futures contracts. 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. These investments will be made by the Portfolio solely for hedging purposes. Such investments will be made only if they are economically appropriate to the reduction of risks involved in the management of the Portfolio. In this regard, the Portfolio may enter into futures contracts or options on futures related to the S&P 500.
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.
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 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.
In addition, futures contracts entail other risks. The Sub-advisor believes that use of such contracts will benefit the Portfolio. The successful use of futures contracts, however, depends on the degree of correlation between the futures and securities markets. In addition, successful use of futures contracts is dependent on the Sub-advisor's ability to correctly predict movements in the securities markets and no assurance can be given that its judgment will be correct. For an additional discussion of futures contracts and the risks involved therein, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may use stock index futures on a continual basis to equitize cash so that the Portfolio may maintain 100% equity exposure. 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.
A futures option gives the holder, in return for the premium paid, the right to buy (call) from or sell (put) to the writer of the option a futures contract at a specified price at any time during the period of the option. Upon exercise, the writer of the option is obligated to pay the difference between the cash value of the futures contract and the exercise price. Like the buyer or seller of a futures contract, the holder, or writer, of an option has the right to terminate its position prior to the scheduled expiration of the option by selling or purchasing an option of the same series, at which time the person entering into the closing transaction will realize a gain or loss. The Portfolio will be required to deposit initial margin and variation margin with respect to put and call options on futures contracts written by it pursuant to brokers' requirements similar to those described above. Net option premiums received will be included as initial margin deposits. In anticipation of a decline in interest rates, the Portfolio may purchase call options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities that the Portfolio intends to purchase. Similarly, if the value of the securities held by the Portfolio is expected to decline as a result of an increase in interest rates, the Portfolio might purchase put options or sell call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations that are involved in connection with investments in futures contracts (for example, the existence of a liquid secondary market). In addition, the purchase or sale of an option also entails the risk that changes in the value of the underlying futures contract will not correspond to changes in the value of the option purchased. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option my or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contract. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). The writing of an option on a futures contact involves risks similar to those risks relating to the sale of futures contracts.
Options on Securities Indices. The Fund may 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.
Options on securities indices entail certain risks. The absence of a liquid secondary market to close out options positions on securities indices may occur, although the Portfolio generally will only purchase or write such an option if the Sub-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 Sub-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.
For an additional discussion of options and the risks involved therein, see the Trust's Prospectus and this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Bankers Trust Enhanced 500 Portfolio. These limitations are not "fundamental' restrictions and may be changed by the Trustees without shareholder approval. The Portfolio will not:
1. 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;
2. Invest for the purpose of exercising control or management;
3. Purchase securities of other investment companies except in compliance with the 1940 Act; or
4. Invest more than 15% of the Portfolio'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 is not traded flat or in default as to interest or principal.
Marsico Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth. This is a fundamental objective of the Portfolio. Realization of income is not an investment objective and any income realized on the Portfolio's investments, therefore, will be incidental to the Portfolio's objective.
Investment Policies:
Futures, Options and Other Derivative Instruments. The Portfolio may enter into futures contracts on securities, financial indices, and foreign currencies and options on such contracts, and may invest in options on securities, financial indices and foreign currencies, forward contracts and swaps. The Portfolio will not enter into any futures contracts or options on futures contracts if the aggregate amount of the Portfolio's commitments under outstanding futures contract positions and options on futures contracts written by the Portfolio would exceed the market value of the total assets of the Portfolio. The Portfolio may invest in forward currency contracts with stated values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated transactions on the types of securities and indices based on the types of securities in which the Portfolio is permitted to invest directly. The Portfolio will effect such transactions only with investment dealers and other financial institutions (such as commercial banks or savings and loan institutions) deemed creditworthy by the Sub-advisor, and only pursuant to procedures adopted by the Sub-advisor for monitoring the creditworthiness of those entities. To the extent that an option bought or written by the Portfolio in a negotiated transaction is illiquid, the value of an option bought or the amount of the Portfolio's obligations under an option written by the Portfolio, as the case may be, will be subject to the Portfolio's limitation on illiquid investments. In the case of illiquid options, it may not be possible for the Portfolio to effect an offsetting transaction at a time when the Sub-advisor believes it would be advantageous for the Portfolio to do so. For a description of these strategies and instruments and certain risks involved therein, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and Floors. In addition to the strategies noted above, the Portfolio, in order to attempt to protect the value of its investments from interest rate or currency exchange rate fluctuations, may enter into interest rate swaps and may buy or sell interest rate caps and floors. The Portfolio expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its investments. The Portfolio also may enter into these transactions to protect against any increase in the price of securities the Portfolio may consider buying at a later date. The Portfolio does not intend to use these transactions as speculative investments. Interest rate swaps involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The exchange commitments can involve payments to be made in the same currency or in different currencies. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, depending upon whether it is hedging its assets or its liabilities, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Portfolio's obligations over its entitlements with respect to each interest rate swap will be calculated on a daily basis and an amount of cash or other liquid assets having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Portfolio's custodian. If the Portfolio enters into an interest rate swap on other than a net asset basis, the Portfolio would maintain a segregated account in the full amount accrued on a daily basis of the Portfolio's obligations with respect to the swap. The Portfolio will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in one of the three highest rating categories of at least one nationally recognized statistical rating organization at the time of entering into such transaction. The Sub-advisor will monitor the creditworthiness of all counterparties on an ongoing basis. If there is a default by the other party to such a transaction, the Portfolio will have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. The Sub-advisor has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent the Portfolio sells (i.e., writes) caps and floors, it will maintain in a segregated account cash or other liquid assets having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that may be entered into by the Portfolio. These transactions may in some instances involve the delivery of securities or other underlying assets by the Portfolio or its counterparty to collateralize obligations under the swap. Under the documentation currently used in those markets, the risk of loss with respect to interest rate swaps is limited to the net amount of the payments that the Portfolio is contractually obligated to make. If the other party to an interest rate swap that is not collateralized defaults, the Portfolio would risk the loss of the net amount of the payments that the Portfolio contractually is entitled to receive. The Portfolio may buy and sell (i.e., write) caps and floors without limitation, subject to the segregated account requirement described above. For an additional discussion of these strategies, see this Statement under "Certain Risk Factors and Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may enter into repurchase agreements. The Portfolio may also enter into reverse repurchase agreements. For a description of these investment techniques, see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
High-Yield/High-Risk Securities. High-yield/high-risk securities (or "junk" bonds) are debt securities rated below investment grade by the primary rating agencies such as Standard & Poor's Rating Services ("Standard & Poor's") and Moody's Investors Service, Inc. ("Moody's"). The Portfolio will not invest more than 5% of its total assets in these securities.
The value of lower quality securities generally is more dependent on the ability of the issuer to meet interest and principal payments (i.e. credit risk) than is the case for higher quality securities. Conversely, the value of higher quality securities may be more sensitive to interest rate movements than lower quality securities. The Portfolio will not purchase debt securities rated below "CCC-" by Standard & Poor's or "Caa" by Moody's. The Portfolio may also purchase unrated bonds of foreign and domestic issuers. For an additional discussion of high-yield/high-risk securities, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The following limitations are applicable to the Marsico Capital Growth Portfolio. These limitations are not "fundamental" restrictions, and may be changed by the Trustees without shareholder approval.
1. The Portfolio does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short without the payment of any additional consideration therefor, and provided that transactions in futures, options, swaps and forward contracts are not deemed to constitute selling securities short.
2. The Portfolio does not currently intend to purchase securities on margin, except that the Portfolio may obtain such short-term credits as are necessary for the clearance of transactions, and provided that margin payments and other deposits in connection with transactions in futures, options, swaps and forward contracts shall not be deemed to constitute purchasing securities on margin.
3. The Portfolio may not mortgage or pledge any securities owned or held by the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's net asset value, provided that this limitation does not apply to (i) reverse repurchase agreements; (ii) deposits of assets on margin; (iii) guaranteed positions in futures, options, swaps or forward contracts; or (iv) the segregation of assets in connection with such contracts.
4. The Portfolio does not currently intend to purchase any securities or enter into a repurchase agreement if, as a result, more than 15% of its net assets would be invested in repurchase agreements not entitling the holder to payment of principal and interest within seven days and in securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market. The Trustees of the Trust, or the Sub-advisor acting pursuant to authority delegated by the Trustees, may determine that a readily available market exists for securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended, or any successor to such rule, and Section 4(2) commercial paper. Accordingly, such securities may not be subject to the foregoing limitation.
5. The Portfolio may not invest in companies for the purpose of exercising control or management.
Neuberger&Berman Mid-Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital growth.
Investment Policies:
Repurchase Agreements. In a repurchase agreement, the Portfolio purchases securities from a Federal Reserve member bank or a securities dealer deemed creditworthy by the Sub-advisor under procedures established by the Board of Trustees of the Trust. The bank or securities dealer agrees to repurchase the securities from the Portfolio at a higher price on a designated future date. Repurchase agreements generally are for a short period of time, usually less than a week. Repurchase agreements with a maturity of more than seven business days are considered to be illiquid securities; the Portfolio may not enter into such a repurchase agreement if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid securities. The Portfolio will enter into a repurchase agreement only if (1) the underlying securities are of the type (excluding maturity and duration limitations) that the Portfolio's investment policies and limitations would allow it to purchase directly, (2) the market value of the underlying securities, including accrued interest, and any other collateral for the repurchase agreement at al1 times equals or exceeds the amount paid by the Portfolio under the agreement, and (3) payment for the underlying securities is made only upon satisfactory evidence that the securities are being held for the Portfolio's account by the custodian or a bank acting as the Portfolio's agent.
Securities Loans. In order to realize income, the Portfolio may lend portfolio securities with a value not exceeding 33-1/3% of its total assets to banks, brokerage firms, or institutional investors judged creditworthy by the Sub-advisor. Borrowers are required continuously to secure their obligations to return securities on loan from the Portfolio by depositing collateral, which will be marked to market daily, in a form determined to be satisfactory by the Trustees and equal to at least 100% of the market value of the loaned securities, which will also be marked to market daily. The Sub-advisor believes the risk of loss on these transactions is slight because, if a borrower were to default for any reason, the collateral should satisfy the obligation. However, as with other extensions of secured credit, loans of portfolio securities involve some risk of loss of rights in the collateral should the borrower fail financially.
Restricted Securities and Rule 144A Securities. The Portfolio may invest in restricted securities, which are securities that may not be sold to the public without an effective registration statement under the 1933 Act. Before they are registered, such securities may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. In recognition of the increased size and liquidity of the institutional markets for unregistered securities and the importance of institutional investors in the formation of capital, the SEC has adopted Rule 144A under the 1933 Act, which is designed to facilitate efficient trading among institutional investors by permitting the sale of certain unregistered securities to qualified institutional buyers. To the extent privately placed securities held by the Portfolio qualify under Rule 144A, and an institutional market develops for those securities, the Portfolio likely will be able to dispose of the securities without registering them under the 1933 Act. To the extent that institutional buyers become, for a time, uninterested in purchasing these securities, investing in Rule 144A securities could have the effect of increasing the level of the Portfolio's illiquidity. The Sub-advisor, acting under guidelines established by the Board of Trustees of the Trust, may determine that certain securities qualified for trading under Rule 144A are liquid.
Where registration is required, the Portfolio may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the decision to sell and the time the Portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell. Restricted securities, excluding Rule 144A securities deemed liquid by the Sub-advisor, are considered illiquid, and will be subject to the Portfolio's 15% limit on investments in illiquid securities. Foreign securities that are freely tradable in their principal markets are not considered by the Portfolio to be illiquid. Illiquid securities for which no market exists are priced by a method that the Trustees believe accurately reflects fair value.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Portfolio sells portfolio securities subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest; these agreements are considered borrowings for purposes of the Portfolio's investment limitations and policies concerning borrowings. There is a risk that the counterparty to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the Portfolio.
Covered Call Options. The Portfolio may write covered call options on securities it owns valued at up to 10% of its net assets and may purchase call options in related closing transactions. Generally, the purpose of writing these options is to reduce the effect of price fluctuations of securities held by the Portfolio on the Portfolio's net asset value. Securities on which call options may be written by the Portfolio are purchased solely on the basis of investment considerations consistent with the Portfolio's investment objectives.
When the Portfolio writes a call option, it is obligated to sell a security to a purchaser at a specified price at any time until a certain date if the purchaser decides to exercise the option. The Portfolio receives a premium for writing the call option. The Portfolio writes only "covered" call options on securities it owns. So long as the obligation of the writer of the call option continues, the writer may be assigned an exercise notice, requiring it to deliver the underlying security against payment of the exercise price. The Portfolio may be obligated to deliver securities underlying a call option at less than the market price thereby giving up any additional gain on the security.
When the Portfolio purchases a call option, it pays a premium for the right to purchase a security from the writer at a specified price until a specified date. A call option would be purchased by the Portfolio to offset a previously written call option.
The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of "naked" or uncovered call options, which the Portfolio will not do), but is capable of enhancing the Portfolio's total return. When writing a covered call option, the Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security above the exercise price, but conversely retains the risk of loss should the price of the security decline. If a call option that the Portfolio has written expires unexercised, the Portfolio will realize a gain in the amount of the premium; however, that gain may be offset by a decline in the market value of the underlying security during the option period. If the call or put option is exercised, the Portfolio will realize a gain or loss from the sale or purchase of the underlying security.
The exercise price of an option may be below, equal to, or above the market value of the underlying security at the time the option is written. Options normally have expiration dates between three and nine months from the date written. The obligation under any option terminates upon expiration of the option or, at an earlier time, when the writer offsets the option by entering into a "closing purchase transaction" to purchase an option of the same series. If an option is purchased by the Portfolio and is never exercised, the Portfolio will lose the entire amount of the premium paid.
Options are traded both on national securities exchanges and in the over-the-counter ("OTC") market. Exchange-traded options are issued by a clearing organization affiliated with the exchange on which the option is listed; the clearing organization in effect guarantees completion of, every exchange-traded option. In contrast, OTC options are contracts between the Portfolio and its counter-party with no clearing organization guarantee. Thus, when the Portfolio sells or purchases an OTC option, it generally will be able to "close out" the option prior to its expiration only by entering into a "closing purchase transaction" with the dealer to whom or from whom the Portfolio originally sold or purchased the option. The Sub-advisor monitors the creditworthiness of dealers with which the Portfolio may engage in OTC options, and will limit counterparties in such transactions to dealers with a net worth of at least $20 million as reported in their latest financial statements. For an additional discussion of OTC options and their risks, see this Statement under "Certain Risk Factors and Investment Methods."
The premium received (or paid) by the Portfolio when it writes (or purchases) an option is the amount at which the option is currently traded on the applicable exchange, less (or plus) a commission. The premium may reflect, among other things, the current market price of the underlying security, the relationship of the exercise price to the market price, the historical price volatility of the underlying security, the length of the option period, the general supply of and demand for credit, and the general interest rate environment. The premium received by the Portfolio for writing an option is recorded as a liability on the Portfolio's statement of assets and liabilities. This liability is adjusted daily to the option's current market value.
The Portfolio pays the brokerage commissions in connection with purchasing or writing options, including those used to close out existing positions. These brokerage commissions normally are higher than those applicable to purchases and sales of portfolio securities.
From time to time, the Portfolio may purchase an underlying security for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering the security from its portfolio. In those cases, additional brokerage commissions are incurred.
For an additional discussion of options and their risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated securities issued by foreign issuers (including governments and quasi-governments) and foreign branches of U.S. banks, including negotiable CDs and commercial paper. These investments are subject to the Portfolio's quality standards. While investments in foreign securities are intended to reduce risk by providing further diversification, such investments involve sovereign and other risks, in addition to the credit and market risks normally associated with domestic securities.
The Portfolio may invest in equity, debt, or other income-producing
securities that are denominated in or indexed to foreign currencies, including,
but not limited to (1) common and preferred stocks, (2) convertible securities,
(3) CDs, commercial paper, fixed-time deposits, and bankers' acceptances issued
by foreign banks, (4) obligations of other corporations, and (5) obligations of
foreign governments, or their subdivisions, agencies, and instrumentalities,
international agencies, and supranational entities. Risks of investing in
foreign currency denominated securities include (1) nationalization,
expropriation, or confiscatory taxation, (2) adverse changes in investment or
exchange control regulations (which could prevent cash from being brought back
to the U.S.), and (3) expropriation or nationalization of foreign portfolio
companies. Mail service between the U.S. and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. For an additional discussion of the risks associated with foreign
securities, whether denominated in U.S. dollars or foreign currencies, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Prices of foreign securities and exchange rates for foreign currencies may be affected by the interest rates prevailing in other countries. The interest rates in other countries are often affected by local factors, including the strength of the local economy, the demand for borrowing, the government's fiscal and monetary policies, and the international balance of payments. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments position.
Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when a portion of the assets of the Portfolio is uninvested and no return is earned thereon. The inability of the Portfolio to make intended security purchases due to settlement problems could cause the Portfolio to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Portfolio due to subsequent declines in value of the portfolio securities, or, if the Portfolio has entered into a contract to sell the securities, could result in possible liability to the purchaser.
The Portfolio may invest in foreign corporate bonds and debentures and sovereign debt instruments issued or guaranteed by foreign governments, their agencies or instrumentalities. The Portfolio may invest in lower-rated foreign debt securities subject to the Portfolio's 15% limitation on lower-rated debt securities. Foreign debt securities are subject to risks similar to those of other foreign securities, as well as risks similar to those of other debt securities, as discussed in this Statement and in the Trust's Prospectus under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
In order to limit the risk inherent in investing in foreign currency-denominated securities, the Portfolio may not purchase any such security if after such purchase more than 10% of its total assets (taken at market value) would be invested in such securities. Within such limitation, however, the Portfolio is not restricted in the amount it may invest in securities denominated in any one foreign currency.
Foreign Currency Transactions. The Portfolio may engage in foreign currency exchange transactions. Foreign currency exchange transactions will be conducted either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies ("forward contracts"). The Portfolio may enter into forward contracts in order to protect against uncertainty in the level of future foreign currency exchange rates, and only in amounts not exceeding 5% of the Portfolio's net assets.
A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (usually less than one year) from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the spread) between the price at which they are buying and selling various currencies.
When the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may wish to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in the underlying security transactions, the Portfolio will be able to protect itself against a possible loss. When the Sub-advisor believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may also enter into a forward contract to sell the amount of foreign currency for a fixed amount of dollars which approximates the value of some or all of a Portfolio's securities denominated in such foreign currency. The Portfolio may also engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency, when the Sub-advisor believes that there is a pattern of correlation between the two currencies.
When the Portfolio engages in forward contracts for hedging purposes, it will not enter into forward contracts to sell currency or maintain a net exposure to such contracts if their consummation would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of its portfolio securities or other assets denominated in that currency. At the consummation of the forward contract, the Portfolio may either make delivery of the foreign currency or terminate its contractual obligation to deliver by purchasing an offsetting contract obligating it to purchase the same amount of such foreign currency at the same maturity date. If the Portfolio chooses to make delivery of the foreign currency, it may be required to obtain such currency through the sale of portfolio securities denominated in such currency or through conversion of other assets into such currency. If the Portfolio engages in an offsetting transaction, it will incur a gain or a loss to the extent that there has been a change in forward contract prices. Closing purchase transactions with respect to forward contracts are usually made with the currency trader who is a party to the original forward contract.
The Portfolio is not required to enter into such transactions and will not do so unless deemed appropriate by the Sub-advisor.
Using forward contracts to protect the value of the Portfolio's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which can be achieved at some future point in time. The precise projection of short-term currency market movements is not possible, and short-term hedging provides a means of fixing the dollar value of only a portion of the Portfolio's foreign assets.
While the Portfolio may enter forward contracts to reduce currency exchange rate risks, transactions in such contracts involve certain other risks. Thus, while the Portfolio may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Portfolio than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between the Portfolio's holdings of securities denominated in a particular currency and forward contracts entered into by the Portfolio. Such imperfect correlation may cause the Portfolio to sustain losses which will prevent it from achieving a complete hedge or expose it to risk of foreign exchange loss.
The Portfolio generally will not enter into a forward contract with a term of greater than one year. The Portfolio may experience delays in the settlement of its foreign currency transactions.
When the Portfolio engages in forward contracts for the sale or purchase of currencies, the Portfolio will either cover its position or establish a segregated account. The Portfolio will consider its position covered if it has securities in the currency subject to the forward contract, or otherwise has the right to obtain that currency at no additional cost. In the alternative, the Portfolio will place cash, fixed income, or equity securities (denominated in the foreign currency subject to the forward contract) in a separate account. The amounts in such separate account will equal the value of the Portfolio's assets which are committed to the consummation of foreign currency exchange contracts. If the value of the securities placed in the separate account declines, the Portfolio will place additional cash or securities in the account on a daily basis so that the value of the account will equal the amount of its commitments with respect to such contracts.
For an additional discussion of forward foreign currency exchange contracts and their risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may write and purchase covered call and put options on foreign currencies in amounts not exceeding 5% of its net assets for the purpose of protecting against declines in the U.S. dollar value of portfolio securities or increases in the U.S.-dollar cost of securities to be acquired, or to protect the dollar equivalent of dividend, interest, or other payment on those securities. 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 decreases in the value of portfolio securities, the Portfolio may purchase put options on the foreign currency. If the value of the currency declines, the Portfolio will have the right to sell such currency for a fixed amount of dollars which exceeds the market value of such currency. This would result in a gain that may offset, in whole or in part, the negative effect of currency depreciation on the value of the Portfolio's securities denominated in that currency.
Conversely, if the dollar value of a currency in which securities to be acquired by the Portfolio are denominated rises, thereby increasing the cost of such securities, the Portfolio may purchase call options on such currency. If the value of such currency increases sufficiently, the Portfolio will have the right to purchase that currency for a fixed amount of dollars which is less than the market value of that currency. Such a purchase would result in a gain that may offset, at least partially, the effect of any currency-related increase in the price of securities the Portfolio intends to acquire.
As in the case of other types of options transactions, however, the benefit the Portfolio derives from purchasing foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, if 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 deprive it of a portion or all of the benefits of advantageous changes in such rates.
The Portfolio may also write options on foreign currencies for hedging purposes. For example, if the Sub-advisor anticipates a decline in the dollar value of foreign currency denominated securities because of declining exchange rates, it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised, and the decrease in value of portfolio securities will be offset, at least in part, by the amount of the premium received by the Portfolio.
Similarly, the Portfolio could write a put option on the relevant currency, instead of purchasing a call option, to hedge against an anticipated increase in the dollar cost of securities to be acquired. If exchange rates move in the manner projected, the put option most likely will not be exercised, and such increased cost will be offset, at least in part, by the amount of the premium received. However, as in the case of other types of options transactions, 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 unanticipated exchange rate fluctuations occur, a put or call option may be exercised and the Portfolio could be required to purchase or sell the underlying currency at a loss which may not be fully offset by the amount of the premium. As a result of writing 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 currency exchange rates. Certain options on foreign currencies are traded on the OTC market and involve liquidity and credit risks that may not be present in the case of exchange-traded currency options.
A call option written on foreign currency by the Portfolio is "covered" if the Portfolio owns the underlying foreign currency subject to the call, or if it has an absolute and immediate right to acquire that foreign currency without additional cash consideration. A call option is also covered if the Portfolio holds a call on the same foreign currency for the same principal amount as the call written where the exercise price of the call held is (a) equal to or less than the exercise price of the call written or (b) greater than the exercise price of the call written if the amount of the difference is maintained by the Portfolio in cash, fixed income or equity securities in a segregated account with its custodian.
The risks of currency options are similar to the risks of other options, as discussed above and in this Statement under "Certain Risk Factors and Investment Methods."
Cover for Options on Securities, Forward Contracts, and Options on Foreign Currencies ("Hedging Instruments"). The Portfolio will comply with SEC staff guidelines regarding "cover" for Hedging Instruments and, if the guidelines so require, set aside in a segregated account with its custodian the prescribed amount of cash, fixed income, or equity securities. Securities held in a segregated account cannot be sold while the futures, option, or forward strategy covered by those securities is outstanding, unless they are replaced with other suitable assets. As a result, segregation of a large percentage of the Portfolio's assets could impede portfolio management or the Portfolio's ability to meet current obligations. The Portfolio may be unable promptly to dispose of assets that cover, or are segregated with respect to, an illiquid options or forward position; this inability may result in a loss to the Portfolio.
When-Issued Securities. The Portfolio may purchase securities on a when-issued basis, that is, by committing to purchase securities and completing the purchase by making payment against delivery of the securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases are negotiated directly with the other party, and are not traded on exchanges. When-issued purchases enable the Portfolio to "lock in" what the Sub-advisor believes to be an attractive price or yield on a particular security for a period of time, regardless of future changes in interest rates. For instance, in periods of falling interest rates and rising prices, the Portfolio might purchase a security on a when-issued basis and sell a similar security to settle such purchase, thereby obtaining the benefit of currently higher yields.
The value of securities purchased on a when-issued basis and any subsequent fluctuations in their value are reflected in the computation of a Portfolio's net asset value starting on the date of the agreement to purchase the securities. Because the Portfolio has not yet paid for the securities, this produces an effect similar to leverage. The Portfolio does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.
The Portfolio will purchase securities on a when-issued basis only with the intention of completing the transaction and actually purchasing the securities. If deemed advisable as a matter of investment strategy, however, the Portfolio may dispose of or renegotiate a commitment after it has been entered into. The Portfolio also may sell securities it has committed to purchase before those securities are delivered to the Portfolio on the settlement date. The Portfolio may realize a gain or loss in connection with these transactions.
When the Portfolio purchases securities on a when-issued basis, it will deposit, in a segregated account with its custodian, until payment is made, cash, fixed income, or equity securities having an aggregate market value (determined daily to the extent required by SEC staff policy) at least equal to the amount of the Portfolio's purchase commitments. In the case of a forward commitment to sell portfolio securities, the custodian will hold the portfolio securities themselves in a segregated account while the commitment is outstanding. These procedures are designed to ensure that a Portfolio will maintain sufficient assets at all times to cover its obligations under when-issued purchases.
Preferred Stock. The Portfolio may invest in preferred stock. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuer's board of directors, although preferred shareholders may have certain rights if dividends are not paid. Shareholders may suffer a loss of value if dividends are not paid, and generally have no legal recourse against the issuer. The market prices of preferred stocks are generally more sensitive to changes in the issuer's creditworthiness than are the prices of debt securities.
Fixed Income Securities. The Portfolio may invest in money market instruments, U.S. Government or Agency securities, and corporate bonds and debentures receiving one of the four highest ratings from Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or any other nationally recognized statistical rating organization ("NRSRO"), or, if not rated by any NRSRO, deemed comparable by the Sub-advisor to such rated securities ("Comparable Unrated Securities"). In addition, the Portfolio may invest up to 15% of its net assets, measured at the time of investment, in corporate debt securities rated below investment grade or Comparable Unrated Securities. The ratings of an NRSRO represent its opinion as to the quality of securities it undertakes to rate. Ratings are not absolute standards of quality; consequently, securities with the same maturity, coupon, and rating may have different yields. Although the Portfolio may rely on the ratings of any NRSRO, the Portfolio mainly refers to ratings assigned by S&P and Moody's, which are described in Appendix A to this Statement.
Fixed income securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations ("credit risk") and also may be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity ("market risk"). Lower-rated securities are more likely to react to developments affecting market and credit risk than are more highly rated securities, which react primarily to movements in the general level of interest rates.
Changes in economic conditions or developments regarding the individual issuer are more likely to cause price volatility and weaken the capacity of the issuer of such securities to make principal and interest payments than is the case for higher-grade debt securities. An economic downturn affecting the issuer may result in an increased incidence of default. The market for lower-rated securities may be thinner and less active than for higher-rated securities. Pricing of thinly traded securities requires greater judgment than pricing of securities for which market transactions are regularly reported.
Subsequent to its purchase by the Portfolio, an issue of securities may cease to be rated be or its rating may be reduced, so that the securities would no longer be eligible for purchase by the Portfolio. In such a case, the Sub-advisor will engage in an orderly disposition of the downgraded securities to the extent necessary to ensure that the Portfolio's holdings of securities that are below investment grade and Comparable Unrated Securities will not exceed 15% of the its net assets.
Convertible Securities. The Portfolio may invest in convertible securities. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower than the yield on non-convertible debt. Convertible securities are usually subordinated to comparable-tier nonconvertible securities but rank senior to common stock in a corporation's capital structure. The value of a convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege, and (2) its worth, at market value, if converted into the underlying common stock. Convertible debt securities are subject to the Portfolio's investment policies and limitations concerning fixed-income investments.
Convertible securities are typically issued by smaller companies whose stock prices may be volatile. The price of a convertible security often reflects such variations in the price of the underlying common stock in a way that nonconvertible debt does not. A convertible security may be subject to redemption at the option of the issuer at a price established in the security's governing instrument. If a convertible security held by the Portfolio is called for redemption, the Portfolio will be required to convert it into the underlying common stock, sell it to a third party or permit the issuer to redeem the security. Any of these actions could have an adverse effect on the Portfolio's ability to achieve its investment objective.
Commercial Paper. Commercial paper is a short-term debt security issued by a corporation, bank, municipality, or other issuer, usually for purposes such as financing current operations. The Portfolio may invest only in commercial paper receiving the highest rating from S&P (A-1) or Moody's (P-1), or deemed by the Sub-advisor to be of equivalent quality. Some commercial paper may be considered illiquid and be subject to the Portfolio's limitation on illiquid securities.
Zero Coupon Securities. The Portfolio may invest up to 5% of its net assets in zero coupon securities, which are debt obligations that do not entitle the holder to any periodic payment of interest prior to maturity or specify a future date when the securities begin paying current interest. Rather, they are issued and traded at a discount from their face amount or par value, which discount varies depending on prevailing interest rates, the time remaining until cash payments begin, the liquidity of the security, and the perceived credit quality of the issuer.
The market prices of zero coupon securities generally are more volatile than the prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do other types of debt securities having similar maturities and credit quality.
Investment Policies Which May be Changed Without Shareholder Approval. The following limitations are applicable to the Neuberger&Berman Mid-Cap Value Portfolio. These limitations are not fundamental restrictions, and can be changed without shareholder approval.
1. The Portfolio may not purchase securities if outstanding borrowings, including any reverse repurchase agreements, exceed 5% of its total assets.
2. Except for the purchase of debt securities and engaging in repurchase agreements, the Portfolio may not make any loans other than securities loans.
3. The Portfolio may not purchase securities on margin from brokers, except that the Portfolio may obtain such short-term credits as are necessary for the clearance of securities transactions. Margin payments in connection with transactions in futures contracts and options on futures contracts shall not constitute the purchase of securities on margin and shall not be deemed to violate the foregoing limitation.
4. The Portfolio may not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold. Transactions in futures contracts and options shall not constitute selling securities short.
5. The Portfolio may not purchase any security if, as a result, more than 15% of its net assets would be invested in illiquid securities. Illiquid securities include securities that cannot be sold within seven days in the ordinary course of business for approximately the amount at which the Portfolio has valued the securities, such as repurchase agreements maturing in more than seven days.
6. The Portfolio may not invest in puts, calls, straddles, spreads, or any combination thereof, except that the Portfolio may (i) write (sell) covered call options against portfolio securities having a market value not exceeding 10% of its net assets and (ii) purchase call options in related closing transactions. The Portfolio does not construe the foregoing limitation to preclude it from purchasing or writing options on futures contracts.
7. The Portfolio may not invest more than 10% of the value of its total assets in securities of foreign issuers, provided that this limitation shall not apply to foreign securities denominated in U.S. dollars.
Neuberger&Berman Mid-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek capital appreciation.
Investment Policies:
Repurchase Agreements. In a repurchase agreement, the Portfolio purchases securities from a Federal Reserve member bank or a securities dealer deemed creditworthy by the Sub-advisor under procedures established by the Board of Trustees of the Trust. The bank or securities dealer agrees to repurchase the securities from the Portfolio at a higher price on a designated future date. Repurchase agreements generally are for a short period of time, usually less than a week. Repurchase agreements with a maturity of more than seven business days are considered to be illiquid securities; the Portfolio may not enter into such a repurchase agreement if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid securities. The Portfolio will enter into a repurchase agreement only if (1) the underlying securities are of the type (excluding maturity and duration limitations) that the Portfolio's investment policies and limitations would allow it to purchase directly, (2) the market value of the underlying securities, including accrued interest, and any other collateral for the repurchase agreement at al1 times equals or exceeds the amount paid by the Portfolio under the agreement, and (3) payment for the underlying securities is made only upon satisfactory evidence that the securities are being held for the Portfolio's account by the custodian or a bank acting as the Portfolio's agent.
Securities Loans. In order to realize income, the Portfolio may lend portfolio securities with a value not exceeding 33-1/3% of its total assets to banks, brokerage firms, or institutional investors judged creditworthy by the Sub-advisor. Borrowers are required continuously to secure their obligations to return securities on loan from the Portfolio by depositing collateral, which will be marked to market daily, in a form determined to be satisfactory by the Trustees and equal to at least 100% of the market value of the loaned securities, which will also be marked to market daily. The Sub-advisor believes the risk of loss on these transactions is slight because, if a borrower were to default for any reason, the collateral should satisfy the obligation. However, as with other extensions of secured credit, loans of portfolio securities involve some risk of loss of rights in the collateral should the borrower fail financially.
Restricted Securities and Rule 144A Securities. The Portfolio may invest in restricted securities, which are securities that may not be sold to the public without an effective registration statement under the 1933 Act. Before they are registered, such securities may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. In recognition of the increased size and liquidity of the institutional markets for unregistered securities and the importance of institutional investors in the formation of capital, the SEC has adopted Rule 144A under the 1933 Act, which is designed to facilitate efficient trading among institutional investors by permitting the sale of certain unregistered securities to qualified institutional buyers. To the extent privately placed securities held by the Portfolio qualify under Rule 144A, and an institutional market develops for those securities, the Portfolio likely will be able to dispose of the securities without registering them under the 1933 Act. To the extent that institutional buyers become, for a time, uninterested in purchasing these securities, investing in Rule 144A securities could have the effect of increasing the level of the Portfolio's illiquidity. The Sub-advisor, acting under guidelines established by the Board of Trustees of the Trust, may determine that certain securities qualified for trading under Rule 144A are liquid.
Where registration is required, the Portfolio may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the decision to sell and the time the Portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell. Restricted securities, excluding Rule 144A securities deemed liquid by the Sub-advisor, are considered illiquid, and will be subject to the Portfolio's 15% limit on investments in illiquid securities. Foreign securities that are freely tradable in their principal markets are not considered by the Portfolio to be illiquid. Illiquid securities for which no market exists are priced by a method that the Trustees believe accurately reflects fair value.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Portfolio sells portfolio securities subject to its agreement to repurchase the securities at a later date for a fixed price reflecting a market rate of interest; these agreements are considered borrowings for purposes of the Portfolio's investment limitations and policies concerning borrowings. There is a risk that the counterparty to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the Portfolio.
Covered Call Options and Put Options on Securities. The Portfolio may write and purchase put and call options on securities. The Portfolio may write covered call options and may purchase put options on securities it owns valued at up to 25% of its net assets. Securities on which call and put options may be written and purchased by the Portfolio are purchased solely on the basis of investment considerations consistent with the Portfolio's investment objectives.
The Portfolio may write call options and purchase put options on securities in order to hedge (i.e., write or purchase options to reduce the effect of price fluctuations of securities held by the Portfolio), and may also purchase or write put options, purchase call options and write covered call options in an attempt to enhance income.
When the Portfolio writes a put option, it receives a premium and becomes obligated to acquire a certain security at a price at any time until a certain date if the purchaser of the option decides to exercise the option. The writer of the option may be obligated to purchase the security at more than its current value.
When the Portfolio purchases a put option, it pays a premium to the writer for the right to sell a security to the writer for a specified amount at any time until a certain date. The Portfolio would purchase a put option in order to protect itself against a decline in the market value of a security it owns. The Portfolio does not currently intend to purchase any put options if, as a result, more than 5% of its total assets would be invested in put options.
When the Portfolio writes a call option, it is obligated to sell a security to a purchaser at a specified price at any time until a certain date if the purchaser decides to exercise the option. The Portfolio receives a premium for writing the call option. The Portfolio writes only "covered" call options on securities it owns. So long as the obligation of the writer of the call option continues, the writer may be assigned an exercise notice, requiring it to deliver the underlying security against payment of the exercise price. The Portfolio may be obligated to deliver securities underlying a call option at less than the market price thereby giving up any additional gain on the security.
When the Portfolio purchases a call option, it pays a premium for the right to purchase a security from the writer at a specified price until a specified date. A call option would be purchased by the Portfolio to offset a previously written call option.
The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of "naked" or uncovered call options, which the Portfolio will not do), but is capable of enhancing the Portfolio's total return. When writing a covered call option, the Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security above the exercise price, but conversely retains the risk of loss should the price of the security decline. When writing a put option, the Portfolio, in return for the premium, takes the risk that it must purchase the underlying security at a price that may be more than the current market price of the security. If a call or put option that the Portfolio has written expires unexercised, the Portfolio will realize a gain in the amount of the premium; however, in the case of a call option, that gain may be offset by a decline in the market value of the underlying security during the option period. If the call or put option is exercised, the Portfolio will realize a gain or loss from the sale or purchase of the underlying security.
The exercise price of an option may be below, equal to, or above the market value of the underlying security at the time the option is written. Options normally have expiration dates between three and nine months from the date written. The obligation under any option terminates upon expiration of the option or, at an earlier time, when the writer offsets the option by entering into a "closing purchase transaction" to purchase an option of the same series. If an option is purchased by the Portfolio and is never exercised, the Portfolio will lose the entire amount of the premium paid.
Options are traded both on national securities exchanges and in the over-the-counter ("OTC") market. Exchange-traded options are issued by a clearing organization affiliated with the exchange on which the option is listed; the clearing organization in effect guarantees completion of, every exchange-traded option. In contrast, OTC options are contracts between the Portfolio and its counter-party with no clearing organization guarantee. Thus, when the Portfolio sells or purchases an OTC option, it generally will be able to "close out" the option prior to its expiration only by entering into a "closing purchase transaction" with the dealer to whom or from whom the Portfolio originally sold or purchased the option. The Sub-advisor monitors the creditworthiness of dealers with which the Portfolio may engage in OTC options, and will limit counterparties in such transactions to dealers with a net worth of at least $20 million as reported in their latest financial statements. For an additional discussion of OTC options and their risks, see this Statement under "Certain Risk Factors and Investment Methods."
The premium received (or paid) by the Portfolio when it writes (or purchases) an option is the amount at which the option is currently traded on the applicable exchange, less (or plus) a commission. The premium may reflect, among other things, the current market price of the underlying security, the relationship of the exercise price to the market price, the historical price volatility of the underlying security, the length of the option period, the general supply of and demand for credit, and the general interest rate environment. The premium received by the Portfolio for writing an option is recorded as a liability on the Portfolio's statement of assets and liabilities. This liability is adjusted daily to the option's current market value.
From time to time, the Portfolio may purchase an underlying security for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering the security from its portfolio. In those cases, additional brokerage commissions are incurred.
The Portfolio pays the brokerage commissions in connection with purchasing or writing options, including those used to close out existing positions. These brokerage commissions normally are higher than those applicable to purchases and sales of portfolio securities.
For an additional discussion of options and their risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Securities Indices. The Portfolio also may write or purchase put and call options on securities indices for the purpose of hedging against the risk of unfavorable price movements adversely affecting the value of the Portfolio's securities or securities the Portfolio intends to buy. However, the Portfolio currently does not expect to invest a substantial portion of its assets in securities index options. Unlike a securities option, which gives the holder the right to purchase or sell a specified security at a specified price, an option on a securities index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the difference between the exercise price of the option and the value of the underlying securities index on the exercise date multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market values of the securities included in the index. Options on stock indexes are currently traded on the Chicago Board Options Exchange, the NYSE, the AMex and foreign exchanges.
The Portfolio may purchase put options in order to hedge against an anticipated decline in securities market prices that might adversely affect the value of the Portfolio's portfolio securities. If the Portfolio purchases a put option on a securities index, the amount of the payment it would receive upon exercising the option would depend on the extent of any decline in the level of the securities index below the exercise price. Such payments would tend to offset a decline in the value of the Portfolio's portfolio securities. However, if the level of the securities index increases and remains above the exercise price while the put option is outstanding, the Portfolio will not be able to exercise the option profitably and will lose the amount of the premium and any transaction costs. Such loss may be partially offset by an increase in the value of the Portfolio's securities.
The Portfolio may purchase call options on securities indices in order to participate in an anticipated increase in securities market prices. If the Portfolio purchases a call option on a securities index, the amount of the payment it receives upon exercising the option depends on the extent of any increase in the level of the securities index above the exercise price. Such payments would, in effect, allow the Portfolio to benefit from securities market appreciation even though it may not have had sufficient cash to purchase the underlying securities. Such payments may also offset increases in the price of securities that the Portfolio intends to purchase. If, however, the level of the securities index declines and remains below the exercise price while the call option is outstanding, the Portfolio will not be able to exercise the option profitably and will lose the amount of the premium and transaction costs. In circumstances where a securities index is declining, the Portfolio also may experience a loss in the value of its portfolio securities. Such losses may be partially offset by a reduction in the price the Portfolio pays to buy additional securities for its portfolio.
The Portfolio may write securities index options in order to close out positions in securities index options which it has purchased. These closing sale transactions enable the Portfolio immediately to realize gains or minimize losses on its options positions. If the Portfolio is unable to effect a closing sale transaction with respect to options that it has purchased, it would have to exercise the options in order to realize any profit and may incur transaction costs upon the purchase or sale of underlying securities.
All securities index options purchased by the Portfolio will be listed and traded on an exchange. While exchange-traded options may be more liquid than OTC options, there is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular exchange-traded option at any particular time. As is the case with options on securities, the Portfolio will incur brokerage commissions and other transactions costs in connection with purchasing and writing options on securities indices.
For an additional discussion of options on securities indices and their risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options Thereon. The Portfolio may enter into futures contracts for the purchase or sale of individual securities, futures contracts on securities indices, which are traded on exchanges licensed and regulated by the Commodity Futures Trading Commission ("CFTC") or on foreign exchanges. Trading on foreign exchanges is subject to the legal requirements of the jurisdiction in which the exchange is located and the rules of such foreign exchange. The Portfolio may purchase and sell futures for bona fide hedging purposes and for non-hedging purposes (i.e., in an effort to enhance income) to the extent permitted in CFTC regulations.
A "sale" of a futures contract (or a "short" futures position) entails the assumption of a contractual obligation to deliver the securities or currency underlying the contract at a specified price at a specified future time. A "purchase" of a futures contract (or a "long" futures position) entails the assumption of a contractual obligation to acquire the securities or currency underlying the contract at a specified price at a specified future time. Certain futures, including bond index futures, are settled on a net cash payment basis rather than by the sale and delivery of the securities underlying the futures.
U.S. futures (except certain currency futures) are traded on exchanges that have been designated as "contract markets" by the CFTC; futures transactions must be executed through a futures commission merchant that is a member of the relevant contract market. The exchange's affiliated clearing organization guarantees performance of the contracts between the clearing members of the exchange.
"Margin" with respect to futures is the amount of assets that must be deposited by the Portfolio with, or for the benefit of, a futures commission merchant in order to initiate and maintain the Portfolio's futures positions. The margin deposit made by the Portfolio when it enters into a futures contract ("initial margin") is intended to assure its performance of the contract. If the price of the futures contract changes -- increases in the case of a short (sale) position or decreases in the case of a long (purchase) position -- so that the unrealized loss on the contract causes the margin deposit not to satisfy margin requirements, the Portfolio will be required to make an additional margin deposit ("variation margin"). However, if favorable price changes in the futures contract cause the margin on deposit to exceed the required margin, the excess will be paid to the Portfolio. In computing its daily net asset value, the Portfolio marks to market the value of its open futures positions. The Portfolio also must make margin deposits with respect to options on futures that it has written. If the futures commission merchant holding the deposit goes bankrupt, the Portfolio could suffer a delay in recovering its funds and could ultimately suffer a loss.
An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in the contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the option exercise period. The writer of the option is required upon exercise to assume a short futures position (it the option is a call) or a long futures position (if the option is a put). Upon exercise of the option, the accumulated cash balance in the writer's futures margin account is delivered to the holder of the option. That balance represents the amount by which the market price of the futures contract at exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option.
Although the Sub-advisor believes that the use of futures contracts will benefit the Portfolio, if the Sub-advisor's judgment about the general direction of the markets is incorrect, the Portfolio's overall return would be lower than if it had not entered into any such contracts. For an additional discussion of futures contracts, related options and their risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated equity and debt securities issued by foreign issuers (including governments, quasi-governments and foreign banks) and foreign branches of U.S. banks, including negotiable CDs and commercial paper. These investments are subject to the Portfolio's quality standards. While investments in foreign securities are intended to reduce risk by providing further diversification, such investments involve sovereign and other risks, in addition to the credit and market risks normally associated with domestic securities.
The Portfolio may invest in equity, debt, or other income-producing
securities that are denominated in or indexed to foreign currencies, including,
but not limited to (1) common and preferred stocks, (2) convertible securities,
(3) warrants, (4) CDs, commercial paper, fixed-time deposits, and bankers'
acceptances issued by foreign banks, (5) obligations of other corporations, and
(6) obligations of foreign governments, or their subdivisions, agencies, and
instrumentalities, international agencies, and supranational entities. Risks of
investing in foreign currency denominated securities include (1)
nationalization, expropriation, or confiscatory taxation, (2) adverse changes in
investment or exchange control regulations (which could prevent cash from being
brought back to the U.S.), and (3) expropriation or nationalization of foreign
portfolio companies. Mail service between the U.S. and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. For an additional discussion of the risks associated with
foreign securities, whether denominated in U.S. dollars or foreign currencies,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Prices of foreign securities and exchange rates for foreign currencies may be affected by the interest rates prevailing in other countries. The interest rates in other countries are often affected by local factors, including the strength of the local economy, the demand for borrowing, the government's fiscal and monetary policies, and the international balance of payments. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments position.
Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when a portion of the assets of the Portfolio is uninvested and no return is earned thereon. The inability of the Portfolio to make intended security purchases due to settlement problems could cause the Portfolio to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Portfolio due to subsequent declines in value of the portfolio securities, or, if the Portfolio has entered into a contract to sell the securities, could result in possible liability to the purchaser.
The Portfolio may invest in foreign corporate bonds and debentures and sovereign debt instruments issued or guaranteed by foreign governments, their agencies or instrumentalities. The Portfolio may invest in lower-rated foreign debt securities subject to the Portfolio's 15% limitation on lower-rated debt securities. Foreign debt securities are subject to risks similar to those of other foreign securities, as well as risks similar to those of other debt securities, as discussed in this Statement and in the Trust's Prospectus under "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods."
In order to limit the risk inherent in investing in foreign currency-denominated securities, the Portfolio may not purchase any such security if after such purchase more than 20% of its total assets (taken at market value) would be invested in such securities. Within such limitation, however, the Portfolio is not restricted in the amount it may invest in securities denominated in any one foreign currency.
Foreign Currency Transactions. The Portfolio may engage in foreign currency exchange transactions. Foreign currency exchange transactions will be conducted either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies ("forward contracts"). The Portfolio may enter into forward contracts in order to protect against uncertainty in the level of future foreign currency exchange rates. The Portfolio may also use forward contracts for non-hedging purposes.
A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (usually less than one year) from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the spread) between the price at which they are buying and selling various currencies.
When the Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may wish to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign currency involved in the underlying security transactions, the Portfolio will be able to protect itself against a possible loss. When the Sub-advisor believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may also enter into a forward contract to sell the amount of foreign currency for a fixed amount of dollars which approximates the value of some or all of a Portfolio's securities denominated in such foreign currency.
The Portfolio may also engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency, when the Sub-advisor believes that there is a pattern of correlation between the two currencies. The Portfolio may also purchase and sell forward contracts for non-hedging purposes when the Sub-advisor anticipates that the foreign currency will appreciate or depreciate in value, but securities in that currency do not present attractive investment opportunities and are not held in the Portfolio's portfolio.
When the Portfolio engages in forward contracts for hedging purposes, it will not enter into forward contracts to sell currency or maintain a net exposure to such contracts if their consummation would obligate the Portfolio to deliver an amount of foreign currency in excess of the value of its portfolio securities or other assets denominated in that currency. At the consummation of the forward contract, the Portfolio may either make delivery of the foreign currency or terminate its contractual obligation to deliver by purchasing an offsetting contract obligating it to purchase the same amount of such foreign currency at the same maturity date. If the Portfolio chooses to make delivery of the foreign currency, it may be required to obtain such currency through the sale of portfolio securities denominated in such currency or through conversion of other assets into such currency. If the Portfolio engages in an offsetting transaction, it will incur a gain or a loss to the extent that there has been a change in forward contract prices. Closing purchase transactions with respect to forward contracts are usually made with the currency trader who is a party to the original forward contract.
The Portfolio is not required to enter into such transactions and will not do so unless deemed appropriate by the Sub-advisor.
Using forward contracts to protect the value of the Portfolio's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which can be achieved at some future point in time. The precise projection of short-term currency market movements is not possible, and short-term hedging provides a means of fixing the dollar value of only a portion of the Portfolio's foreign assets.
While the Portfolio may enter forward contracts to reduce currency exchange rate risks, transactions in such contracts involve certain other risks. Thus, while the Portfolio may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Portfolio than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between the Portfolio's holdings of securities denominated in a particular currency and forward contracts entered into by the Portfolio. Such imperfect correlation may cause the Portfolio to sustain losses which will prevent it from achieving a complete hedge or expose it to risk of foreign exchange loss.
The Portfolio generally will not enter into a forward contract with a term of greater than one year. The Portfolio may experience delays in the settlement of its foreign currency transactions.
When the Portfolio engages in forward contracts for the sale or purchase of currencies, the Portfolio will either cover its position or establish a segregated account. The Portfolio will consider its position covered if it has securities in the currency subject to the forward contract, or otherwise has the right to obtain that currency at no additional cost. In the alternative, the Portfolio will place cash, fixed income, or equity securities (denominated in the foreign currency subject to the forward contract) in a separate account. The amounts in such separate account will equal the value of the Portfolio's assets which are committed to the consummation of foreign currency exchange contracts. If the value of the securities placed in the separate account declines, the Portfolio will place additional cash or securities in the account on a daily basis so that the value of the account will equal the amount of its commitments with respect to such contracts.
For an additional discussion of forward foreign currency exchange contracts and their risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Futures and Related Options. The Portfolio may enter into currency futures contracts and options on such futures contracts in domestic and foreign markets. The Portfolio may sell a currency futures contract or a call option, or it may purchase a put option on such futures contract, if the Sub-advisor anticipates that exchange rates for a particular currency will fall. Such a transaction will be used as a hedge (or, in the case of a sale of a call option, a partial hedge) against a decrease in the value of the Portfolio's securities denominated in such currency. If the Sub-advisor anticipates that exchange rates will rise, the Portfolio may purchase a currency futures contract or a call option to protect against an increase in the price of securities which are denominated in a particular currency and which the Portfolio intends to purchase. The Portfolio will use these futures contracts and related options for hedging purposes. The Portfolio may also purchase a currency futures contract, or a call option thereon, for non-hedging purposes (i.e., in an effort to enhance income) when the Sub-advisor anticipates that a particular currency will appreciate in value, but securities denominated in that currency do not present an attractive investment and are not included in the Portfolio's portfolio.
The sale of a currency futures contract creates an obligation by the Portfolio, as seller, to deliver the amount of currency called for in the contract at a specified future time for a specified price. The purchase of a currency futures contract creates an obligation by the Portfolio, as purchaser, to take delivery of an amount of currency at a specified future time at a specified price. Although the terms of currency futures contracts specify actual delivery or receipt, in most instances the contracts are closed out before the settlement date without the making or taking of delivery of the currency. Closing out of a currency futures contract is effected by entering into an offsetting purchase or sale transaction. To close out a currency futures contract sold by the Portfolio, the Portfolio may purchase a currency futures contract for the same aggregate amount of currency and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Portfolio is immediately paid the difference. Similarly, to close out a currency futures contract purchased by the Portfolio, the Portfolio sells a currency futures contract. If the offsetting sale price exceeds the purchase price, the Portfolio realizes a gain. Likewise, if the offsetting sale price is less than the purchase price, the Portfolio realizes a loss.
Unlike a currency futures contract, which requires the parties to buy and sell currency on a set date, an option on a futures contract entitles its holder to decide on or before a future date whether to enter into such a contract. If the holder decides not to enter into the contract, the premium paid for the option is lost. For the holder of an option, there are no daily payments of cash for "variation" or "maintenance" margin payments to reflect the change in the value of the underlying contract as there are by a purchaser or seller of a currency futures contract.
A risk in employing currency futures contracts to protect against price volatility of portfolio securities which are denominated in a particular currency is that the prices of such securities subject to currency futures contracts may not completely correlate with the behavior of the cash prices of the Portfolio's securities. The correlation may be distorted by the fact that the currency futures market may be dominated by short-term traders seeking to profit from changes in exchange rates. This would reduce the value of such contracts used for hedging purposes over a short-term period. Such distortions are generally minor and would diminish as the contract approached maturity. Another risk is that the Sub-advisor could be incorrect in its expectation as to the direction or extent of various exchange rate movements or the time span within which the movements take place. When the Portfolio engages in the purchase of currency futures contracts, an amount equal to the market value of the currency futures contract (minus any required margin) will be deposited in a segregated account of securities, cash, or cash equivalents to collateralize the position and thereby limit the use of such futures contracts.
Put and call options on currency futures have characteristics similar to those of other options. In addition to the risks associated with investing in options on securities, however, there are particular risks associated with transactions in options on currency futures. In particular, the ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market for such options.
Options on Foreign Currencies. The Portfolio may write and purchase covered call and put options on foreign currencies in amounts not exceeding 5% of its net assets for the purpose of protecting against declines in the U.S. dollar value of portfolio securities or increases in the U.S.-dollar cost of securities to be acquired, or to protect the dollar equivalent of dividend, interest, or other payment on those securities. 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 decreases in the value of portfolio securities, the Portfolio may purchase put options on the foreign currency. If the value of the currency declines, the Portfolio will have the right to sell such currency for a fixed amount of dollars which exceeds the market value of such currency. This would result in a gain that may offset, in whole or in part, the negative effect of currency depreciation on the value of the Portfolio's securities denominated in that currency.
Conversely, if the dollar value of a currency in which securities to be acquired by the Portfolio are denominated rises, thereby increasing the cost of such securities, the Portfolio may purchase call options on such currency. If the value of such currency increases sufficiently, the Portfolio will have the right to purchase that currency for a fixed amount of dollars which is less than the market value of that currency. Such a purchase would result in a gain that may offset, at least partially, the effect of any currency-related increase in the price of securities the Portfolio intends to acquire.
As in the case of other types of options transactions, however, the benefit the Portfolio derives from purchasing foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, if 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 deprive it of a portion or all of the benefits of advantageous changes in such rates.
The Portfolio may also write options on foreign currencies for hedging purposes. For example, if the Sub-advisor anticipates a decline in the dollar value of foreign currency denominated securities because of declining exchange rates, it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised, and the decrease in value of portfolio securities will be offset, at least in part, by the amount of the premium received by the Portfolio.
Similarly, the Portfolio could write a put option on the relevant currency, instead of purchasing a call option, to hedge against an anticipated increase in the dollar cost of securities to be acquired. If exchange rates move in the manner projected, the put option most likely will not be exercised, and such increased cost will be offset, at least in part, by the amount of the premium received. However, as in the case of other types of options transactions, 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 unanticipated exchange rate fluctuations occur, a put or call option may be exercised and the Portfolio could be required to purchase or sell the underlying currency at a loss which may not be fully offset by the amount of the premium. As a result of writing 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 currency exchange rates. Certain options on foreign currencies are traded on the OTC market and involve liquidity and credit risks that may not be present in the case of exchange-traded currency options.
The Portfolio may purchase call options on currency for non-hedging purposes when the Sub-advisor anticipates that the currency will appreciate in value, but the securities denominated in that currency do not present attractive investment opportunities and are not included in the Portfolio's portfolio. The Portfolio may write (sell) put and covered call options on any currency in order to realize greater income than would be realized on portfolio securities alone. However, in writing covered call options for additional income, the Portfolio may forego the opportunity to profit from an increase in the market value of the underlying currency. Also, when writing put options, the Portfolio accepts, in return for the option premium, the risk that it may be required to purchase the underlying currency at a price in excess of the currency's market value at the time of purchase.
The Portfolio would normally purchase call options for non-hedging purposes in anticipation of an increase in the market value of a currency. The Portfolio would ordinarily realize a gain if, during the option period, the value of such currency exceeded the sum of the exercise price, the premium paid and transaction costs. Otherwise the Portfolio would realize either no gain or a loss on the purchase of the call option. Put options may be purchased by the Portfolio for the purpose of benefiting from a decline in the value of currencies which it does not own. The Portfolio would ordinarily realize a gain if, during the option period, the value of the underlying currency decreased below the exercise price sufficiently to more than cover the premium and transaction costs. Otherwise the Portfolio would realize either no gain or a loss on the purchase of the put option.
A call option written on foreign currency by the Portfolio is "covered" if the Portfolio owns the underlying foreign currency subject to the call, or if it has an absolute and immediate right to acquire that foreign currency without additional cash consideration. A call option is also covered if the Portfolio holds a call on the same foreign currency for the same principal amount as the call written where the exercise price of the call held is (a) equal to or less than the exercise price of the call written or (b) greater than the exercise price of the call written if the amount of the difference is maintained by the Portfolio in cash, fixed income or equity securities in a segregated account with its custodian.
The risks of currency options are similar to the risks of other options, as discussed above and in this Statement under "Certain Risk Factors and Investment Methods."
Cover for Futures, Options on Futures, Options on Securities and Indices, Forward Contracts, and Options on Foreign Currencies ("Hedging Instruments"). The Portfolio will comply with SEC staff guidelines regarding "cover" for Hedging Instruments and, if the guidelines so require, set aside in a segregated account with its custodian the prescribed amount of cash, fixed income, or equity securities. Securities held in a segregated account cannot be sold while the futures, option, or forward strategy covered by those securities is outstanding, unless they are replaced with other suitable assets. As a result, segregation of a large percentage of the Portfolio's assets could impede portfolio management or the Portfolio's ability to meet current obligations. The Portfolio may be unable promptly to dispose of assets that cover, or are segregated with respect to, an illiquid options or forward position; this inability may result in a loss to the Portfolio.
Forward Commitments and When-Issued Securities. The Portfolio may purchase securities on a when-issued basis, that is, by committing to purchase securities (to secure an advantageous price and yield at the time of the commitment) and completing the purchase by making payment against delivery of the securities at a future date. The Portfolio also may purchase or sell securities on a forward commitment basis. These transactions involve a commitment by the Portfolio to purchase or sell securities at a future date (ordinarily within two months although the Portfolio may agree to a longer settlement period). The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such commitments are not traded on exchanges.
When-issued purchases and forward commitment transactions enable the Portfolio to "lock in" what the Sub-advisor believes to be an attractive price or yield on a particular security for a period of time, regardless of future changes in interest rates. For instance, in periods of rising interest rates and falling prices, the Portfolio might sell securities it owns on a forward commitment basis to limit its exposure to falling prices. In periods of failing interest rates and rising prices, the Portfolio might purchase a security on a when-issued or forward commitment basis and sell a similar security to settle such purchase, thereby obtaining the benefit of currently higher yields.
The value of securities purchased on a when-issued or forward commitment basis and any subsequent fluctuations in their value are reflected in the computation of the Portfolio's net asset value starting on the date of the agreement to purchase the securities. Because the Portfolio has not yet paid for the securities, this produces an effect similar to leverage. The Portfolio does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date. When the Portfolio makes a forward commitment to sell securities it owns, the proceeds to be received upon settlement are included in the Portfolio's assets. Fluctuations in the market value of the underlying securities are not reflected in the Portfolio's net asset value as long as the commitment to sell remains in effect.
The Portfolio will purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, the Portfolio may dispose of or renegotiate a commitment after it has been entered into. The Portfolio also may sell securities it has committed to purchase before those securities are delivered to the Portfolio on the settlement date. The Portfolio may realize a capital gain or loss in connection with these transactions.
When the Portfolio purchases securities on a when-issued basis, it will deposit, in a segregated account with its custodian, until payment is made, cash, fixed income, or equity securities having an aggregate market value (determined daily to the extent required by SEC staff policy) at least equal to the amount of the Portfolio's purchase commitments. In the case of a forward commitment to sell portfolio securities, the custodian will hold the portfolio securities themselves in a segregated account while the commitment is outstanding. These procedures are designed to ensure that the Portfolio will maintain sufficient assets at all times to cover its obligations under when-issued purchases and forward commitments.
Short Sales Against-the-Box. The Portfolio may make short sales against-the-box. To effect a short sale, the Portfolio will borrow a security from a brokerage firm to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed at a later date. A short sale is "against-the-box" when, at all times during which a short position is open, the Portfolio owns an equal amount of such securities, or owns securities giving it the right, without payment of future consideration, to obtain an equal amount of securities sold short. Short sales against-the-box allow the Portfolio to hedge against price fluctuations by locking in a sale price for securities it does not wish to sell immediately.
Preferred Stock. The Portfolio may invest in preferred stock. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuer's board of directors, although preferred shareholders may have certain rights if dividends are not paid. Shareholders may suffer a loss of value if dividends are not paid, and generally have no legal recourse against the issuer. The market prices of preferred stocks are generally more sensitive to changes in the issuer's creditworthiness than are the prices of debt securities.
Fixed Income Securities. The Portfolio may invest in money market instruments, U.S. Government or Agency securities, and corporate bonds and debentures receiving one of the four highest ratings from Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or any other nationally recognized statistical rating organization ("NRSRO"), or, if not rated by any NRSRO, deemed comparable by the Sub-advisor to such rated securities ("Comparable Unrated Securities"). In addition, the Portfolio may invest up to 10% of its net assets, measured at the time of investment, in corporate debt securities rated below investment grade or Comparable Unrated Securities, but may not invest in securities rated below C by Moody's or S&P or Comparable Unrated Securities. The ratings of an NRSRO represent its opinion as to the quality of securities it undertakes to rate. Ratings are not absolute standards of quality; consequently, securities with the same maturity, coupon, and rating may have different yields. Although the Portfolio may rely on the ratings of any NRSRO, the Portfolio mainly refers to ratings assigned by S&P and Moody's, which are described in Appendix A to this Statement.
Fixed income securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations ("credit risk") and also may be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity ("market risk"). Lower-rated securities are more likely to react to developments affecting market and credit risk than are more highly rated securities, which react primarily to movements in the general level of interest rates.
Changes in economic conditions or developments regarding the individual issuer are more likely to cause price volatility and weaken the capacity of the issuer of such securities to make principal and interest payments than is the case for higher-grade debt securities. An economic downturn affecting the issuer may result in an increased incidence of default. The market for lower-rated securities may be thinner and less active than for higher-rated securities. Pricing of thinly traded securities requires greater judgment than pricing of securities for which market transactions are regularly reported.
If the quality of any fixed income securities held by the Portfolio deteriorates so that they are no longer rated at least C by Moody's or S&P, or, if unrated, are determined by the Sub-advisor to no longer be of comparable quality, the Portfolio will engage in an orderly disposition of the securities to the extent necessary to ensure that the Portfolio's holding of such securities will not exceed 5% of its net assets.
Convertible Securities. The Portfolio may invest in convertible securities of any quality. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower than the yield on non-convertible debt. Convertible securities are usually subordinated to comparable-tier nonconvertible securities but rank senior to common stock in a corporation's capital structure. The value of a convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege, and (2) its worth, at market value, if converted into the underlying common stock. Convertible debt securities are subject to the Portfolio's investment policies and limitations concerning fixed-income investments.
Convertible securities are typically issued by smaller companies whose stock prices may be volatile. The price of a convertible security often reflects such variations in the price of the underlying common stock in a way that nonconvertible debt does not. A convertible security may be subject to redemption at the option of the issuer at a price established in the security's governing instrument. If a convertible security held by the Portfolio is called for redemption, the Portfolio will be required to convert it into the underlying common stock, sell it to a third party or permit the issuer to redeem the security. Any of these actions could have an adverse effect on the Portfolio's ability to achieve its investment objective.
Zero Coupon Securities. The Portfolio may invest in zero coupon securities, which are debt obligations that do not entitle the holder to any periodic payment of interest prior to maturity or specify a future date when the securities begin paying current interest. Rather, they are issued and traded at a discount from their face amount or par value, which discount varies depending on prevailing interest rates, the time remaining until cash payments begin, the liquidity of the security, and the perceived credit quality of the issuer.
The market prices of zero coupon securities generally are more volatile than the prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do other types of debt securities having similar maturities and credit quality.
Commercial Paper. Commercial paper is a short-term debt security issued by a corporation, bank, municipality, or other issuer, usually for purposes such as financing current operations. The Portfolio may invest only in commercial paper receiving the highest rating from S&P (A-1) or Moody's (P-1), or deemed by the Sub-advisor to be of equivalent quality. Some commercial paper may be considered illiquid and be subject to the Portfolio's limitation on illiquid securities.
Banking and Savings Institution Securities. The Portfolio may invest in banking and savings institution obligations, which include CDs, time deposits, bankers' acceptances, and other short-term debt obligations issued by savings institutions. CDs are receipts for funds deposited for a specified period of time at a specified rate of return; time deposits generally are similar to CDs, but are uncertificated; and bankers' acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international commercial transactions. The CDs, time deposits, and bankers' acceptances in which the Portfolio invests typically are not covered by deposit insurance.
Investment Policies Which May be Changed Without Shareholder Approval. The following limitations are applicable to the Neuberger&Berman Mid-Cap Growth Portfolio. These limitations are not fundamental restrictions and can be changed without shareholder approval.
1. The Portfolio may not purchase securities if outstanding borrowings, including any reverse repurchase agreements, exceed 5% of its total assets.
2. Except for the purchase of debt securities and engaging in repurchase agreements, the Portfolio may not make any loans other than securities loans.
3. The Portfolio may not purchase securities on margin from brokers, except that the Portfolio may obtain such short-term credits as are necessary for the clearance of securities transactions. Margin payments in connection with transactions in futures contracts and options on futures contracts shall not constitute the purchase of securities on margin and shall not be deemed to violate the foregoing limitation.
4. The Portfolio may not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold. Transactions in futures contracts and options shall not constitute selling securities short.
5. The Portfolio may not purchase any security if, as a result, more than 15% of its net assets would be invested in illiquid securities. Illiquid securities include securities that cannot be sold within seven days in the ordinary course of business for approximately the amount at which the Portfolio has valued the securities, such as repurchase agreements maturing in more than seven days.
Investment Objective and Policy Applicable to All Portfolios:
In order to permit the sale of shares of the Trust to separate accounts of Participating Insurance Companies in certain states, the Trust may make commitments more restrictive than the restrictions described in the section of this Statement entitled "Investment Restrictions." Should the Trust determine that any such commitment is no longer in the best interests of the Trust and its shareholders it will revoke the commitment and terminate sales of its shares in the state(s) involved.
The Board of Trustees of the Trust may, from time to time, promulgate guidelines with respect to the investment policies of the Portfolios.
INVESTMENT RESTRICTIONS:
The investment restrictions set forth below are "fundamental" policies. See the subsection of this Statement entitled "Investment Objectives and Policies" for further discussion of "fundamental" policies of the Trust and the requirements for changing such "fundamental" policies. Investment policies that are not "fundamental" may be found in the general description of the investment policies of each Portfolio, as described in the section of this Statement and the Trust's Prospectus entitled "Investment Objectives and Policies."
The investment restrictions below apply only to the Portfolio or Portfolios described in the text preceding the restrictions.
Investment Restrictions Applicable Only to the Lord Abbett Growth and Income Portfolio, the JanCap Growth Portfolio, the AST Money Market Portfolio, the Federated High Yield Portfolio, the Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio, the PIMCO Total Return Bond Portfolio, and the PIMCO Limited Maturity Bond Portfolio.
1. A Portfolio will not purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than a customary broker's commission, is involved and only if immediately thereafter not more than 10% of this Portfolio's total assets, at market value, would be invested in such securities, or by investing no more than 5% of the Portfolio's total assets in other open-end investment companies or by purchasing no more than 3% of any one open-end investment company's securities.
2. A Portfolio will not buy any securities or other property on margin (except for such short-term credits as are necessary for the clearance of transactions).
3. A Portfolio will not invest in companies for the purpose of exercising control or management.
4. A Portfolio will not underwrite securities issued by others except to the extent that the Portfolio may be deemed an underwriter when purchasing or selling securities.
5. A Portfolio will not purchase or retain securities of any issuer (other than the shares of such Portfolio) if to the Trust's knowledge, the officers and Trustees of the Trust and the officers and directors of the Investment Manager who individually own beneficially more than 1/2 of 1% of the outstanding securities of such issuer, together own beneficially more than 5% of such outstanding securities.
6. A Portfolio will not issue senior securities.
Investment Restrictions Applicable Only to the Lord Abbett Growth and Income Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio would own more than 10% of the outstanding voting securities of any issuer.
2. The Portfolio will not lend money or securities to any person except through entering into short-term repurchase agreements with sellers of securities the Portfolio has purchased, and through lending Portfolio securities to registered broker-dealers where the loan is 100% secured by cash or its equivalent as long as the Portfolio complies with regulatory requirements and the Sub-advisor deems such loans not to expose the Portfolio to significant risk or adversely affect the Portfolio's qualification for pass-through tax treatment under the Internal Revenue Code (investment in repurchase agreements exceeding 7 days and in other illiquid investments is limited to a maximum of 10% of Portfolio net assets).
3. The Portfolio will not pledge, mortgage, or hypothecate its assets -- however, this provision does not apply to the grant of escrow receipts or the entry into other similar escrow arrangements arising out of the writing of covered call options.
4. The Portfolio will not purchase securities of any issuer unless it or its predecessor has a record of three years' continuous operation, except that the Portfolio may purchase securities of such issuers through subscription offers or other rights it receives as a security holder of companies offering such subscriptions or rights, and such purchases will then be limited in the aggregate to 5% of the Portfolio's net assets at the time of investment.
5. The Portfolio will not concentrate its investments in any one industry (the Portfolio's investment policy of keeping its assets in those securities which are selling at the most reasonable prices in relation to value normally results in diversification among many industries -- consistent with this, the Portfolio does not intend to invest more than 25% of its assets in any one industry classification used by the Sub-advisor for investment purposes, although such concentration could, under unusual economic and market conditions, amount to 30% or conceivably somewhat more).
6. The Portfolio will not borrow money except from banks and then in amounts not in excess of 33 1/3% of its total assets. The Portfolio may borrow at prevailing interest rates and invest the Portfolios in additional securities. The Portfolio's borrowings are limited so that immediately after such borrowing the value of the Portfolio's assets (including borrowings) less its liabilities (not including borrowings) is at least three times the amount of the borrowings. Should the Portfolio, for any reason, have borrowings that do not meet the above test then, within three business days, the Portfolio must reduce such borrowings so as to meet the necessary test. Under such a circumstance, the Portfolio have to liquidate securities at a time when it is disadvantageous to do so.
7. The Portfolio will not make short sales except short sales made "against the box" to defer recognition of taxable gains or losses.
8. The Portfolio will not purchase or sell real estate (although it may purchase securities secured by real estate interests or interests therein, or issued by companies or investment trusts which invest in real estate or interests therein).
9. The Portfolio will not invest directly in oil, gas, or other mineral exploration or development programs; however, the Portfolio may purchase securities of issuers whose principal business activities fall within such areas.
10. The Portfolio will not purchase a security if as a result, more than 5% of the value of that Portfolio's assets, at market value, would be invested in the securities of issuers which, with their predecessors, have been in business less than three years.
Investment Restrictions Applicable Only to the JanCap Growth Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest more than 5% of its total assets, at market value, in the securities of any one issuer (except cash items and securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
3. The Portfolio will not purchase a security if as a result, more than 25% of its total assets, at market value, would be invested in the securities of issuers principally engaged in the same industry (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
4. The Portfolio will not purchase or sell real estate (although it may purchase securities secured by real estate interests or interests therein, or issued by companies or investment trusts which invest in real estate or interests therein).
5. The Portfolio will not purchase or sell physical commodities other than foreign currencies unless acquired as a result of ownership of securities (but this shall not prevent the Portfolio from purchasing or selling options, futures, swaps and forward contracts or from investing in securities and other instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan, if as a result, more than 25% of its total assets would be lent to other parties (but this limitation does not apply to purchases of commercial paper, debt securities or to repurchase agreements).
Investment Restrictions Applicable Only to the AST Janus Overseas Growth Portfolio:
1. The Portfolio may borrow money for temporary or emergency purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of the value of its total assets (including the amount borrowed) less liabilities (other than borrowings). If borrowings exceed 33 1/3% of the value of the Portfolio's total assets by reason of a decline in net assets, the Portfolio will reduce its borrowings within three business days to the extent necessary to comply with the 33 1/3% limitation. This policy shall not prohibit reverse repurchase agreements, deposits of assets to margin or guarantee positions in futures, options, swaps or forward contracts, or the segregation of assets in connection with such contracts.
2. The Portfolio will not, as to 75% of the value of its total assets, own more than 10% of the outstanding voting securities of any one issuer, or purchase the securities of any one issuer (except cash items and "government securities" as defined under the 1940 Act as amended), if immediately after and as a result of such purchase, the value of the holdings of the Portfolio in the securities of such issuer exceeds 5% of the value of its total assets.
3. The Portfolio will not invest more than 25% of the value of its assets in any particular industry (other than U.S. government securities).
4. The Portfolio will not invest directly in real estate or interests in real estate; however, the Portfolio may own debt or equity securities issued by companies engaged in those businesses.
5. The Portfolio will not purchase or sell physical commodities other than foreign currencies unless acquired as a result of ownership of securities (but this limitation shall not prevent the Portfolio from purchasing or selling options, futures, swaps and forward contracts or from investing in securities or other instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan if, as a result, more than 25% of the Portfolio's total assets would be lent to other parties (but this limitation does not apply to purchases of commercial paper, debt securities or repurchase agreements).
7. The Portfolio will not act as an underwriter of securities issued by others, except to the extent that the Portfolio may be deemed an underwriter in connection with the disposition of its securities.
8. The Portfolio will not issue senior securities except in compliance with the 1940 Act.
Investment Restrictions Applicable Only to the AST Money Market Portfolio:
1. The Portfolio will not purchase a security if as a result, the Portfolio would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest more than 5% of its total assets, at market value, in the securities of any one issuer (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
3. The Portfolio will not acquire any illiquid securities, such as repurchase agreements with more than seven days to maturity or fixed time deposits with a duration of over seven calendar days, if as a result thereof, more than 10% of the market value of the Portfolio's total assets would be in investments which are illiquid.
4. The Portfolio will not purchase a security if as a result, more than 25% of its total assets, at market value, would be invested in the securities of issuers principally engaged in the same industry (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, negotiable certificates of deposit, time deposits, and bankers' acceptances of United States branches of United States banks).
5. The Portfolio will not enter into reverse repurchase agreements exceeding in the aggregate one-third of the market value of the Portfolio's total assets, less liabilities other than obligations created by reverse repurchase agreements.
6. The Portfolio will not borrow money, except from banks for extraordinary or emergency purposes and then only in amounts not to exceed 10% of the value of the Portfolio's total assets, taken at cost, at the time of such borrowing. The Portfolio may not mortgage, pledge or hypothecate any assets except in connection with any such borrowing and in amounts not to exceed 10% of the value of the Portfolio's net assets at the time of such borrowing. The Portfolio will not purchase securities while borrowings exceed 5% of the Portfolio's total assets. This borrowing provision is included to facilitate the orderly sale of securities, for example, in the event of abnormally heavy redemption requests, and is not for investment purposes and shall not apply to reverse repurchase agreements.
7. The Portfolio will not make loans, except through purchasing or holding debt obligations, or entering into repurchase agreements, or loans of Portfolio securities in accordance with the Portfolio's investment objectives and policies.
8. The Portfolio will not purchase securities on margin, make short sales of securities, or maintain a short position, provided that this restriction shall not be deemed to be applicable to the purchase or sale of when-issued securities or of securities for delivery at a future date.
9. The Portfolio will not purchase or sell puts, calls, straddles, spreads, or any combination thereof; real estate; commodities; or commodity contracts or interests in oil, gas or mineral exploration or development programs. However, the Portfolio may purchase bonds or commercial paper issued by companies which invest in real estate or interests therein including real estate investment trusts.
Investment Restrictions Applicable Only to the Federated High Yield Portfolio:
1. The Portfolio will not purchase any securities on margin but may obtain such short-term credits as may be necessary for the clearance of transactions.
2. The Portfolio will not borrow money except as a temporary measure for extraordinary or emergency purposes and then only from banks and only in amounts not in excess of 5% of the value of its net assets, taken at the lower of cost or market. In addition, to meet redemption requests without immediately selling portfolio securities, the Portfolio may borrow up to one-third of the value of its total assets (including the amount borrowed) less its liabilities (not including borrowings, but including the current fair market value of any securities carried in open short positions). This practice is not for investment leverage but solely to facilitate management of the portfolio by enabling the Portfolio to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. If, due to market fluctuations or other reasons, the value of the Portfolio's assets falls below 300% of its borrowings, it will reduce its borrowings within three business days. No more than 10% of the value of the Portfolio's total assets at the time of providing such security may be used to secure borrowings.
3. The Portfolio will not invest more than 5% of its total assets in the securities of any one issuer (except cash and cash instruments, securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or instruments secured by these money market instruments, such as repurchase agreements).
4. The Portfolio will not invest more than 5% of the value of its total assets in securities of companies, including their predecessors, that have been in operation for less than three years.
5. The Portfolio will not invest more than 5% of the value of its total assets in foreign securities which are not publicly traded in the United States.
6. The Portfolio will not purchase or sell real estate, although it may invest in marketable securities secured by real estate or interests in real estate, and it may invest in the marketable securities of companies investing or dealing in real estate.
7. The Portfolio will not purchase or sell commodities or commodity contracts or oil, gas, or other mineral exploration or development programs. However, it may invest in the marketable securities of companies investing in or sponsoring such programs.
8. The Portfolio will not make loans, except through the purchase or holding of securities in accordance with its investment objective, policies, and limitations and through repurchase agreements. The Portfolio may invest up to 5% of its total assets in repurchase agreements which mature more than seven days from the time they are entered into. The Portfolio may lend portfolio securities if the borrower provides 100% cash collateral in the form of cash or U.S. government securities. This collateral must be valued daily and should the market value of the loaned securities increase, the borrower must furnish additional collateral. The Portfolio retains the right to any dividends, interest, or other distribution paid on the securities and any increase in their market value. Loans will be subject to termination at the option of the Portfolio or the borrower.
9. The Portfolio will not write, purchase, or sell puts, calls, or any combination thereof.
10. The Portfolio will not make short sales of securities or maintain short positions, unless: during the time the short position is open, it owns an equal amount of the securities sold or securities readily and freely convertible into or exchangeable, without payment of additional consideration, for securities of the same issue as, and equal in amount to, the securities sold short; and not more than 10% of the Portfolio's net assets (taken at current value) is held as collateral for such sales at any one time.
11. The Portfolio will not purchase securities of a company for the purpose of exercising control or management. However, the Portfolio may invest in up to 10% of the voting securities of any one issuer and may exercise its voting powers consistent with the best interests of the Portfolio. From time to time, the Portfolio, together with other investment companies advised by subsidiaries or affiliates of Federated Investors, may together buy and hold substantial amounts of a company's voting stock. All such stock may be voted together. In some such cases, the Portfolio and the other investment companies might collectively be considered to be in control of the company in which they have invested. In some cases, Directors, agents, employees, officers, or others affiliated with or acting for the Portfolio, its Sub-advisor, or affiliated companies might possibly become directors of companies in which the Portfolio holds stock.
12. The Portfolio will not invest more than 25% of the value of its total assets in one industry. However, for temporary defensive purposes, the Portfolio may at times invest more than that percentage in: cash and cash items; securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities; or instruments secured by these money market instruments, such as repurchase agreements.
Investment Restrictions Only Applicable to the T. Rowe Price Asset Allocation Portfolio:
The following fundamental policies should be read in connection with the notes set forth below. The notes are not fundamental policies. As a matter of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may or may be deemed to involve a borrowing, in a manner consistent with the Portfolio's investment objective and policies, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Portfolio may borrow from banks, other Price Portfolios or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the value of the Portfolio's total assets would be invested in the securities of issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities and enter into repurchase agreements; (ii) acquire publicly- distributed or privately placed debt securities and purchase debt; (iii) lend portfolio securities; and (iv) participate in an interfund lending program with other Price Portfolios provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of its total assets, more than 5% of the value of the Portfolio's total assets would be invested in the securities of a single issuer, except securities issued or guaranteed by the U.S. government, or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the Portfolio's total assets, more than 10% of the outstanding voting securities of any issuer would be held by the Portfolio (other than obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Portfolio from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the Portfolio may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will not borrow or lend to any other fund unless it applies for and receives an exemptive order from the SEC, if so required, or the SEC issues rules permitting such transactions. The Portfolio has no current intention of engaging in any such activity and there is no assurance the SEC would grant any order requested by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not consider currency contracts on hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal, state or local governments, or related agencies and instrumentalities, are not considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Only Applicable to the T. Rowe Price International Equity Portfolio:
The following fundamental policies should be read in connection with the notes set forth below. The notes are not fundamental policies. As a matter of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may or may be deemed to involve a borrowing, in a manner consistent with the Portfolio's investment objective and policies, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Portfolio may borrow from banks, other Price Portfolios or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that the Portfolio may enter into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the value of the Portfolio's total assets would be invested in the securities of issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities and enter into repurchase agreements; (ii) acquire publicly-distributed or privately placed debt securities and purchase debt; (iii) lend portfolio securities; and (iv) participate in an interfund lending program with other Price Portfolios provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of the Portfolio's total assets, more than 5% of the value of its total assets would be invested in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
6. Purchase a security if, as a result, with respect to 75% of the value of the Portfolio's total assets, more than 10% of the outstanding voting securities of any issuer would be held by the Portfolio (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Portfolio from investing in securities or other instruments back by real estate or securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the Portfolio may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will not borrow or lend to any other fund unless it applies for and receives an exemptive order from the SEC, if so required, or the SEC issues rules permitting such transactions. The Portfolio has no current intention of engaging in any such activity and there is no assurance the SEC would grant any order requested by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not consider currency contracts or hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal, state or local governments, or related agencies and instrumentalities, are not considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price Natural Resources Portfolio:
The following fundamental policies should be read in connection with the notes set forth below. The notes are not fundamental policies. As a matter of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may involve a borrowing, in a manner consistent with the Portfolio's investment objective and program, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Portfolio may borrow from banks, other Price Portfolios or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the value of the Portfolio's total assets would be invested in the securities of issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and participate in an interfund lending program with other Price Portfolio provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's total assets; (ii) purchase money market securities and enter into repurchase agreements; and (iii) acquire publicly-distributed or privately-placed debt securities and purchase debt;
5. Purchase a security if, as a result, with respect to 75% of the value of its total assets, more than 5% of the value of the Portfolio's total assets would be invested in the securities of a single issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the Portfolio's total assets, more than 10% of the outstanding voting securities of any issuer would be held by the Portfolio (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Portfolio from investing in securities or other instruments backed by real estate or in securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the Portfolio may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will not borrow from or lend to any other fund unless it applies for and receives an exemptive order from the SEC, if so required, or the SEC issues rules permitting such transactions. The Portfolio has no current intention of engaging in any such activity and there is no assurance the SEC would grant any order requested by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local governments, or related agencies or instrumentalities, are not considered an industry. Industries are determined by reference to the classifications of industries set forth in the Portfolio's semi-annual and annual reports.
For purposes of investment restriction (4), the Portfolio will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price International Bond Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Borrow money, except as a temporary measure for extraordinary or emergency purposes or except in connection with reverse repurchase agreements provided that the Portfolio maintains asset coverage of 300% for all borrowings;
2. Purchase or sell real estate (except that the Portfolio may invest in (i) securities of companies which deal in real estate or mortgages, and (ii) securities secured by real estate or interests therein, and that the Portfolio reserves freedom of action to hold and to sell real estate acquired as a result of the Portfolio's ownership of securities) or purchase or sell physical commodities or contracts relating to physical commodities;
3. Act as underwriter of securities issued by others, except to the extent that it may be deemed an underwriter in connection with the disposition of portfolio securities of the Portfolio;
4. Make loans to other persons, except (a) loans of portfolio securities, and
(b) to the extent the entry into repurchase agreements and the purchase of debt
securities in accordance with its investment objectives and investment policies
may be deemed to be loans;
5. Issue senior securities except in compliance with the 1940 Act; or
6. Purchase any securities which would cause more than 25% of the market value of its total assets at the time of such purchase to be invested in the securities of one or more issuers having their principal business activities in the same industry, provided that there is no limitation with respect to investments in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (for the purposes of this restriction, telephone companies are considered to be in a separate industry from gas and electric public utilities, and wholly-owned finance companies are considered to be in the industry of their parents if their activities are primarily related to financing the activities of their parents).
Investment Restrictions Applicable Only to the T. Rowe Price Small Company Value Portfolio:
The following fundamental policies should be read in connection with the notes set forth below. The notes are not fundamental policies. As a matter of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may involve a borrowing, in a manner consistent with the Portfolio's investment objective and program, provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Portfolio may borrow from banks, and other funds or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the value of the Portfolio's total assets would be invested in the securities of issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and participate in an interfund lending program to the extent permitted by applicable law, provided that no such loan may be made if, as a result, the aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's total assets; (ii) purchase money market securities and enter into repurchase agreements; and (iii) acquire publicly-distributed or privately-placed debt securities and purchase debt;
5. Purchase a security if, as a result, with respect to 75% of the value of its total assets, more than 5% of the value of the Portfolio's total assets would be invested in the securities of a single issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the Portfolio's total assets, more than 10% of the outstanding voting securities of any issuer would be held by the Portfolio (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Portfolio from investing in securities or other instruments backed by real estate or in securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the Portfolio may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will not borrow from or lend to any other fund unless it applies for and receives an exemptive order from the SEC, if so required, or the SEC issues rules permitting such transactions. The Portfolio has no current intention of engaging in any such activity and there is no assurance the SEC would grant any order requested by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local governments, or related agencies or instrumentalities, are not considered an industry.
For purposes of investment restriction (4), the Portfolio will consider the acquisition of a debt security to include the execution of a note or other evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the Founders Capital Appreciation Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions.
2. Sell securities short.
3. Make loans to other persons; the purchase of a portion of an issue of publicly distributed bonds, debentures or other securities is not considered the making of a loan by the Portfolio. The Portfolio may also enter into repurchase agreements by purchasing U.S. Government securities with a simultaneous agreement with the seller to repurchase them at the original purchase price plus accrued interest.
4. Underwrite the securities of other issuers.
5. Invest in commodities, commodity futures contracts, real estate, real estate mortgage loans or other illiquid interests in real estate, except that the Portfolio may invest in securities of issuers which invest in commodities, commodity futures, real estate, real estate mortgage loans or other illiquid interests in real estate.
6. Make any investment which would concentrate 25% or more of the Portfolio's total assets in the securities of issuers having their principal business activities in the same industry, provided that this limitation does not apply to obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities.
7. Issue any senior securities.
8. Borrow money, except for extraordinary or emergency purposes, and then only from banks in amounts up to 10% of the Portfolio's net assets computed at the lesser of cost or value.
In applying the above restriction regarding investments in a single industry, the Portfolio uses industry classifications based, where applicable, on Baseline, Bridge Information Systems, Reuters, the S&P Stock Guide published by Standard & Poor's, information obtained from Bloomberg L.P. and Moody's International, and/or the prospectus of the issuing company. Selection of an appropriate industry classification resource will be made by the Sub-advisor in the exercise of its reasonable discretion. (This note is not a fundamental policy.)
Investment Restrictions Applicable Only to the Founders Passport Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Make loans of money or securities other than (a) through the purchase of securities in accordance with the Portfolio's investment objective, (b) through repurchase agreements, and (c) by lending portfolio securities in an amount not to exceed 33 1/3% of the Portfolio's total assets;
2. Underwrite securities issued by others except to the extent that the Portfolio may be deemed an underwriter when purchasing or selling securities;
3. Issue senior securities;
4. Invest directly in physical commodities (other than foreign currencies), real estate or interests in real estate; provided, that the Portfolio may invest in securities of issuers which invest in physical commodities, real estate or interests in real estate; and, provided further, that this restriction shall not prevent the Portfolio from purchasing or selling options, futures, swaps and forward contracts, or from investing in securities or other instruments backed by physical commodities, real estate or interests in real estate;
5. Make any investment which would concentrate 25% or more of the Portfolio's total assets in the securities of issuers having their principal business activities in the same industry, provided that this limitation does not apply to obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities;
6. Borrow money except from banks in amounts up to 33 1/3% of the Portfolio's total assets;
7. As to 75% of the value of its total assets, invest more than 5% of its total assets, at market value, in the securities of any one issuer (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities); or
8. As to 75% of the value of its total assets, purchase more than 10% of any class of securities of any single issuer or purchase more than 10% of the voting securities of any single issuer.
In applying the above restriction regarding investments in a single industry, the Portfolio uses industry classifications based, where applicable, on Baseline, Bridge Information Systems, Reuters, the S&P Stock Guide published by Standard & Poor's, information obtained from Bloomberg L.P. and Moody's International, and/or the prospectus of the issuing company. Selection of an appropriate industry classification resource will be made by the Sub-advisor in the exercise of its reasonable discretion. (This note is not a fundamental policy.)
Investment Restrictions Applicable Only to the INVESCO Equity Income Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue preference shares or create any funded debt;
2. Sell short;
3. Borrow money except from banks in excess of 5% of the value of its total net assets, and when borrowing, it is a temporary measure for emergency purposes;
4. Buy or sell real estate, commodities, commodity contracts (however, the Portfolio may purchase securities of companies investing in real estate);
5. Purchase any security or enter into a repurchase agreement, if as a result, more than 15% of its net assets would be invested in repurchase agreements not entitling the holder to payment of principal and interest within seven days and in securities that are illiquid by virtue of legal or contractual restrictions on resale or the absence of a readily available market. The Trustees or the Investment Manager or the Sub-advisor, acting pursuant to authority delegated by the Trustees, may determine that a readily available market exists for securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or any successor to that rule, and therefore that such securities are not subject to the foregoing limitation;
6. Purchase securities if the purchase would cause the Portfolio, at the time, to have more than 5% of its total assets invested in the securities of any one company or to own more than 10% of the voting securities of any one company (except obligations issued or guaranteed by the U.S. Government);
7. Make loans to any person, except through the purchase of debt securities in accordance with the Portfolio's investment policies, or the lending of portfolio securities to broker-dealers or other institutional investors, or the entering into repurchase agreements with member banks of the Federal Reserve System, registered broker-dealers and registered government securities dealers. The aggregate value of all portfolio securities loaned may not exceed 33-1/3% of the Portfolio's total net assets (taken at current value); or
8. Invest more than 25% of the value of the Portfolio's assets in one particular industry.
Investment Restrictions Applicable Only to the PIMCO Total Return Bond Portfolio:
1. The Portfolio will not invest in a security if, as a result of such investment, more than 25% of its total assets (taken at market value at the time of investment) would be invested in securities of issuers of a particular industry, except that this restriction does not apply to securities issued or guaranteed by the U.S. government or its agencies or instrumentalities (or repurchase agreements with respect thereto);
2. The Portfolio will not, with respect to 75% of its total assets, invest in a security if, as a result of such investment, more than 5% of its total assets (taken at market value at the time of investment) would be invested in the securities of any one issuer, except that this restriction does not apply to securities issued or guaranteed by the U.S. government or its agencies or instrumentalities (or repurchase agreements with respect thereto);
3. The Portfolio will not, with respect to 75% of its assets, invest in a security if, as a result of such investment, it would hold more than 10% (taken at the time of investment) of the outstanding voting securities of any one issuer;
4. The Portfolio will not purchase or sell real estate (although it may purchase securities secured by real estate or interests therein, or securities issued by companies which invest in real estate, or interests therein);
5. The Portfolio will not purchase or sell commodities contracts or oil, gas or mineral programs. This restriction shall not prohibit the Portfolio, subject to restrictions stated in the Trust's Prospectus and elsewhere in this Statement, from purchasing, selling or entering into futures contracts, options on futures contracts, foreign currency forward contracts, foreign currency options, or any interest rate, securities related or foreign currency-related hedging instrument, including swap agreements and other derivative instruments, subject to compliance with any applicable provisions of the federal securities laws or commodities laws;
6. The Portfolio will not borrow money, issue senior securities, pledge, mortgage, hypothecate its assets, except that the Portfolio may (i) borrow from banks or enter into reverse repurchase agreements, or employ similar investment techniques, and pledge its assets in connection therewith, but only if immediately after each borrowing there is an asset coverage of 300% and (ii) enter into transactions in options, futures and options on futures and other derivative instruments as described in the Trust's Prospectus and this Statement (the deposit of assets in escrow in connection with the writing of covered put and call options and the purchase of securities on a when-issued or delayed delivery basis, collateral arrangements with respect to initial or variation margin deposits for future contracts and commitments entered into under swap agreements or other derivative instruments, will not be deemed to be pledges of the Portfolio's assets);
7. The Portfolio will not lend funds or other assets, except that the Portfolio may, consistent with its investment objective and policies: (a) invest in debt obligations, including bonds, debentures or other debt securities, bankers' acceptances and commercial paper, even though the purchase of such obligations may be deemed to be the making of a loan, (b) enter into repurchase agreements, and (c) lend its Portfolio securities in an amount not to exceed one-third the value of its total assets, provided such loans are and in accordance with applicable guidelines established by the SEC and the Trust's Board of Trustees; or
8. The Portfolio will not maintain a short position, or purchase, write or sell puts, calls, straddles, spreads or combinations thereof, except as set forth in the Trust's Prospectus and this Statement for transactions in options, futures, and options on futures transactions arising under swap agreements or other derivative instruments.
Investment Restrictions Applicable Only to the PIMCO Limited Maturity Bond Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Invest in a security if, as a result of such investment, more than 25% of its total assets (taken at market value at the time of such investment) would be invested in the securities of issuers in any particular industry, except that this restriction does not apply to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities (or repurchase agreements with respect thereto);
2. With respect to 75% of its assets, invest in a security if, as a result of such investment, more than 5% of its total assets (taken at market value at the time of such investment) would be invested in securities of any one issuer, except that this restriction does not apply to securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities;
3. With respect to 75% of its assets, invest in a security if, as a result of such investment, it would hold more than 10% (taken at the time of such investment) of the outstanding voting securities of any one issuer;
4. Purchase or sell real estate (although it may purchase securities secured by real estate or interests therein, or securities issued by companies which invest in real estate, or interests therein);
5. Purchase or sell commodities or commodities contracts or oil, gas or mineral programs. This restriction shall not prohibit the Portfolio, subject to restrictions described in the Prospectus and elsewhere in this Statement, from purchasing, selling or entering into futures contracts, options, or any interest rate, securities-related or foreign currency-related hedging instrument, including swap agreements and other derivative instruments, subject to compliance with any applicable provisions of the federal securities or commodities laws;
6. Borrow money, issue senior securities, or pledge, mortgage or hypothecate its assets, except that the Portfolio may (i) borrow from banks or enter into reverse repurchase agreements, or employ similar investment techniques, and pledge its assets in connection therewith, but only if immediately after each borrowing there is asset coverage of 300% and (ii) enter into transactions in options, futures and options on futures and other derivative instruments as described in the Prospectus and in this Statement (the deposit of assets in escrow in connection with the writing of covered put and call options and the purchase of securities on a when-issued or delayed delivery basis, collateral arrangements with respect to initial or variation margin deposits for futures contracts and commitments entered into under swap agreements or other derivative instruments, will not be deemed to be pledges of the Portfolio assets);
7. Lend any funds or other assets, except that a Portfolio may, consistent with its investment objective and policies: (a) invest in debt obligations, including bonds, debentures or other debt securities, banker' acceptance and commercial paper, even though the purchase of such obligations may be deemed to be the making of loans, (b) enter into repurchase agreements, and (c) lend its portfolio securities in an amount not to exceed one-third of the value of its total assets, provided such loans are made in accordance with applicable guidelines established by the Securities and Exchange Commission and the Trust's Board of Trustees; or
8. Maintain a short position, or purchase, write or sell puts, calls, straddles, spreads or combinations thereof, except on such conditions as may be set forth in the Prospectus and in this Statement.
Investment Restrictions Applicable Only to the Robertson Stephens Value + Growth Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue any class of securities which is senior to the Portfolio's shares of beneficial interest, except that the Portfolio may borrow money to the extent contemplated by Restriction 3 below;
2. Purchase securities on margin (but the Portfolio may obtain such short-term credits as may be necessary for the clearance of transactions). (Margin payments or other arrangements in connection with transactions in short sales, futures contracts, options, and other financial instruments are not considered to constitute the purchase of securities on margin for this purpose.);
3. Borrow more than one-third of the value of its total assets less all liabilities and indebtedness (other than such borrowings) not represented by senior securities;
4. Act as underwriter of securities of other issuers except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws;
5. As to 75% of the Portfolio's total assets, purchase any security (other than obligations of the U.S. Government, its agencies or instrumentalities) if as a result: (i) more than 5% of the Portfolio's total assets (taken at current value) would then be invested in securities of a single issuer, or (ii) more than 25% of the Portfolio's total assets (taken at current value) would be invested in a single industry;
6. Invest in securities of any issuer if any officer or Trustee of the Trust or any officer or director of the Sub-advisor, as the case may be, owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers, Trustees and directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer; or
7. Make loans, except by purchase of debt obligations or other financial instruments in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements, or through the lending of its portfolio securities.
All percentage limitations on investments will apply at the time of investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
Investment Restrictions Applicable Only to the Twentieth Century International Growth Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Lend its portfolio securities except to unaffiliated persons and subject to the rules and regulations adopted under the 1940 Act. No such rules and regulations have been issued, but it is Sub-advisor's policy that such loans must be secured continuously by cash collateral maintained on a current basis in an amount at least equal to the market value of the securities loaned, or by irrevocable letters of credit. During the existence of the loan, the Portfolio must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral; the Portfolio must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the Portfolio to vote the securities. To comply with the regulations of certain state securities administrators, such loans may not exceed one-third of the Portfolio's net assets taken at market;
2. With respect to 75% of the value of its total assets, purchase the security of any one issuer if such purchase would cause more than 5% of the Portfolio's assets at market to be invested in the securities of such issuer, except U.S. government securities, or if the purchase would cause more than 10% of the outstanding voting securities of any one issuer to be held in the Portfolio;
3. Invest more than 25% of the assets of the Portfolio, exclusive of cash and U.S. government securities, in securities of any one industry;
4. Issue any senior security except in compliance with the 1940 Act;
5. Underwrite any securities except to the extent that the Portfolio may be deemed an underwriter when purchasing or selling securities;
6. Purchase or sell real estate. (In the opinion of the Sub-advisor, this restriction will not preclude the Portfolio from investing in securities of corporations that deal in real estate);
7. Purchase or sell commodities or commodity contracts; except that the Portfolio may, for non-speculative purposes, buy or sell interest rate futures contracts on debt securities (debt futures and bond index futures) and related options; or
8. Borrow any money, except in an amount not in excess of 33 1/3% of the total assets of the Portfolio, and then only for emergency and extraordinary purposes; this does not prohibit the escrow and collateral arrangements in connection with investment in interest rate futures contracts and related options by the Portfolio.
In determining industry groups for purposes of the above restriction regarding investments in a single industry, the Securities and Exchange Commission ordinarily uses the Standard Industry Classification codes developed by the United States Office of Management and Budget. The Sub-advisor monitors industry concentration using a more restrictive list of industry groups than that recommended by the Securities and Exchange Commission. The Sub-advisor believes that these classifications are reasonable and are not so broad that the primary economic characteristics of the companies in a single class are materially different. The use of these more restrictive industry classifications may, however, cause the Portfolio to forego investment possibilities which may otherwise be available to it under the 1940 Act. (This note is not a fundamental policy.)
Investment Restrictions Applicable Only to the Twentieth Century Strategic Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Lend its securities except to unaffiliated persons and subject to the rules and regulations adopted under the 1940 Act. No such rules and regulations have been promulgated, but it is the Sub-advisor's policy that such loans must be secured continuously by cash collateral maintained on a current basis in an amount at least equal to the market value of the securities loaned, or by irrevocable letters of credit. During the existence of the loan, the Sub-advisor must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral; the Portfolio must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the Portfolio to vote the securities. To comply with the regulations of certain state securities administrators, such loans may not exceed one-third of the Portfolio's net assets taken at market.
2. With respect to 75% of the value of its total assets, purchase the security of any one issuer if such purchase would cause more than 5% of the Portfolio's assets at market to be invested in the securities of such issuer, except United States government securities, or if the purchase would cause more than 10% of the outstanding voting securities of any one issuer to be held in the Portfolio;
3. Invest more than 25% of the assets of the Portfolio, exclusive of cash and U.S. government securities, in securities of any one industry;
4. Issue any senior security except in compliance with the 1940 Act;
5. Underwrite any securities except to the extent that the Portfolio may be deemed an underwriter when purchasing or selling securities;
6. Purchase or sell real estate. (In the opinion of the Sub-advisor, this restriction will not preclude the Portfolio from investing in securities of corporations that deal in real estate.);
7. Purchase or sell commodities or commodity contracts; except that the Portfolio may, for non-speculative purposes, buy or sell interest rate futures contracts on debt securities (debt futures and bond index futures) and related options; or
8. Borrow any money, except in an amount not in excess of 33 1/3% of the total assets of the Portfolio, and then only for emergency and extraordinary purposes; this does not prohibit the escrow and collateral arrangements in connection with investment in interest rate futures contracts and related options by the Portfolio.
Investment Restrictions Applicable Only to the AST Putnam Value Growth & Income Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Borrow money in excess of 33 1/3% of the value (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) at the time the borrowing is made, and then only from banks as a temporary measure to facilitate the meeting of redemption requests (not for leverage) which might otherwise require the untimely disposition of portfolio investments or for extraordinary or emergency purposes. Such borrowings will be repaid before any additional investments are purchased;
2. Underwrite securities issued by other persons except to the extent that, in connection with the disposition of its portfolio investments, it may be deemed to be an underwriter under certain federal securities laws;
3. Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and securities which represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein;
4. Purchase or sell commodities or commodity contracts, except that the Portfolio may purchase and sell financial futures contracts and options;
5. Make loans, except by purchase of debt obligations in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements, or by lending its portfolio securities;
6. With respect to 75% of its total assets, invest in the securities of any issuer if, immediately after such investment, more than 5% of the total assets of the Portfolio (taken at current value) would be invested in the securities of such issuer; provided that this limitation does not apply to obligations issued or guaranteed as to interest or principal by the U.S. government or its agencies or instrumentalities;
7. With respect to 75% of its total assets, acquire more than 10% of the outstanding voting securities of any issuer;
8. Purchase securities (other than securities of the U.S. government, its agencies or instrumentalities) if, as a result of such purchase, more than 25% of the Portfolio's total assets would be invested in any one industry; or
9. Issue any class of securities which is senior to the Portfolio's shares of beneficial interest.
All percentage limitations on investments will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
Investment Restrictions Applicable Only to the AST Putnam International Equity Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Borrow money except from banks and then in amounts not in excess of 33 1/3% of its total assets. The Portfolio may borrow at prevailing interest rates and invest the funds in additional securities. The Portfolio's borrowings are limited so that immediately after such borrowing the value of the Portfolio's assets (including borrowings) less its liabilities (not including borrowings) is at least three times the amount of the borrowings. Should the Portfolio, for any reason, have borrowings that do not meet the above test then, within three business days, the Portfolio must reduce such borrowings so as to meet the necessary test. Under such a circumstance, the Portfolio may have to liquidate securities at a time when it is disadvantageous to do so;
2. Underwrite securities issued by other persons except to the extent that, in connection with the disposition of its portfolio investments, it may be deemed to be an underwriter under certain federal securities laws;
3. Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and securities representing interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein;
4. Purchase or sell commodities or commodity contracts, except that the Portfolio may purchase and sell financial futures contracts and related options;
5. Make loans, except by purchase of debt obligations in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements, or by lending its portfolio securities;
6. With respect to 75% of its total assets, invest in the securities of any issuer if, immediately after such investment, more than 5% of the total assets of the Portfolio (taken at current value) would be invested in the securities of such issuer; provided that this limitation does not apply to obligations issued or guaranteed as to interest or principal by the U.S. government or its agencies or instrumentalities;
7. With respect to 75% of its total assets, acquire more than 10% of the outstanding voting securities of any issuer;
8. Purchase securities (other than securities of the U.S. government, its agencies or instrumentalities) if as a result of such purchase more than 25% of the Portfolio's total assets would be invested in any one industry; or
9. Issue senior securities.
All percentage limitations on investments will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
Investment Restrictions Applicable Only to the AST Putnam Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. With respect to 75% of its total assets, invest in the securities of any issuer if, immediately after such investment, more than 5% of the total assets of the Portfolio (taken at current value) would be invested in the securities of such issuer; provided that this limitation does not apply to obligations issued or guaranteed as to interest or principal by the U.S. government or its agencies or instrumentalities;
2. With respect to 75% of its total assets, acquire more than 10% of the outstanding voting securities of any issuer;
3. Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and securities which represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein;
4. Purchase securities (other than securities of the U.S. government, its agencies or instrumentalities) if, as a result of such purchase, more than 25% of the Portfolio's total assets would be invested in any one industry;
5. Invest in commodities or commodity contracts except that it may purchase or sell financial futures contracts and options thereon;
6. Underwrite securities issued by others except to the extent that the Portfolio may be deemed an underwriter when purchasing or selling securities;
7. Borrow money in excess of 10% of the value (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) at the time the borrowing is made, and then only from banks as a temporary measure to facilitate the meeting of redemption requests (not for leverage) which might otherwise require the untimely disposition of portfolio investments or for extraordinary or emergency purposes. Such borrowings will be repaid before any additional investments are purchased;
8. Make loans, except by purchase of debt obligations in which the Portfolio may invest consistent with its investment policies, by entering into repurchase agreements, or by lending its portfolio securities; or
9. Issue senior securities.
All percentage limitations on investments will apply at the time of the making of an investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment.
Investment Restrictions Applicable Only to the Lord Abbett Small Cap Value Portfolio, the Cohen & Steers Realty Portfolio, the Stein Roe Venture Portfolio, the Bankers Trust Enhanced 500 Portfolio, the Marsico Capital Growth Portfolio, the Neuberger&Berman Mid-Cap Value Portfolio and the Neuberger&Berman Mid-Cap Growth Portfolio.
1. No Portfolio may issue senior securities, except as permitted under the 1940 Act.
2. No Portfolio may borrow money, except that a Portfolio may (i) borrow money for non-leveraging, temporary or emergency purposes, and (ii) engage in reverse repurchase agreements and make other investments or engage in other transactions, which may involve a borrowing, in a manner consistent with the Portfolio's investment objective and policies; provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. Subject to the above limitations, a Portfolio may borrow from banks or other persons to the extent permitted by applicable law.
3. No Portfolio may underwrite securities issued by other persons, except to the extent that the Portfolio may be deemed to be an underwriter (within the meaning of the Securities Act of 1933) in connection with the purchase and sale of portfolio securities.
4. No Portfolio may purchase or sell real estate unless acquired as a result of the ownership of securities or other instruments; provided that this restriction shall not prohibit a Portfolio from investing in securities or other instruments backed by real estate or in securities of companies engaged in the real estate business.
5. No Portfolio may purchase or sell physical commodities unless acquired as a result of the ownership of securities or instruments; provided that this restriction shall not prohibit a Portfolio from (i) engaging in permissible options and futures transactions and forward foreign currency contracts in accordance with the Portfolio's investment policies, or (ii) investing in securities of any kind.
6. No Portfolio may make loans, except that a Portfolio may (i) lend portfolio securities in accordance with the Portfolio's investment policies in amounts up to 33 1/3% of the total assets of the Portfolio taken at market value, (ii) purchase money market securities and enter into repurchase agreements, and (iii) acquire publicly distributed or privately placed debt securities.
7. No Portfolio other than the Cohen & Steers Realty Portfolio may purchase any security if, as a result, more than 25% of the value of the Portfolio's assets would be invested in the securities of issuers having their principal business activities in the same industry; provided that this restriction does not apply to investments in obligations issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities (or repurchase agreements with respect thereto). The Cohen & Steers Realty Portfolio will invest at least 25% of its total assets in securities of companies engaged in the real estate business.
8. No Portfolio other than the Cohen & Steers Realty Portfolio may, with respect to 75% of the value of its total assets, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, (i) more than 5% of the value of the Portfolio's total assets would be invested in the securities of such issuer, or (ii) more than 10% of the outstanding voting securities of such issuer would be held by the Portfolio. The Cohen & Steers Realty Portfolio may not, with respect to 50% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such investment more than 5% of the total assets of the Portfolio would be invested in such issuer.
If a restriction on a Portfolio's investments is adhered to at the time an investment is made, a subsequent change in the percentage of Portfolio assets invested in certain securities or other instruments, or change in average duration of the Portfolio's investment portfolio, resulting from changes in the value of the Portfolio's total assets, will not be considered a violation of the restriction; provided, however, that the asset coverage requirement applicable to borrowings shall be maintained in the manner contemplated by applicable law.
With respect to investment restrictions (2) and (6), a Portfolio will not borrow or lend to any other fund unless it applies for and receives an exemptive order from the Securities and Exchange Commission (the "Commission"), if so required, or the Commission issues rules permitting such transactions. There is no assurance the Commission would grant any order requested by a Portfolio or promulgate any rules allowing the transactions.
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the investment instruments, techniques and methods which may be used by one or more of the Portfolios and the risks attendant thereto are described below. Other risk factors and investment methods may be described in the "Investment Objectives and Policies" and "Certain Risk Factors and Investment Methods" section in the Trust's Prospectus and in the "Investment Objectives and Policies" section of this Statement. The risks and investment methods described below apply only to those Portfolios which may invest in such instruments or use such techniques.
Debt Obligations:
Yields on short, intermediate, and long-term securities are dependent on a variety of factors, including, the general conditions of the money and bond markets, the size of a particular offering, the maturity of the obligation, and the rating of the issue. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market prices of debt securities usually vary, depending upon available yields. An increase in interest rates will generally reduce the value of portfolio investments, and a decline in interest rates will generally increase the value of portfolio investments. The ability of the Portfolio to achieve its investment objectives is also dependent on the continuing ability of the issuers of the debt securities in which the Portfolio invests to meet their obligations for the payment of interest and principal when due.
Special Risks Associated with Low-Rated and Comparable Unrated Securities:
Low-rated and comparable unrated securities, while generally offering higher yields than investment-grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with such investments are discussed below. See the Appendix of this Statement for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated and comparable unrated securities market is relatively new, and its growth paralleled a long economic expansion. As a result, it is not clear how this market may withstand a prolonged recession or economic downturn. Such a prolonged economic downturn could severely disrupt the market for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of low-rated and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher-rated securities, which react primarily to fluctuations in the general level of interest rates. Low-rated and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of low-rated and comparable unrated securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of low-rated and comparable unrated securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a low-rated and comparable unrated security defaulted, a Portfolio might incur additional expenses to seek recovery. Periods of economic uncertainty and changes would also generally result in increased volatility in the market prices of low-rated and comparable unrated securities and thus in a Portfolio's net asset value.
As previously stated, the value of such a security will decrease in a rising interest rate market and accordingly, so will a Portfolio's net asset value. If a Portfolio experiences unexpected net redemptions in such a market, it may be forced to liquidate a portion of its portfolio securities without regard to their investment merits. Due to the limited liquidity of high-yield securities (discussed below) a Portfolio may be forced to liquidate these securities at a substantial discount. Any such liquidation would reduce a Portfolio's asset base over which expenses could be allocated and could result in a reduced rate of return for a Portfolio.
Payment Expectations. Low-rated and comparable unrated securities typically contain redemption, call, or prepayment provisions which permit the issuer of such securities containing such provisions to, at their discretion, redeem the securities. During periods of falling interest rates, issuers of high-yield securities are likely to redeem or prepay the securities and refinance them with debt securities with a lower interest rate. To the extent an issuer is able to refinance the securities, or otherwise redeem them, a Portfolio may have to replace the securities with a lower-yielding security, which would result in a lower return for a Portfolio.
Issuers of lower-rated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. Such issuers may not have more traditional methods of financing available to them and may be unable to repay outstanding obligations at maturity by refinancing. The risk of loss due to default in payment of interest or repayment of principal by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness.
Credit Ratings. Credit ratings issued by credit-rating agencies evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of low-rated and comparable unrated securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit-rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality. Investments in low-rated and comparable unrated securities will be more dependent on the Sub-advisor's credit analysis than would be the case with investments in investment-grade debt securities. The Sub-advisor may employ its own credit research and analysis, which could include a study of existing debt, capital structure, ability to service debt and to pay dividends, the issuer's sensitivity to economic conditions, its operating history, and the current trend of earnings. The Sub-advisor continually monitors the investments in a Portfolio and evaluates whether to dispose of or to retain low-rated and comparable unrated securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. A Portfolio may have difficulty disposing of certain low-rated and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all low-rated and comparable unrated securities, there is no established retail secondary market for many of these securities. A Portfolio anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. As a result, a Portfolio's asset value and a Portfolio's ability to dispose of particular securities, when necessary to meet a Portfolio's liquidity needs or in response to a specific economic event, may be impacted. The lack of a liquid secondary market for certain securities may also make it more difficult for the Portfolio to obtain accurate market quotations for purposes of valuing a Portfolio. Market quotations are generally available on many low-rated and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. During periods of thin trading, the spread between bid and asked prices is likely to increase significantly. In addition, adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of low-rated and comparable unrated securities, especially in a thinly-traded market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder (buyer) the "right to purchase" a security or currency at a specified price (the exercise price), at expiration of the option (European style) or at any time until a certain date (the expiration date) (American style). So long as the obligation of the writer of a call option continues, he may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring him to deliver the underlying security or currency against payment of the exercise price. This obligation terminates upon the expiration of the call option, or such earlier time at which the writer effects a closing purchase transaction by repurchasing an option identical to that previously sold.
When writing a call option, a Portfolio, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, the Portfolio has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligation as a writer. If a call option which the Portfolio has written expires, the Portfolio will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, a Portfolio will realize a gain or loss from the sale of the underlying security or currency.
Writing (Selling) Put Options. A put option gives the purchaser of the option the right to sell, and the writer (seller) has the obligation to buy, the underlying security or currency at the exercise price during the option period (American style) or at the expiration of the option (European style). So long as the obligation of the writer continues, he may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring him to make payment of the exercise price against delivery of the underlying security or currency. The operation of put options in other respects, including their related risks and rewards, is substantially identical to that of call options.
Premium Received from Writing Call or Put Options. A Portfolio will receive a premium from writing a put or call option, which increases such Portfolio's return in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the market price of the underlying security to the exercise price of the option, the term of the option and the volatility of the market price of the underlying security. By writing a call option, a Portfolio limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option, a Portfolio assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss if the purchase price exceeds the market value plus the amount of the premium received, unless the security subsequently appreciates in value.
Closing Transactions. Closing transactions may be effected in order to realize a profit on an outstanding call option, to prevent an underlying security or currency from being called, or, to permit the sale of the underlying security or currency. A Portfolio may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. A Portfolio will realize a profit or loss from such transaction if the cost of such transaction is less or more than the premium received from the writing of the option. In the case of a put option, any loss so incurred may be partially or entirely offset by the premium received from a simultaneous or subsequent sale of a different put option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by such Portfolio.
Furthermore, effecting a closing transaction will permit the Portfolio to write another call option on the underlying security or currency with either a different exercise price or expiration date or both. If the Portfolio desires to sell a particular security or currency from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security or currency. There is, of course, no assurance that the Portfolio will be able to effect such closing transactions at a favorable price. If the Portfolio cannot enter into such a transaction, it may be required to hold a security or currency that it might otherwise have sold. When the Portfolio writes a covered call option, it runs the risk of not being able to participate in the appreciation of the underlying securities or currencies above the exercise price, as well as the risk of being required to hold on to securities or currencies that are depreciating in value. This could result in higher transaction costs. The Portfolio will pay transaction costs in connection with the writing of options to close out previously written options. Such transaction costs are normally higher than those applicable to purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a Portfolio for the purpose of acquiring the underlying securities or currencies for its portfolio. Utilized in this fashion, the purchase of call options enables the Portfolio to acquire the securities or currencies at the exercise price of the call option plus the premium paid. At times the net cost of acquiring securities or currencies in this manner may be less than the cost of acquiring the securities or currencies directly. This technique may also be useful to a Portfolio in purchasing a large block of securities or currencies that would be more difficult to acquire by direct market purchases. So long as it holds such a call option rather than the underlying security or currency itself, the Portfolio is partially protected from any unexpected decline in the market price of the underlying security or currency and in such event could allow the call option to expire, incurring a loss only to the extent of the premium paid for the option.
Purchasing Put Options. A Portfolio may purchase a put option on an underlying security or currency (a "protective put") owned by the Portfolio as a defensive technique in order to protect against an anticipated decline in the value of the security or currency. Such hedge protection is provided only during the life of the put option when the Portfolio, as the holder of the put option, is able to sell the underlying security or currency at the put exercise price regardless of any decline in the underlying security's market price or currency's exchange value. For example, a put option may be purchased in order to protect unrealized appreciation of a security or currency where a Sub-advisor deems it desirable to continue to hold the security or currency because of tax considerations. The premium paid for the put option and any transaction costs would reduce any capital gain otherwise available for distribution when the security or currency is eventually sold.
If a Portfolio purchases put options at a time when the Portfolio does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, the Portfolio seeks to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, the Portfolio will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently below the exercise price to cover the premium and transaction costs, unless the put option is sold in a closing sale transaction.
Dealer Options. Exchange-traded options generally have a continuous liquid market while dealer options have none. Consequently, the Portfolio will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when the Portfolio writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Portfolio originally wrote the option. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with the Portfolio, there can be no assurance that the Portfolio will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Until the Portfolio, as a covered dealer call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the contra party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, since the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options and the assets used to secure the written dealer options are illiquid securities. The Portfolio may treat the cover used for written OTC options as liquid if the dealer agrees that the Portfolio may repurchase the OTC option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the OTC option would be considered illiquid only to the extent the maximum repurchase price under the formula exceeds the intrinsic value of the option. To this extent, the Portfolio will treat dealer options as subject to the Portfolio's limitation on unmarketable securities. If the SEC changes its position on the liquidity of dealer options, the Portfolio will change its treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and Put Options: During the option period, a Portfolio, as writer of a call option has, in return for the premium received on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. The writer has no control over the time when it may be required to fulfill its obligation as a writer of the option. The risk of purchasing a call or put option is that the Portfolio may lose the premium it paid plus transaction costs. If the Portfolio does not exercise the option and is unable to close out the position prior to expiration of the option, it will lose its entire investment.
An option position may be closed out only on an exchange which provides a secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at a particular time and that the Portfolio can close out its position by effecting a closing transaction. If the Portfolio is unable to effect a closing purchase transaction, it cannot sell the underlying security until the option expires or the option is exercised. Accordingly, the Portfolio may not be able to sell the underlying security at a time when it might otherwise be advantageous to do so. Possible reasons for the absence of a liquid secondary market include the following: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) inadequacy of the facilities of an exchange or the clearing corporation to handle trading volume; and (v) a decision by one or more exchanges to discontinue the trading of options or impose restrictions on orders. In addition, the hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets. The purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number of call options, whether or not covered, which may be written by a single investor acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions.
Options on Stock Indices:
Options on stock indices are similar to options on specific securities except that, rather than the right to take or make delivery of the specific security at a specific price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of that stock index is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars multiplied by a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike options on specific securities, all settlements of options on stock indices are in cash and gain or loss depends on general movements in the stocks included in the index rather than price movements in particular stocks. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific amount multiplied by the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of securities is made.
Risk Factors in Options on Indices. Because the value of an index option depends upon the movements in the level of the index rather than upon movements in the price of a particular security, whether the Portfolio will realize a gain or a loss on the purchase or sale of an option on an index depends upon the movements in the level of prices in the market generally or in an industry or market segment rather than upon movements in the price of the individual security. Accordingly, successful use of positions will depend upon a Sub-advisor's ability to predict correctly movements in the direction of the market generally or in the direction of a particular industry. This requires different skills and techniques than predicting changes in the prices of individual securities.
Index prices may be distorted if trading of securities included in the index is interrupted. Trading in index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of securities in the index. If this occurred, a Portfolio would not be able to close out options which it had written or purchased and, if restrictions on exercise were imposed, might be unable to exercise an option it purchased, which would result in substantial losses.
Price movements in Portfolio securities will not correlate perfectly with movements in the level of the index and therefore, a Portfolio bears the risk that the price of the securities may not increase as much as the level of the index. In this event, the Portfolio would bear a loss on the call which would not be completely offset by movements in the prices of the securities. It is also possible that the index may rise when the value of the Portfolio's securities does not. If this occurred, a Portfolio would experience a loss on the call which would not be offset by an increase in the value of its securities and might also experience a loss in the market value of its securities.
Unless a Portfolio has other liquid assets which are sufficient to satisfy the exercise of a call on the index, the Portfolio will be required to liquidate securities in order to satisfy the exercise.
When a Portfolio has written a call on an index, there is also the risk that the market may decline between the time the Portfolio has the call exercised against it, at a price which is fixed as of the closing level of the index on the date of exercise, and the time the Portfolio is able to sell securities. As with options on securities, the Sub-advisor will not learn that a call has been exercised until the day following the exercise date, but, unlike a call on securities where the Portfolio would be able to deliver the underlying security in settlement, the Portfolio may have to sell part of its securities in order to make settlement in cash, and the price of such securities might decline before they could be sold.
If a Portfolio exercises a put option on an index which it has purchased before final determination of the closing index value for the day, it runs the risk that the level of the underlying index may change before closing. If this change causes the exercised option to fall "out-of-the-money" the Portfolio will be required to pay the difference between the closing index value and the exercise price of the option (multiplied by the applicable multiplier) to the assigned writer. Although the Portfolio may be able to minimize this risk by withholding exercise instructions until just before the daily cutoff time or by selling rather than exercising an option when the index level is close to the exercise price, it may not be possible to eliminate this risk entirely because the cutoff time for index options may be earlier than those fixed for other types of options and may occur before definitive closing index values are announced.
Trading in Futures:
A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g., units of a stock index) for a specified price, date, time and place designated at the time the contract is made. Brokerage fees are incurred when a futures contract is bought or sold and margin deposits must be maintained. Entering into a contract to buy is commonly referred to as buying or purchasing a contract or holding a long position. Entering into a contract to sell is commonly referred to as selling a contract or holding a short position.
Unlike when the Portfolio purchases or sells a security, no price would be paid or received by the Portfolio upon the purchase or sale of a futures contract. Upon entering into a futures contract, and to maintain the Portfolio's open positions in futures contracts, the Portfolio would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, U.S. government securities, suitable money market instruments, or other liquid securities, known as "initial margin." The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Portfolio.
These subsequent payments, called "variation margin," to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuate making the long and short positions in the futures contract more or less valuable, a process known as "marking to the market." The Portfolio expects to earn interest income on its margin deposits. Although certain futures contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice most futures contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is effected by entering into an offsetting futures contract purchase or sale, respectively, for the same aggregate amount of the identical securities and the same delivery date. If the offsetting purchase price is less than the original sale price, the Portfolio realizes a gain; if it is more, the Portfolio realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, the Portfolio realizes a gain; if it is less, the Portfolio realizes a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that the Portfolio will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the Portfolio is not able to enter into an offsetting transaction, the Portfolio will continue to be required to maintain the margin deposits on the futures contract.
For example, one contract in the Financial Times Stock Exchange 100 Index future is a contract to buy 25 pounds sterling multiplied by the level of the UK Financial Times 100 Share Index on a given future date. Settlement of a stock index futures contract may or may not be in the underlying security. If not in the underlying security, then settlement will be made in cash, equivalent over time to the difference between the contract price and the actual price of the underlying asset at the time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments except that options on futures give the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell the futures contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by the delivery of the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. Alternatively, settlement may be made totally in cash. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
The writer of an option on a futures contract is required to deposit margin pursuant to requirements similar to those applicable to futures contracts. Upon exercise of an option on a futures contract, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's margin account. This amount will be equal to the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract.
Although financial futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out is accomplished by effecting an offsetting transaction. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of securities and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller immediately would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller would immediately pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a futures contract sale for the same securities and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss.
Commissions on financial futures contracts and related options transactions may be higher than those which would apply to purchases and sales of securities directly.
A public market exists in interest rate futures contracts covering primarily the following financial instruments: U.S. Treasury bonds; U.S. Treasury notes; Government National Mortgage Association ("GNMA") modified pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; and Eurodollar certificates of deposit. It is expected that Futures contracts trading in additional financial instruments will be authorized. The standard contract size is generally $100,000 for Futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass-through securities and $1,000,000 for the other designated Futures contracts. A public market exists in Futures contracts covering a number of indexes, including, but not limited to, the Standard & Poor's 500 Index, the Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite Index and the New York Stock Exchange Composite Index.
Regulatory Matters. The Staff of Securities and Exchange Commission ("SEC") has taken the position that the purchase and sale of futures contracts and the writing of related options may give rise to "senior securities" for the purposes of the restrictions contained in Section 18 of the 1940 Act on investment companies' issuing senior securities. However, the Staff has taken the position that no senior security will be created if a Portfolio maintains in a segregated account an amount of cash or other liquid assets at least equal to the amount of the Portfolio's obligation under the futures contract or option. Similarly, no senior security will be created if a Portfolio "covers" its futures and options positions by owning corresponding positions or securities underlying the positions that enable the Portfolio to close out its futures and options positions without paying additional cash consideration. Each Portfolio will conduct its purchases and sales of any futures contracts and writing of related options transactions in accordance with these requirements.
Certain Risks Relating to Futures Contracts and Related Options. There are special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are volatile and are influenced, among other things, by actual and anticipated changes in the market and interest rates, which in turn are affected by fiscal and monetary policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. However, the Portfolio would presumably have sustained comparable losses if, instead of the futures contract, it had invested in the underlying instrument and sold it after the decline. Furthermore, in the case of a futures contract purchase, in order to be certain that the Portfolio has sufficient assets to satisfy its obligations under a futures contract, the Portfolio earmarks to the futures contract money market instruments equal in value to the current value of the underlying instrument less the margin deposit.
Liquidity. The Portfolio may elect to close some or all of its futures positions at any time prior to their expiration. The Portfolio would do so to reduce exposure represented by long futures positions or increase exposure represented by short futures positions. The Portfolio may close its positions by taking opposite positions which would operate to terminate the Portfolio's position in the futures contracts. Final determinations of variation margin would then be made, additional cash would be required to be paid by or released to the Portfolio, and the Portfolio would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade where the contracts were initially traded. Although the Portfolio intends to purchase or sell futures contracts only on exchanges or boards of trade where there appears to be an active market, there is no assurance that a liquid market on an exchange or board of trade will exist for any particular contract at any particular time. In such event, it might not be possible to close a futures contract, and in the event of adverse price movements, the Portfolio would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge the underlying instruments, the Portfolio would continue to hold the underlying instruments subject to the hedge until the futures contracts could be terminated. In such circumstances, an increase in the price of the underlying instruments, if any, might partially or completely offset losses on the futures contract. However, as described below, there is no guarantee that the price of the underlying instruments will, in fact, correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior, market or interest rate trends. There are several risks in connection with the use by the Portfolio of futures contracts as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the futures contracts and movements in the prices of the underlying instruments which are the subject of the hedge. Sub-advisor will, however, attempt to reduce this risk by entering into futures contracts whose movements, in its judgment, will have a significant correlation with movements in the prices of the Portfolio's underlying instruments sought to be hedged.
Successful use of futures contracts by the Portfolio for hedging purposes is also subject to a Sub-advisor's ability to correctly predict movements in the direction of the market. It is possible that, when the Portfolio has sold futures to hedge its portfolio against a decline in the market, the index, indices, or underlying instruments on which the futures are written might advance and the value of the underlying instruments held in the Portfolio's portfolio might decline. If this were to occur, the Portfolio would lose money on the futures and also would experience a decline in value in its underlying instruments. However, while this might occur to a certain degree, Sub-advisor may believe that over time the value of the Portfolio's portfolio will tend to move in the same direction as the market indices which are intended to correlate to the price movements of the underlying instruments sought to be hedged. It is also possible that if the Portfolio were to hedge against the possibility of a decline in the market (adversely affecting the underlying instruments held in its portfolio) and prices instead increased, the Portfolio would lose part or all of the benefit of increased value of those underlying instruments that it has hedged, because it would have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio had insufficient cash, it might have to sell underlying instruments to meet daily variation margin requirements. Such sales of underlying instruments might be, but would not necessarily be, at increased prices (which would reflect the rising market). The Portfolio might have to sell underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect correlation, or no correlation at all, between price movements in the futures contracts and the portion of the portfolio being hedged, the price movements of futures contracts might not correlate perfectly with price movements in the underlying instruments due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors might close futures contracts through offsetting transactions which could distort the normal relationship between the underlying instruments and futures markets. Second, the margin requirements in the futures market are less onerous than margin requirements in the securities markets, and as a result the futures market might attract more speculators than the securities markets do. Increased participation by speculators in the futures market might also cause temporary price distortions. Due to the possibility of price distortion in the futures market and also because of the imperfect correlation between price movements in the underlying instruments and movements in the prices of futures contracts, even a correct forecast of general market trends by Sub-advisor might not result in a successful hedging transaction over a very short time period.
Certain Risks of Options on Futures Contracts. The Portfolio may seek to close out an option position by writing or buying an offsetting option covering the same index, underlying instruments, or contract and having the same exercise price and expiration date. The ability to establish and close out positions on such options will be subject to the maintenance of a liquid secondary market. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options, or underlying instruments; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers' orders.
Foreign Futures and Options:
Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign options transaction occurs. For these reasons, customers who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the CFTC's regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the Commission and arbitration proceedings provided by the National Futures Association or any domestic futures exchange. In particular, funds received from customers for foreign futures or foreign options transactions may not be provided the same protections as funds received in respect of transactions on United States futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon may be affected by any variance in the foreign exchange rate between the time your order is placed and the time it is liquidated, offset or exercised.
Foreign Currency Futures Contracts and Related Options. A forward foreign currency exchange contract involves 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. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades.
Depending on the applicable investment policies and restrictions applicable to a Portfolio, a Portfolio may generally enter into forward foreign currency exchange contracts under two circumstances. First, when a Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to "lock in" the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying security transactions, the Portfolio may be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date the security is purchased or sold and the date on which payment is made or received.
Second, when a Sub-advisor believes that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, including the U.S. dollar, it may enter into a forward contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Portfolio's securities denominated in such foreign currency. Alternatively, where appropriate, the Portfolio may hedge all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currencies or currency act as an effective proxy for other currencies. In such a case, the Portfolio may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in the Portfolio. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the forward contract. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. However, as noted, in order to avoid excessive transactions and transaction costs, the Portfolio may use liquid, high-grade debt securities, denominated in any currency, to cover the amount by which the value of a forward contract exceeds the value of the securities to which it relates.
If the Portfolio retains the portfolio security and engages in an offsetting transaction, the Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Portfolio engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between the Portfolio's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Portfolio will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
Purchase and Sale of Currency Futures Contracts and Related Options. As noted above, a currency futures contract sale creates an obligation by a Portfolio, as seller, to deliver the amount of currency called for in the contract at a specified future time for a special price. A currency futures contract purchase creates an obligation by a Portfolio, as purchaser, to take delivery of an amount of currency at a specified future time at a specified price. Although the terms of currency futures contracts specify actual delivery or receipt, in most instances the contracts are closed out before the settlement date without the making or taking of delivery of the currency. Closing out of a currency futures contract is effected by entering into an offsetting purchase or sale transaction. Unlike a currency futures contract, which requires the parties to buy and sell currency on a set date, an option on a currency futures contract entitles its holder to decide on or before a future date whether to enter into such a contract. If the holder decides not to enter into the contract, the premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors:
Interest rate swaps involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The exchange commitments can involve payments to be made in the same currency or in different currencies. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a contractually based principal amount from the party selling the interest rate floor.
Hybrid Instruments:
Hybrid instruments combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument. The risks of investing in hybrid instruments reflect a combination of the risks from investing in securities, futures and currencies, including volatility and lack of liquidity. Reference is made to the discussion of futures and forward contracts in this Statement for a discussion of these risks. Further, the prices of the hybrid instrument and the related commodity or currency may not move in the same direction or at the same time. Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. In addition, because the purchase and sale of hybrid instruments could take place in an over-the-counter market or in a private transaction between the Portfolio and the seller of the hybrid instrument, the creditworthiness of the contra party to the transaction would be a risk factor which the Portfolio would have to consider. Hybrid instruments also may not be subject to regulation of the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
Foreign Currency Exchange-Related Securities:
Certain Portfolios may invest in foreign currency warrants and performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are warrants which entitle the holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the U.S. dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S. dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. dollar depreciates against the value of a major foreign currency such as the Japanese Yen or German Deutschmark. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction (e.g., unless the U.S. dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining "time value" of the warrants (i.e., the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were "out-of-the-money," in a total loss of the purchase price of the warrants. Warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate linked securities are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. dollar and a particular foreign currency at or about that time. The return on "standard" principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. dollar, and is adversely affected by increases in the foreign exchange value of the U.S. dollar. "Reverse" principal exchange rate linked securities are like the "standard" securities, except that their return is enhanced by increases in the value of the U.S. dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. dollars at rates that reflect the degree of foreign currency risk assumed or given up by the purchaser of the notes (i.e., at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S. dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. dollar and a designated currency as of or about that time (generally, the index maturity two days prior to maturity). The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. dollar-denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
Zero-Coupon Securities:
Zero-coupon securities pay no cash income and are sold at substantial discounts from their value at maturity. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. Zero-coupon securities are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest (cash). Zero-coupon securities which are convertible into common stock offer the opportunity for capital appreciation as increases (or decreases) in market value of such securities closely follows the movements in the market value of the underlying common stock. Zero-coupon convertible securities generally are expected to be less volatile than the underlying common stocks, as they usually are issued with maturities of 15 years or less and are issued with options and/or redemption features exercisable by the holder of the obligation entitling the holder to redeem the obligation and receive a defined cash payment.
Zero-coupon securities include securities issued directly by the U.S. Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons and receipts for their underlying principal ("coupons") which have been separated by their holder, typically a custodian bank or investment brokerage firm. A holder will separate the interest coupons from the underlying principal (the "corpus") of the U.S. Treasury security. A number of securities firms and banks have stripped the interest coupons and receipts and then resold them in custodial receipt programs with a number of different names, including "Treasury Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on Treasuries (CATSTM). The underlying U.S. Treasury bonds and notes themselves are held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. Counsel to the underwriters of these certificates or other evidences of ownership of the U.S. Treasury securities have stated that, for federal tax and securities purposes, in their opinion purchasers of such certificates, such as the Portfolio, most likely will be deemed the beneficial holder of the underlying U.S. Government securities.
The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero-coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities that the Treasury sells
itself.
When-Issued Securities:
The price of when-issued securities, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for the when-issued securities take place at a later date. Normally, the settlement date occurs within 90 days of the purchase. During the period between purchase and settlement, no payment is made by the Portfolio to the issuer and no interest accrues to the Portfolio. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in value of the Portfolio's other assets. While when-issued securities may be sold prior to the settlement date, the Portfolio intends to purchase such securities with the purpose of actually acquiring them unless a sale appears desirable for investment reasons.
Mortgage-Backed Securities:
Principal and interest payments made on the mortgages in an underlying mortgage pool are passed through to the Portfolio. Unscheduled prepayments of principal shorten the securities' weighted average life and may lower their total return. (When a mortgage in the underlying mortgage pool is prepaid, an unscheduled principal prepayment is passed through to the Portfolio. This principal is returned to the Portfolio at par. As a result, if a mortgage security were trading at a premium, its total return would be lowered by prepayments, and if a mortgage securities were trading at a discount, its total return would be increased by prepayments.) The value of these securities also may change because of changes in the market's perception of the creditworthiness of the federal agency that issued them. In addition, the mortgage securities market in general may be adversely affected by changes in governmental regulation or tax policies.
Asset-Backed Securities:
Asset-backed securities directly or indirectly represent a participation interest in, or are secured by and payable from, a stream of payments generated by particular assets such as motor vehicle or credit card receivables. Payments of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution unaffiliated with the entities issuing the securities. Asset-backed securities may be classified as pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an undivided fractional ownership interest in an underlying pool of assets. Pass-through certificates usually provide for payments of principal and interest received to be passed through to their holders, usually after deduction for certain costs and expenses incurred in administering the pool. Because pass-through certificates represent an ownership interest in the underlying assets, the holders thereof bear directly the risk of any defaults by the obligors on the underlying assets not covered by any credit support. See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known as collateralized obligations, are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Such assets are most often trade, credit card or automobile receivables. The assets collateralizing such asset-backed securities are pledged to a trustee or custodian for the benefit of the holders thereof. Such issuers generally hold no assets other than those underlying the asset-backed securities and any credit support provided. As a result, although payments on such asset-backed securities are obligations of the issuers, in the event of defaults on the underlying assets not covered by any credit support (see "Types of Credit Support"), the issuing entities are unlikely to have sufficient assets to satisfy their obligations on the related asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities are issued with only one class of security, many asset-backed securities are issued in more than one class, each with different payment terms. Multiple class asset-backed securities are issued for two main reasons. First, multiple classes may be used as a method of providing credit support. This is accomplished typically through creation of one or more classes whose right to payments on the asset-backed security is made subordinate to the right to such payments of the remaining class or classes. See "Types of Credit Support." Second, multiple classes may permit the issuance of securities with payment terms, interest rates or other characteristics differing both from those of each other and from those of the underlying assets. Examples include so-called "strips" (asset-backed securities entitling the holder to disproportionate interests with respect to the allocation of interest and principal of the assets backing the security), and securities with a class or classes having characteristics which mimic the characteristics of non-asset-backed securities, such as floating interest rates (i.e., interest rates which adjust as a specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying assets are allocated in a manner different than those described above may be issued in the future. The Portfolio may invest in such asset-backed securities if such investment is otherwise consistent with its investment objectives and policies and with the investment restrictions of the Portfolio.
Types of Credit Support. 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 failures by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two classes: liquidity protection and protection against 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 scheduled payments on the underlying pool are made in a timely fashion. Protection against ultimate default ensures 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 from third parties, through various means of structuring the transaction or through a combination of such approaches. Examples of asset-backed securities with credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class asset-backed securities with certain classes subordinate to other classes as to the payment of principal thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class) and asset-backed securities that have "reserve portfolios" (where cash or investments, sometimes funded from a portion of the initial payments on the underlying assets, are held in reserve against future losses) or that have been "over collateralized" (where the scheduled payments on, or the principal amount of, the underlying assets substantially exceeds that required to make payment of the asset-backed securities and pay any servicing or other fees). The degree of credit support provided on each issue is based generally on historical information respecting the level of credit risk associated with such payments. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in an asset-backed security. Additionally, if the letter of credit is exhausted, holders of asset-backed securities may also experience delays in payments or losses if the full amounts due on underlying sales contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may be backed by receivables from motor vehicle installment sales contracts or installment loans secured by motor vehicles ("Automobile Receivable Securities"). Since installment sales contracts for motor vehicles or installment loans related thereto ("Automobile Contracts") typically have shorter durations and lower incidences of prepayment, Automobile Receivable Securities generally will exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an enforceable interest in their respective Automobile Contracts only by filing a financing statement and by having the servicer of the Automobile Contracts, which is usually the originator of the Automobile Contracts, take custody thereof. In such circumstances, if the servicer of the Automobile Contracts were to sell the same Automobile Contracts to another party, in violation of its obligation not to do so, there is a risk that such party could acquire an interest in the Automobile Contracts superior to that of the holders of Automobile Receivable Securities. Also although most Automobile Contracts grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to create an enforceable security interest against competing claims of other parties. Due to the large number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the Automobile Contracts underlying the Automobile Receivable Security, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the Automobile Receivable Securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on the securities. In addition, various state and federal securities laws give the motor vehicle owner the right to assert against the holder of the owner's Automobile Contract certain defenses such owner would have against the seller of the motor vehicle. The assertion of such defenses could reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may be backed by receivables from revolving credit card agreements ("Credit Card Receivable Securities"). Credit balances on revolving credit card agreements ("Accounts") are generally paid down more rapidly than are Automobile Contracts. Most of the Credit Card Receivable Securities issued publicly to date have been Pass-Through Certificates. In order to lengthen the maturity of Credit Card Receivable Securities, most such securities provide for a fixed period during which only interest payments on the underlying Accounts are passed through to the security holder and principal payments received on such Accounts are used to fund the transfer to the pool of assets supporting the related Credit Card Receivable Securities of additional credit card charges made on an Account. The initial fixed period usually may be shortened upon the occurrence of specified events which signal a potential deterioration in the quality of the assets backing the security, such as the imposition of a cap on interest rates. The ability of the issuer to extend the life of an issue of Credit Card Receivable Securities thus depends upon the continued generation of additional principal amounts in the underlying accounts during the initial period and the non-occurrence of specified events. An acceleration in cardholders' payment rates or any other event which shortens the period during which additional credit card charges on an Account may be transferred to the pool of assets supporting the related Credit Card Receivable Security could shorten the weighted average life and yield of the Credit Card Receivable Security.
Credit card holders are entitled to the protection of a number of state and federal consumer credit laws, many of which give such holder the right to set off certain amounts against balances owed on the credit card, thereby reducing amounts paid on Accounts. In addition, unlike most other asset-backed securities, Accounts are unsecured obligations of the cardholder.
Warrants:
Investments in warrants is speculative in that warrants have no voting rights, pay no dividends, and have no rights with respect to the assets of the corporation issuing them. Warrants basically are options to purchase equity securities at a specific price valid for a specific period of time. They do not represent ownership of the securities but only the right to buy them. Warrants differ from call options in that warrants are issued by the issuer of the security which may be purchased on their exercise, whereas call options may be written or issued by anyone. The prices of warrants do not necessarily move parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in foreign currencies involves certain risks. A change in the value of any such currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Portfolio's assets denominated in that currency. Such changes will also affect a Portfolio's income. Generally, when a given currency appreciates against the dollar (the dollar weakens) the value of a Portfolio's securities denominated in that currency will rise. When a given currency depreciates against the dollar (the dollar strengthens). The value of a Portfolio's securities denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment in the securities markets of certain foreign countries is restricted or controlled in varying degrees. These restrictions may at times limit or preclude investment in certain of such countries and may increase the cost and expenses of a Portfolio. Investments by foreign investors are subject to a variety of restrictions in many developing countries. These restrictions may take the form of prior governmental approval, limits on the amount or type of securities held by foreigners, and limits on the types of companies in which foreigners may invest. Additional or different restrictions may be imposed at any time by these or other countries in which a Portfolio invests. In addition, the repatriation of both investment income and capital from several foreign countries is restricted and controlled under certain regulations, including in some cases the need for certain government consents. Although these restrictions may in the future make it undesirable to invest in these countries, Sub-advisor does not believe that any current repatriation restrictions would affect its decision to invest in these countries.
Market Characteristics. Foreign securities may be purchased in over-the-counter markets or on stock exchanges located in the countries in which the respective principal offices of the issuers of the various securities are located, if that is the best available market. Foreign stock markets are generally not as developed or efficient as, and may be more volatile than, those in the United States. While growing in volume, they usually have substantially less volume than U.S. markets and a Portfolio's securities may be less liquid and more volatile than securities of comparable U.S. companies. Equity securities may trade at price/earnings multiples higher than comparable U.S. securities and such levels may not be sustainable. Fixed commissions on foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges, although a Portfolio will endeavor to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of foreign stock exchanges, brokers and listed companies than in the United States. Moreover, settlement practices for transactions in foreign markets may differ from those in U.S. markets, and may include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies of certain countries may differ favorably or unfavorably from the United States' economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. The internal politics of certain foreign countries are not as stable as in the United States.
Governments in certain foreign countries continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could have a significant effect on market prices of securities and payment of dividends. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by protective trade barriers and economic conditions of their trading partners. The enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries.
Information and Supervision. There is generally less publicly available information about foreign companies comparable to reports and ratings that are published about companies in the United States. Foreign companies are also generally not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. companies.
Taxes. The dividends and interest payable on certain of a Portfolio's foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Portfolio's shareholders. A shareholder otherwise subject to U.S. federal income taxes may, subject to certain limitations, be entitled to claim a credit or deduction for U.S. federal income tax purposes for his or her proportionate share of such foreign taxes paid by the Portfolio.
Costs. Investors should understand that the expense ratio of the Portfolio can be expected to be higher than investment companies investing in domestic securities since the cost of maintaining the custody of foreign securities and the rate of advisory fees paid by the Portfolio are higher.
Other. With respect to certain foreign countries, especially developing and emerging ones, there is the possibility of adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitations on the removal of funds or other assets of the Portfolio, political or social instability, or diplomatic developments which could affect investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia today could have long-term potential consequences. As restrictions fall, this could result in rising standards of living, lower manufacturing costs, growing consumer spending, and substantial economic growth. However, investment in the countries of Eastern Europe and Russia is highly speculative at this time. Political and economic reforms are too recent to establish a definite trend away from centrally-planned economies and state owned industries. In many of the countries of Eastern Europe and Russia, there is no stock exchange or formal market for securities. Such countries may also have government exchange controls, currencies with no recognizable market value relative to the established currencies of western market economies, little or no experience in trading in securities, no financial reporting standards, a lack of a banking and securities infrastructure to handle such trading, and a legal tradition which does not recognize rights in private property. In addition, these countries may have national policies which restrict investments in companies deemed sensitive to the country's national interest. Further, the governments in such countries may require governmental or quasi-governmental authorities to act as custodian of the Portfolio's assets invested in such countries and these authorities may not qualify as a foreign custodian under the 1940 Act and exemptive relief from such Act may be required. All of these considerations are among the factors which could cause significant risks and uncertainties to investment in Eastern Europe and Russia.
Latin America. The political history of certain Latin American countries has been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization and removal of trade barriers and result in significant disruption in securities markets. Persistent levels of inflation or in some cases, hyperinflation, have led to high interest rates, extreme measures by governments to keep inflation in check and a generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, a number of Latin American countries are also among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the imposition of onerous conditions on their economics.
Certain Latin American countries may have managed currencies which are maintained at artificial levels to the U.S. dollar rather than at levels determined by the market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. Certain Latin American countries also may restrict the free conversion of their currency into foreign currencies, including the U.S. dollar. There is no significant foreign exchange market for certain currencies and it would, as a result, be difficult for the Portfolio to engage in foreign currency transactions designed to protect the value of the Portfolio's interests in securities denominated in such currencies.
PORTFOLIO TURNOVER: High turnover involves correspondingly greater brokerage commissions and other transaction costs. Portfolio turnover information can be found in the Trust's Prospectus under "Financial Highlights" and "Portfolio Turnover."
Over the past two fiscal years the following Portfolios experienced significant variation in their portfolio turnover rates. The turnover rate for the Founders Passport Portfolio (formerly, the Seligman Henderson International Small Cap Portfolio) for the years ended December 31, 1996 and 1997 were 133% and 73% respectively. Founders Asset Management, Inc. became the Portfolio's Sub-advisor on October 15, 1996, and manages the Portfolio with an anticipated annual rate of turnover not to exceed 150%. The turnover rate for the PIMCO Limited Maturity Bond Portfolio for the year ended December 31, 1996 was 247% and for the year ended December 31, 1997 was 54%. The Portfolio's turnover rate decreased in 1997 as the Portfolio's growth slowed and the consequent restructuring of its portfolio was completed early in the year. The turnover rate for the AST Putnam Balanced Portfolio (formerly, the AST Phoenix Balanced Asset Portfolio) for the years ended December 31, 1996 and 1997 were 276% and 170% respectively. Putnam Investment Management, Inc. became the Portfolio's Sub-advisor on October 15, 1996, and manages the Portfolio with an anticipated annual rate of turnover not to exceed 200%. The rate of turnover for the Robertson Stephens Value + Growth Portfolio was 77% for the period from commencement of operations (May 2, 1996) to December 31, 1996, and 219% for the year ended December 31, 1997. The portfolio turnover rate for the first partial year of the Portfolio's operations was abnormally low, as the Sub-advisor focused on investing incoming cash rather than selling portfolio securities. The turnover rate for the Neuberger&Berman Mid-Cap Growth Portfolio (formerly, the Berger Capital Growth Portfolio) for the year ended December 31, 1996 was 156% and for the year ended December 31, 1997 was 305%. The Portfolio underwent portfolio manager changes during 1997 (when it was managed by its prior Sub-advisor, Berger Associates, Inc.), which resulted in higher portfolio turnover.
The annual rates of turnover for the AST Janus Overseas Growth Portfolio, the T. Rowe Price Small Company Value Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth Century Strategic Balanced Portfolio and the AST Putnam Value Growth & Income Portfolio, all of which were first publicly offered in January 1997, are not anticipated to exceed 200%, 100%, 150%, 150% and 100%, respectively, under normal market conditions. The annual rates of turnover for the Lord Abbett Small Cap Value Portfolio, the Cohen & Steers Realty Portfolio, the Stein Roe Venture Portfolio, the Bankers Trust Enhanced 500 Portfolio, and the Marsico Capital Growth Portfolio, which were first publicly offered in December 1997 or January 1998, are not anticipated to exceed 100%, 150%, 100%, 100%, and 100%, respectively, under normal market conditions. The policy of the AST Money Market Portfolio of investing only in securities maturing 397 days or less from the date of acquisition or purchased pursuant to repurchase agreements that provide for repurchase by the seller within 397 days from the date of acquisition will result in a high portfolio turnover rate.
MANAGEMENT: The overall management of the business and affairs of the Trust is vested with the Board of Trustees. The Board of Trustees approves all significant agreements between the Trust and persons or companies furnishing services to the Trust, including the Trust's agreements with the Investment Manager, Administrator, Custodian and Transfer and Shareholder Servicing Agent and the agreements between the Investment Manager and each Sub-advisor. The day-to-day operations of the Trust are delegated to the Trust's officers subject always to the investment objectives and policies of the Trust and to the general supervision of the Board of Trustees.
The Trustees and officers of the Trust and their principal occupations are listed below. Unless otherwise indicated, the address of each Trustee and executive officer is One Corporate Drive, Shelton, Connecticut 06484:
Name, Office and Age Principal Occupation
John Birch+ Chief Operating Officer:
Vice President (47) American Skandia Investment Services, Incorporated
December 1997 to present
Executive Vice President and
Chief Operating Officer
International Fund Administration
Bermuda
August 1996 to October 1997
Senior Vice President and
Chief Administrative Officer
Gabelli Funds, Inc.
Rye, New York
March 1995 to August 1996
Executive Vice President
Kansallis Osake Pankki
New York, New York
May 1985 to March 1995
Gordon C. Boronow*+ President and Chief Operating Officer:
Vice President and Trustee (45) American Skandia Life Assurance Corporation
June 1989 to present
Jan R. Carendi*+ Senior Executive Vice President and
President, Principal Executive Officer Member of Corporate Management Group:
and Trustee (53) Skandia Insurance Company Ltd.
September 1986 to present
David E. A. Carson Chairman and Chief Executive Officer:
Trustee (63) People's Bank
850 Main Street
Bridgeport, Connecticut 06604
1983 to present
President, Chairman and Chief Executive Officer:
People's Bank
1983 to December 1997.
Richard G. Davy, Jr.*+ Controller:
Treasurer (49) American Skandia Investment
Services, Incorporated
September 1994 to present;
Self-employed Consultant
December 1991 to September 1994
Eric. C. Freed* Securities Counsel
Secretary (35) American Skandia Investment Holding Corporation
December 1996 to present;
Attorney, Senior Attorney and Special Counsel,
U.S. Securities and Exchange Commission
March 1991 to November 1996
Julian A. Lerner Semi-retired since 1995; Senior Vice President
Trustee (73) and Portfolio Manager of AIM Charter Fund
and AIM Summit Fund from 1986 to 1995:
12850 Spurling Road -- Suite 208
Dallas, Texas 75230
Thomas M. O'Brien Vice Chairman
Trustee (47) North Fork Bank
275 Broad Hollow Road
Melville, NY 11747;
January 1997 to present
President and Chief Executive Officer:
North Side Savings Bank
170 Tulip Avenue
Floral Park, New York 11001
December 1984 to December 1996
F. Don Schwartz Management Consultant:
Trustee (62) 1101 Penn Grant Road
Lancaster, PA 17602
April 1985 to present
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* Interested person as defined in the 1940 Act.
+ Unless otherwise indicated, each officer and Trustee listed above has held his/her principal occupation for at least the last five years. In addition to the principal occupations noted above, the following officers and Trustees of the Trust hold various positions with American Skandia Investment Services, Incorporated ("ASISI"), the Trust's Investment Manager, and its affiliates, including American Skandia Life Assurance Corporation ("ASLAC"), American Skandia Marketing, Incorporated ("ASM"), American Skandia Information Services and Technology Corporation ("ASIST") or American Skandia Investment Holding Corporation ("ASIHC"): Mr. Boronow also serves as Executive Vice President, Chief Operating Officer and a Director of ASIHC, and a Director of ASLAC, ASISI, ASM and ASIST; Mr. Carendi also serves as Chairman, President, Chief Executive Officer and a Director of ASIHC, and Chief Executive Officer and a Director of ASLAC, ASISI, ASM and ASIST; Mr. Davy also serves as a Director of ASISI.
The interested Trustees and officers of the Trust do not receive compensation directly from the Trust for serving in such capacities. However, those officers and Trustees of the Trust who are affiliated with the Investment Manager may receive remuneration indirectly, as the Investment Manager will receive fees from the Trust for the services it provides. Each of the other Trustees receives an annual fee paid by the Trust plus expenses for each meeting of the Board and of shareholders which he attends. Compensation received during the year ended December 31, 1997 by the Trustees who are not interested persons was as follows:
Aggregate Compensation from Total Compensation from Registrant and
Name of Trustee Registrant Fund Complex Paid to Trustee(1)
-------------------------- ----------------------------------------------- -----------------------------------------
David E. A. Carson $45,500 $64,500
Julian A. Lerner 45,500 64,500
Thomas M. O'Brien 45,500 60,500
F. Don Schwartz 45,500 64,500
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(1) As of the date of this Statement, the "Fund Complex" consisted of the Trust, American Skandia Advisor Funds, Inc. ("ASAF"), and American Skandia Master Trust ("ASMT"). ASAF commenced operations in July, 1997 and ASMT commenced operations in June, 1997. >
The Trust does not offer pension or retirement benefits to its Trustees.
Under the terms of the Massachusetts General Corporation Law, the Trust may indemnify any person who was or is a Trustee, officer or employee of the Trust to the maximum extent permitted by the Massachusetts General Corporation Law; provided, however, that any such indemnification (unless ordered by a court) shall be made by the Trust only as authorized in the specific case upon a determination that indemnification of such persons is proper in the circumstances. Such determination shall be made (i) by the Board of Trustees, by a majority vote of a quorum which consists of Trustees who are neither "interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act (the "1940 Act"), nor parties to the proceeding, or (ii) if the required quorum is not obtainable or if a quorum of such Trustees so directs by independent legal counsel in a written opinion. No indemnification will be provided by the Trust to any Trustee or officer of the Trust for any liability to the Trust or its shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
INVESTMENT ADVISORY AND OTHER SERVICES:
Investment Advisory Services: The Trust has entered into investment management agreements with the Investment Manager (the "Management Agreements"). The Investment Manager furnishes each Portfolio with investment advice and certain administrative services with respect to the applicable Portfolio's assets subject to the supervision of the Board of Trustees and in conformity with the stated policies of the applicable Portfolio. The Investment Manager has engaged the Sub-advisors noted on the cover of this Statement to conduct the various investment programs of each Portfolio pursuant to separate sub-advisory agreements with the Investment Manager.
Under the terms of the Management Agreements, the Investment Manager furnishes, at its expense, such personnel as is required by each Portfolio for the proper conduct of its affairs and engages the Sub-advisors to conduct the investment programs pursuant to the Investment Manager's obligations under the Management Agreements. The Investment Manager, not the Trust, is responsible for the expenses of conducting the investment programs. The Sub-advisor is responsible for the expenses of conducting the investment programs in relation to the applicable Portfolio pursuant to agreements between the Investment Manager and each Sub-advisor. Each Portfolio pays all of its other expenses, including but not limited to, brokerage commissions, legal, auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder servicing agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and Trustees if available) of the Trust which inure to its benefit, expenses relating to Trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Trust in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders. Expenses incurred by the Trust not directly attributable to any specific Portfolio or Portfolios are allocated on the basis of the net assets of the respective Portfolios.
Under the terms of the Management Agreements, the Investment Manager is permitted to render services to others. The Management Agreements provide that neither the Investment Manager nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the applicable Portfolios, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Management Agreements.
The investment management fee paid for each of the past three fiscal years by each Portfolio that was publicly offered prior to January 1998 was as follows:
Investment Management Fees
--------------------------- --------------------------- ----------------------------
1995 1996 1997
--------------------------- --------------------------- ----------------------------
--------------------------- --------------------------- ----------------------------
Lord Abbett Growth and Income 1,059,567 2,881,119 5,424,483
JanCap Growth 2,977,217 5,726,567 11,384,457
AST Janus Overseas Growth 0 0 1,260,797
AST Money Market 1,503,661 2,092,880 2,941,160
Federated High Yield 601,598 764,844 2,345,042
T. Rowe Price Asset Allocation 314,161 727,787 1,413,730
T. Rowe Price International Equity 1,412,350 3,011,378 4,640,262
T. Rowe Price Natural Resources 20,950 351,569 986,496
T. Rowe Price International Bond 276,299 595,953 941,760
T. Rowe Price Small Company Value 0 0 713,045
Founders Capital Appreciation 486,749 1,240,016 2,219,824
Founders Passport 76,285 778,018 1,257,908
INVESCO Equity Income 821,220 1,883,792 3.565.372
PIMCO Total Return Bond 652,311 1,895,849 2,979,876
PIMCO Limited Maturity Bond 100,949 1,239,854 1,649,461
AST Putnam International Equity 2,198,484 2,771,876 3,428,762
AST Putnam Balanced 1,107,736 1,828,306 2,387,734
AST Putnam Value Growth & Income 0 0 416,420
Robertson Stephens Value + Growth 0 117,917 1,501,894
Twentieth Century Strategic Balanced 0 0 115,602
Twentieth Century International Growth 0 0 157,826
Marsico Capital Growth 0 0 1,568
Neuberger&Berman Mid-Cap Value 601,598 764,844 886,649
Neuberger&Berman Mid-Cap Growth 160,794 683,999 1,259,790
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The sub-advisory fee paid by the Investment Manager to the Sub-advisors for each such Portfolio for each of the past three fiscal years was as follows:
Sub-Advisory Fees
--------------------------- --------------------------- ----------------------------
1995 1996 1997
--------------------------- --------------------------- ----------------------------
Lord Abbett Growth and Income 705,288 1,736,325 3,018,989
JanCap Growth 1,869,411 3,451,651 6,261,619
AST Janus Overseas Growth 0 0 793,793
AST Money Market 501,220 697,446 885,676
Federated High Yield 210,529 448,151 899,181
T. Rowe Price Asset Allocation 166,105 301,555 503,303
T. Rowe Price International Equity 786,175 1,532,137 2,320,131
T. Rowe Price Natural Resources 13,967 208,022 548,053
T. Rowe Price International Bond(1) 165,779 315,293 470,880
T. Rowe Price Small Company Value 0 0 413,993
Founders Capital Appreciation 350,949 859,376 1,469,059
Founders Passport(2) 45,904 463,898 728,954
INVESCO Equity Income 482,833 979,103 1,763,840
PIMCO Total Return Bond 299,969 804,173 1,221,106
PIMCO Limited Maturity Bond 47,155 551,613 709,408
AST Putnam International Equity(3) 1,389,549 1,752,761 2,205,668
AST Putnam Balanced(4) 576,648 942,912 1,343,009
AST Putnam Value Growth & Income 0 0 249,852
Robertson Stephens Value + Growth 0 70,750 892,079
Twentieth Century Strategic Balanced 0 0 68,001
Twentieth Century International Growth 0 0 110,478
Marsico Capital Growth 0 0 784
Neuberger&Berman Mid-Cap Value(5) 306,916 374,935 425,687
Neuberger&Berman Mid-Cap Growth(6) 116,002 427,236 734,388
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(1) For fiscal year 1995, the entire fee noted above was paid to Scudder,
Stevens & Clark, Inc. ("Scudder"), the prior Sub-advisor for the Portfolio. For
fiscal year 1996, $103,905 was paid to Scudder and $211,388 was paid to Rowe
Price-Fleming International, Inc., the current Sub-advisor for the Portfolio.
(2) For fiscal year 1995, the entire fee noted above was paid to Seligman
Henderson Co. ("Seligman"), the prior Sub-advisor for the Portfolio. For fiscal
year 1996, $325,763 was paid to Seligman and $138,135 was paid to Founders Asset
Management, Inc., the current Sub-advisor for the Portfolio. (3) For fiscal year
1995, the entire fee noted above was paid to Seligman, the prior Sub-advisor for
the Portfolio. For fiscal year 1996, $1,338,724 was paid to Seligman and
$414,037 was paid to Putnam Investment Management, Inc. ("Putnam"), the current
Sub-advisor for the Portfolio. (4) For fiscal year 1995, the entire fee noted
above was paid to Phoenix Investment Counsel, Inc. ("Phoenix"), the prior
Sub-advisor for the Portfolio. For fiscal year 1996, $691,855 was paid to
Phoenix and $251,057 was paid to Putnam, the current Sub-advisor for the
Portfolio. (5) For fiscal year 1995, 1996 and 1997, the entire fee noted above
was paid to Federated Investment Counseling, the prior Sub-advisor for the
Portfolio. (6) For fiscal year 1995, 1996 and 1997, the entire fee noted above
was paid to Berger Associates, Inc., the prior Sub-advisor for the Portfolio.
The Investment Manager has agreed by the terms of the Management Agreements for the following Portfolios of the Trust to reimburse the Portfolio for any fiscal year in order to prevent Portfolio expenses (exclusive of taxes, interest, brokerage commissions and extraordinary expenses, determined by the Trust or the Investment Manager, but inclusive of the management fee) from exceeding a specified percentage of the Portfolio's average daily net assets, as follows:
Lord Abbett Growth and Income Portfolio: 1.25%
JanCap Growth Portfolio: 1.35%. Commencing September 4, 1996, the Investment Manager has voluntarily agreed to reimburse certain operating expenses in excess of 1.33% for the JanCap Growth Portfolio. This voluntary agreement may be terminated by the Investment Manager at any time.
AST Money Market Portfolio: .65%. The Investment Manager has voluntarily agreed to reimburse certain operating expenses in excess of .60% for the AST Money Market Portfolio. This voluntary agreement may be terminated by the Investment Manager at any time.
Federated High Yield Portfolio: 1.15%
T. Rowe Price Asset Allocation Portfolio: 1.25%
T. Rowe Price International Equity Portfolio: 1.75%. Commencing May 1, 1996, the Investment Manager has voluntarily agreed to reimburse certain operating expenses in excess of 1.71% for the T. Rowe Price International Equity Portfolio. This voluntary agreement may be terminated by the Investment Manager at any time.
T. Rowe Price Natural Resources Portfolio: 1.35%
T. Rowe Price International Bond Portfolio: 1.75%
Founders Capital Appreciation Portfolio: 1.30%
Founders Passport Portfolio: 1.75%
INVESCO Equity Income Portfolio: 1.20%
PIMCO Total Return Bond Portfolio: 1.05%
PIMCO Limited Maturity Bond Portfolio: 1.05%
Robertson Stephens Value + Growth Portfolio: 1.45%
AST Putnam International Equity Portfolio: 1.75%
AST Putnam Balanced Portfolio: 1.25%
The Investment Manager has also voluntarily agreed to reimburse the other Portfolios of the Trust for any fiscal year in order to prevent Portfolio expenses (exclusive of taxes, interest, brokerage commissions and extraordinary expenses, determined by the Trust or the Investment Manager, but inclusive of the management fee) from exceeding a specified percentage of each Portfolio's average daily net assets, as follows:
Lord Abbett Small Cap Value Portfolio: 1.35%
AST Janus Overseas Growth Portfolio: 1.75%
T. Rowe Price Small Company Value Portfolio: 1.30%
Twentieth Century International Growth Portfolio: 1.75%
Twentieth Century Strategic Balanced Portfolio: 1.25%
AST Putnam Value Growth & Income Portfolio: 1.25%
Cohen & Steers Realty Portfolio: 1.45%
Stein Roe Venture Portfolio: 1.35%
Bankers Trust Enhanced 500 Portfolio: .80%
Marsico Capital Growth Portfolio: 1.35%
Neuberger&Berman Mid-Cap Value Portfolio: [INSERT]%
Neuberger&Berman Mid-Cap Growth Portfolio: [INSERT]%
The Investment Manager may terminate the above voluntary agreements at any time. Voluntary payments of Portfolio expenses by the Investment Manager are subject to reimbursement by the Portfolio at the Investment Manager's discretion within the two year period following such payment to the extent permissible under applicable law and provided that the Portfolio is able to effect such reimbursement and remain in compliance with applicable expense limitations.
Each Management Agreement will continue in effect from year to year, provided it is approved, at least annually, in the manner stipulated in the 1940 Act. This requires that each Management Agreement and any renewal be approved by a vote of the majority of the Trustees who are not parties thereto or interested persons of any such party, cast in person at a meeting specifically called for the purpose of voting on such approval. Each Management Agreement may be terminated without penalty on sixty days' written notice by vote of a majority of the Board of Trustees or by the Investment Manager, or by holders of a majority of the applicable Portfolio's outstanding shares, and will automatically terminate in the event of its "assignment" as that term is defined in the 1940 Act.
The Administrator and Transfer and Shareholder Servicing Agent: PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington, Delaware 19809, a Delaware corporation that is an indirect wholly-owned subsidiary of PNC Financial Corp., serves as the Administrator and Transfer and Shareholder Servicing Agent for the Trust. Pursuant to a Trust Accounting and Administration Agreement between the Trust and the Administrator, dated May 1, 1992 (the "Administration Agreement"), the Administrator has agreed to provide certain fund accounting and administrative services to the Trust, including, among other services, accounting relating to the Trust and investment transactions of the Trust; computation of daily net asset values; maintaining the Trust's books of account; assisting in monitoring, in conjunction with the Investment Manager, compliance with the Portfolios' investment objectives, policies and restrictions; providing office space and equipment necessary for the proper administration and accounting functions of the Trust; monitoring investment activity and income of the Trust for compliance with applicable tax laws; preparing and filing Trust tax returns; preparing financial information in connection with the preparation of the Trust's annual and semi-annual reports and making requisite filings thereof; preparing schedules of Trust share activity for footnotes to financial statements; furnishing financial information necessary for the completion of certain items to the Trust's registration statement and necessary to prepare and file Rule 24f-2 notices; providing an administrative interface between the Investment Manager and the Trust's custodian; creating and maintaining all necessary records in accordance with applicable laws, rules and regulations, including, but not limited to, those records required to be kept pursuant to the 1940 Act; and performing such other duties related to the administration of the Trust as may be requested by the Board of Trustees of the Trust.
Under the terms of the Administration Agreement, the Administrator shall not be liable for any error of judgment or mistake of law or for any loss or expense suffered by the Trust, in connection with the matters to which the Administration Agreement relates, except for a loss or expense resulting from willful misfeasance, bad faith, or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under the Agreement. Any person, even though also an officer, director, partner, employee or agent of the Administrator, who may be or become an officer, Trustee, employee or agent of the Trust, shall be deemed when rendering services to the Trust or acting on any business of the Trust (other than services or business in connection with the Administrator's duties under the Administration Agreement) to be rendering such services to or acting solely for the Trust and not as an officer, director, partner, employee or agent or one under the control or direction of the Administrator even though paid by them.
Compensation for the services and facilities provided by the Administrator under the Administration Agreement includes payment of the Administrator's "out-of-pocket" expenses. Such "out-of-pocket" expenses of the Administrator include, but are not limited to, postage and mailing, forms, envelopes, checks, toll-free lines (if requested by the Trust), telephone, hardware and telephone lines for remote terminals (if required by the Trust), wire fees, certificate issuance fees, microfiche and microfilm, telex, federal express, outside independent pricing service charges, record retention/storage and proxy solicitation, mailing and tabulation expenses (if required by the Trust). For the years ended December 31, 1995, 1996 and 1997, the Trust paid the Administrator $2,080,598 and $3,330,687 and $4,902,309 respectively.
The Administration Agreement provides that it will continue in effect from year to year. The Administration Agreement is terminable, without penalty, by the Board of Trustees, by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities, or by the Administrator, on not less than sixty days' notice. The Administration Agreement shall automatically terminate upon its assignment by the Administrator without the prior written consent of the Trust, provided, however, that no such assignment shall release Administrator from its obligations under the Agreement.
BROKERAGE ALLOCATION: Subject to the supervision of the Board of Trustees of the Trust, decisions to buy and sell securities for the Trust are made for each Portfolio by its Sub-advisor. Each Sub-advisor is authorized to allocate the orders placed by it on behalf of the applicable Portfolio to brokers who also provide research or statistical material, or other services to the Portfolio or the Sub-advisor for the use of the applicable Portfolio or the Sub-advisor's other accounts. Such allocation shall be in such amounts and proportions as the Sub-advisor shall determine and the Sub-advisor will report on said allocations either to the Investment Manager, which will report on such allocations to the Board of Trustees, or, if requested, directly to the Board of Trustees. Such reports will indicate the brokers to whom such allocations have been made and the basis therefor. The Sub-advisor may consider sale of shares of the Portfolios or variable insurance products that use the Portfolios as investment vehicles, or may consider or follow recommendations of the Investment Manager that take such sales into account, as factors in the selection of brokers to effect portfolio transactions for a Portfolio, subject to the requirements of best net price available and most favorable execution. In this regard, the Investment Manager has directed certain of the Sub-advisors to try to effect a portion of their Portfolios' transactions through broker-dealers that give prominence to variable insurance products using the Portfolios as investment vehicles, to the extent consistent with best net price available and most favorable execution.
Subject to the rules promulgated by the SEC, as well as other regulatory requirements, a Sub-advisor also may allocate orders to brokers or dealers affiliated with the Sub-advisor or the Investment Manager. Such allocation shall be in such amounts and proportions as the Sub-advisor shall determine and the Sub-advisor will report on said allocations either to the Investment Manager, which will report on such allocations to the Board of Trustees, or, if requested, directly to the Board of Trustees.
In selecting a broker to execute each particular transaction, each Sub-advisor will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker; the size and difficulty in executing the order; and the value of the expected contribution of the broker to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions in any transaction may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the brokerage services offered. Subject to such policies and procedures as the Board of Trustees may determine, a Sub-advisor shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused a Portfolio to pay a broker that provides research services to the Sub-advisor an amount of commission for effecting an investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, if the Sub-advisor determines in good faith that such amount of commission was reasonable in relation to the value of the research service provided by such broker viewed in terms of either that particular transaction or the Sub-advisor's ongoing responsibilities with respect to a Portfolio or its managed accounts generally. For the years ended December 31, 1995, 1996 and 1997, aggregate brokerage commissions of $3,220,077, $7,096,640 and $7,265,436, respectively, were paid in relation to brokerage transactions for the Trust. The increase in commissions paid corresponds roughly to the increase in the Trust's net assets during those periods.
During the years ended December 31, 1996 and December 31, 1997 brokerage commissions were paid to certain affiliates of Rowe Price-Fleming International, Inc. by the T. Rowe Price International Equity Portfolio in the amounts of $17,032 and $29,585 respectively. For the year ended December 31, 1997, 5.0% of the total brokerage commissions paid by this Portfolio were paid to the affiliated brokers, with respect to transactions representing 5.2% of the Portfolio's total dollar amount of transactions involving the payment of commissions. Similarly, brokerage commissions were paid to Robertson Stephens & Co., an affiliate of Robertson, Stephens & Company Investment Management L.P., by the Robertson Stephens Value + Growth Portfolio in the aggregate amounts of $31,999 and $68,772 for the years ended December 31, 1996 and 1997 respectively. For the year ended December 31, 1997, 12.3% of the total brokerage commissions paid by this Portfolio was paid to Robertson Stephens & Co., with respect to transactions representing 14.6% of the total amount of the Portfolio's transactions involving the payment of commissions.
ALLOCATION OF INVESTMENTS: The Sub-advisors have other advisory clients, some of which have similar investment objectives to one or more Portfolios for which advisory services are being provided. In addition, a Sub-advisor may be engaged to provide advisory services for more than one of the Trust's Portfolios. There will be times when a Sub-advisor may recommend purchases and/or sales of the same securities for a Portfolio and such Sub-advisor's other clients. In such circumstances, it will be the policy of each Sub-advisor to allocate purchases and sales among a Portfolio and its other clients, including other Trust Portfolios for which it provides advisory services, in a manner which the Sub-advisor deems equitable, taking into consideration such factors as size of account, concentration of holdings, investment objectives, tax status, cash availability, purchase costs, holding period and other pertinent factors relative to each account.
COMPUTATION OF NET ASSET VALUES: The Trust determines the net asset values of a Portfolio's shares at the close of the New York Stock Exchange (the "Exchange"), currently 4:00 p.m. Eastern time, on each day that the Exchange is open for business. Currently, the Exchange is closed on Saturdays and Sundays and on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
All Portfolios with the exception of the AST Money Market Portfolio:
The net asset value per share of all of the Portfolios with the exception of the
AST Money Market Portfolio is determined by dividing the market value of its
securities as of the close of trading plus any cash or other assets (including
dividends and accrued interest receivable) less all liabilities (including
accrued expenses), by the number of shares outstanding. Portfolio securities,
including open short positions and options written, are valued at the last sale
price on the securities exchange or securities market on which such securities
primarily are traded. Securities not listed on an exchange or securities market,
or securities in which there were not transactions on that day, are valued at
the average of the most recent bid and asked prices, except in the case of open
short positions where the asked price is available. Any securities or other
assets for which recent market quotations are not readily available are valued
at fair market value as determined in good faith by or under procedures
established by the Board of Trustees. Short-term obligations with sixty days or
less remaining to maturity are valued on an amortized cost basis. Expenses and
fees, including the investment management fees, are accrued daily and taken into
account for the purpose of determining net asset value of shares.
Generally, trading in foreign securities, as well as U.S. Government securities, money market instruments and repurchase agreements, is substantially completed each day at various times prior to the close of the Exchange. The values of such securities used in computing the net asset value of the shares of a Portfolio generally are determined as of such earlier times. Foreign currency exchange rates are also generally determined prior to the close of the Exchange. Occasionally, events affecting the value of such securities and such exchange rates may occur between the times at which they usually are determined and the close of the Exchange. If such extraordinary events occur, their effects may not be reflected in the net asset value of a Portfolio calculated as of the close of the Exchange on that day.
Foreign securities are valued on the basis of quotations from the primary market in which they are traded. All assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars at an exchange rate quoted by a major bank that is a regular participant in the foreign exchange market or on the basis of a pricing service that takes into account the quotes provided by a number of such major banks.
AST Money Market Portfolio: For the AST Money Market Portfolio, all securities are valued by the amortized cost method. The amortized cost method of valuation values a security at its cost at the time of purchase and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The purpose of this method of calculation is to attempt to maintain a constant net asset value per share of $1.00. No assurance can be given that this goal can be attained. If a difference of more than 1/2 of 1% occurs between valuation based on the amortized cost method and valuation based on market value, the Trustees will take steps necessary to reduce such deviation or any unfair results to shareholders, such as changing dividend policy, shortening the average maturity of the investments in the Portfolio or valuing securities on the basis of current market prices if available or, if not, at fair market value.
PURCHASE AND REDEMPTION OF SHARES: A complete description of the manner by which the Trust's shares may be purchased and redeemed appears in the Prospectus under the heading "Purchase and Redemption of Shares."
TAX MATTERS: A description of some of the tax considerations generally affecting the Trust and its shareholders is found in the section of the Prospectus entitled "Tax Matters." No attempt is made to present a detailed explanation of the tax treatment of the Trust or its shareholders. The discussion in the Prospectus is not intended as a substitute for careful tax planning.
UNDERWRITER: The Trust is presently used for funding variable annuities, and may also be used for funding variable life insurance. Pursuant to an exemptive order of the Securities and Exchange Commission, the Trust may also sell its shares directly to qualified plans. If the Trust does so, it intends to use American Skandia Marketing, Incorporated ("ASM, Inc.") or another affiliated broker-dealer as underwriter, if so required by applicable law. ASM, Inc. is registered as a broker-dealer with the Securities and Exchange Commission and the National Association of Securities Dealers. It is an affiliate of American Skandia Life Assurance Corporation and the Investment Manager, being a wholly-owned subsidiary of American Skandia Investment Holding Corporation. As of the date of this Statement, ASM, Inc. has not received payments from the Trust in connection with any brokerage or underwriting services provided to the Trust.
PERFORMANCE: The Prospectus contains a brief description of how performance is calculated. Quotations of average annual return for a Portfolio will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in such Portfolio over periods of 1, 5, and 10 years (up to the life of the Portfolio) and for such other periods as deemed appropriate by the Investment Manager. These are the annual total rates of return that would equate the initial amount invested to the ending redeemable value. These rates of return are calculated pursuant to the following formula: P(1+T)n = ERV (where P = a hypothetical initial payment of $1,000, T = the average annual total return, n = the number of years and ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period). All total return figures reflect the deduction of a proportional share of Portfolio expenses on an annual basis, and assume that all dividends and distributions are reinvested when paid. The total return of each Portfolio, computed as of December 31, 1997, is shown in the table below. Such performance information is historical and is not intended to indicate future performance of the Portfolio.
Total Return
Date Available Since
for Sale One Year Three Years Five Years Inception
----------------------------------------- ------------------- --------------- ---------------- -------------- --------------
AST Putnam Internat'l Equity 05/17/89 18.15% 12.53% 14.76% 11.62%
Portfolio(1)
Founders Passport Portfolio(2) 05/02/95 2.03% N/A N/A 6.73%
Lord Abbett Growth and Income Portfolio 05/01/92 23.92% 23.72% 17.09% 16.29%
JanCap Growth Portfolio 11/06/92 28.66% 31.59% 19.47% 20.03%
Federated High Yield Portfolio 01/04/94 13.59% 15.55% N/A 10.59%
AST Putnam Balanced Portfolio(3) 05/04/93 18.28% 17.27% N/A 12.13%
T. Rowe Price Asset Allocation Portfolio 01/04/94 18.40% 18.23% N/A 13.23%
T. Rowe Price Internat'l Equity 01/04/94 1.36% 8.73% N/A 5.46%
Portfolio
T. Rowe Price Natural Resources 05/02/95 3.39% N/A N/A 16.44%
Portfolio
T. Rowe Price Internat'l Bond 05/03/94 (3.42)% 4.38% N/A 2.65%
Portfolio(4)
Founders Capital Appreciation Portfolio 01/04/94 6.01% 19.04% N/A 16.31%
INVESCO Equity Income Portfolio 01/04/94 23.33% 23.38% N/A 16.35%
PIMCO Total Return Bond Portfolio 01/04/94 9.87% 10.51% N/A 7.12%
PIMCO Limited Maturity Bond Portfolio 05/02/95 7.46% N/A N/A 6.02%
Robertson Stephens Value + Growth 05/02/96 14.83% N/A N/A 14.97%
Portfolio
AST Janus Overseas Growth Portfolio 01/02/97 18.70% N/A N/A 18.70%
T. Rowe Price Small Company Value 01/02/97 28.80% N/A N/A 28.80%
Portfolio
Twentieth Century Internat'l Growth 01/02/97 15.10% N/A N/A 15.10%
Portfolio
Twentieth Century Strategic Balanced 01/02/97 13.40% N/A N/A 13.40%
Portfolio
AST Putnam Value Growth & Income 01/02/97 22.30% N/A N/A 22.30%
Portfolio
Marsico Capital Growth 12/22/97 N/A N/A N/A 0.30%*
Neuberger&Berman Mid-Cap Value(5) 05/04/93 26.42% 21.15% N/A 13.23%
Neuberger&Berman Mid-Cap Growth(6) 10/20/94 16.68% 19.09% N/A 17.67%
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(1) Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor to the Portfolio. The performance information provided in the above chart reflects that of the Portfolio for periods during part of which the Portfolio was sub-advised by the prior Sub-advisor. (2) Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor to the Portfolio. The performance information provided in the above chart reflects that of the Portfolio for periods during part of which the Portfolio was sub-advised by the prior Sub-advisor. (3) Prior to October 15, 1996, Phoenix Investment Counsel, Inc. served as Sub-advisor to the Portfolio. The performance information provided in the above chart reflects that of the Portfolio for periods during part of which the Portfolio was sub-advised by the prior Sub-advisor. (4) Prior to May 1, 1996, Scudder, Stevens & Clark, Inc. served as Sub-advisor to the Portfolio. The performance information provided in the above chart reflects that of the Portfolio for periods during part of which the Portfolio was sub-advised by the prior Sub-advisor. (5) Prior to May 1, 1998, Federated Investment Counseling served as Sub-advisor to the Portfolio. The performance information provided in the above chart reflects that of the Portfolio for periods during which the Portfolio was sub-advised by the prior Sub-advisor. (6) Prior to May 1, 1998, Berger Associates, Inc. served as Sub-advisor to the Portfolio. The performance information provided in the above chart reflects that of the Portfolio for periods during which the Portfolio was sub-advised by the prior Sub-advisor. * Not annualized.
Quotations of a Portfolio's yield (other than the AST Money Market Portfolio) are based on the investment income per share earned during a particular 30-day period (including dividends, if any, and interest), less expenses accrued during the period ("net investment income"), and are computed by dividing net investment income by the net asset value per share on the last day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 -1]
where: a = dividend and interest income b = expenses accrued for the period c = average daily number of shares outstanding during the period that were entitled to receive dividends d = maximum net asset value per share on the last day of the period
The AST Money Market Portfolio yield refers to the income generated by an investment in the Portfolio over a seven-day period expressed as an annual percentage rate. Such Portfolio also may calculate an effective yield by compounding the base period return over a one-year period. The effective yield will be slightly higher than the yield because of the compounding effect on this assumed reinvestment.
The current yield and effective yield calculations for shares of the AST Money Market Portfolio are illustrated for the seven-day period ended December 31, 1997:
Current Yield Effective Yield 5.29% 5.43%
Such Portfolio's total return is based on the overall dollar or percentage change in value of a hypothetical investment in the Portfolio assuming dividend distributions are reinvested. A cumulative total return reflects the hypothetical annual compounded rate that would have produced the same cumulative total return if performance had been constant over the entire period. Because average annual returns tend to smooth out variations in a Portfolio's performance, investors should recognize that they are not the same as actual year-by-year results.
OTHER INFORMATION:
Principal Holders: As of February 15, 1998, more than 99% of each Portfolio was owned of record by American Skandia Life Assurance Corporation ("ASLAC") on behalf of the owners of variable annuity contracts issued by ASLAC. As of February 15, 1998, the amount of shares of the Trust owned by the ten persons who were the officers and directors of the Trust at that time and who are shown as such in the section of this Statement entitled "Management," was less than one percent of the shares.
The following table lists persons owning more than 5% of any class of the Trust's outstanding shares as of February 15, 1998.
American Skandia Trust, - Report of 5% or Greater Owners
As of February 15, 1998
Portfolio Owner Name Address Percent
Ownership
Stein Roe Venture Portfolio Ms. Alexandra Grewcock P.O. Box 243 9%
Millwood, VA 22646
Mr. Hubert Weller 87 W. 14th Street 5.8%
Holland, MI 49423
Mr. Andrew Mecca 5410 West Genesee Street 5.3%
Camillus, NY 13031
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The Participating Insurance Companies and Qualified Plans are not obligated to continue to invest in shares of any Portfolio under all circumstances. Variable annuity and variable life insurance policy holders should refer to the prospectuses for such products for a description of the circumstances in which such a change might occur.
Reports to Holders: Holders of variable annuity contracts or variable life insurance policies issued by Participating Insurance Companies and Qualified Plans for which shares of the Trust are the investment vehicle will receive from the Participating Insurance Companies or Qualified Plans, as applicable, unaudited semi-annual financial statements and audited year-end financial statements. Participants in Qualified Plans will receive from trustees of the Qualified Plans, or directly from the Trust as applicable, unaudited semi-annual financial statements and audited year-end financial statements. Each report will show the investments owned by the Trust and the market values of the investments and will provide other information about the Trust and its operations.
FINANCIAL STATEMENTS: Included in this Statement of Additional Information are Audited Financial Statements for the Trust for the year ended December 31, 1997. To the extent and only to the extent that any statement in a document incorporated by reference into this Statement is modified or superseded by a statement in this Statement or in a later-filed document, such statement is hereby deemed so modified or superseded and not part of this Statement.
You may obtain, without charge, a copy of any or all the documents incorporated by reference in this Statement, including any exhibits to such documents which have been specifically incorporated by reference. We send such documents upon receipt of your written or oral request. Please address your request to American Skandia Trust, P.O. Box 883, Shelton, Connecticut, 06484 or call (203) 926-1888.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
American Skandia Trust:
We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of AST Putnam International Equity Portfolio, Lord Abbett Growth and Income Portfolio, JanCap Growth Portfolio, AST Money Market Portfolio, Federated Utility Income Portfolio, AST Putnam Balanced Portfolio, Federated High Yield Portfolio, T. Rowe Price Asset Allocation Portfolio, PIMCO Total Return Bond Portfolio, INVESCO Equity Income Portfolio, Founders Capital Appreciation Portfolio, T. Rowe Price International Equity Portfolio, T. Rowe Price International Bond Portfolio, Berger Capital Growth Portfolio, Founders Passport Portfolio, T. Rowe Price Natural Resources Portfolio, PIMCO Limited Maturity Bond Portfolio, Robertson Stephens Value + Growth Portfolio, AST Janus Overseas Growth Portfolio, AST Putnam Value Growth and Income Portfolio, Twentieth Century Strategic Balanced Portfolio, Twentieth Century International Growth Portfolio, T. Rowe Price Small Company Value Portfolio, and Marsico Capital Growth Portfolio (collectively, the "Portfolios") of American Skandia Trust ("the Trust") as of December 31, 1997, the related statements of operations and changes in net assets and the financial highlights for each of the periods presented. These financial statements and the financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at December 31, 1997 by correspondence with the custodians and brokers and where replies were not received, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial positions of the Portfolios of the Trust as of December 31, 1997, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1998
AMERICAN SKANDIA TRUST
SCHEDULES OF INVESTMENTS
DECEMBER 31, 1997
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
LORD ABBETT GROWTH AND INCOME PORTFOLIO
JANCAP GROWTH PORTFOLIO
AST MONEY MARKET PORTFOLIO
FEDERATED UTILITY INCOME PORTFOLIO
AST PUTNAM BALANCED PORTFOLIO
FEDERATED HIGH YIELD PORTFOLIO
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PIMCO TOTAL RETURN BOND PORTFOLIO
INVESCO EQUITY INCOME PORTFOLIO
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
BERGER CAPITAL GROWTH PORTFOLIO
FOUNDERS PASSPORT PORTFOLIO
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
PIMCO LIMITED MATURITY BOND PORTFOLIO
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
AST JANUS OVERSEAS GROWTH PORTFOLIO
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
MARSICO CAPITAL GROWTH PORTFOLIO
SHARES VALUE
--------- ------------
FOREIGN STOCK -- 94.3%
AUSTRALIA -- 1.8%
Australia & New Zealand Banking
Group Ltd. ..................... 491,079 $ 3,244,508
QBE Insurance Group Ltd. ......... 901,065 4,055,133
----------
7,299,641
----------
AUSTRIA -- 0.5%
VA Technologie AG ................ 13,694 2,076,154
----------
BRAZIL -- 0.4%
Petroleo Brasileiro SA [ADR]
144A* .......................... 63,600 1,502,550
----------
CANADA -- 7.7%
Bank of Nova Scotia .............. 130,100 6,123,070
Bombardier, Inc. Cl-B ............ 205,000 4,211,681
CAE, Inc. ........................ 203,000 1,588,797
Magna International, Inc. Cl-A ... 64,800 4,070,250
National Bank of Canada .......... 325,541 5,368,735
Newbridge Networks Corp.* ........ 74,900 2,619,631
Northern Telecom Ltd. ............ 59,200 5,260,080
Royal Bank of Canada ............. 49,900 2,636,190
----------
31,878,434
----------
FINLAND -- 0.4%
Nokia AB Cl-A .................... 22,861 1,624,688
----------
FRANCE -- 14.2%
Banque Nationale de Paris ........ 49,600 2,637,535
Cetelem .......................... 20,400 2,780,650
Compagnie Generale des Eaux ...... 55,214 7,709,581
Compagnie Generale des Eaux
Warrants* ...................... 18,820 12,795
Lafarge SA ....................... 78,200 5,133,294
Michelin C.G.D.E. Cl-B ........... 109,230 5,501,572
Scor SA .......................... 136,100 6,511,052
SGS-Thomson Microelectronics NV
[ADR]* ......................... 88,100 5,379,606
Societe Generale ................. 51,451 7,013,099
Societe Nationale Elf Aquitaine
SA ............................. 64,876 7,548,912
Societe Television Francaise ..... 14,470 1,479,265
Total SA Cl-B .................... 61,170 6,660,120
----------
58,367,481
----------
GERMANY -- 7.4%
Altana AG ........................ 49,120 3,242,722
Bayer AG ......................... 115,866 4,301,381
Bayerische Motoren Werke AG ...... 8,543 6,390,478
Deutsche Bank AG ................. 88,500 6,191,909
Deutsche Telekom AG .............. 184,900 3,424,379
Mannesmann AG .................... 10,400 5,223,021
Veba AG .......................... 27,226 1,854,900
----------
30,628,790
----------
HONG KONG -- 2.2%
Dao Heng Bank Group Ltd. ......... 450,500 1,125,048
Guoco Group Ltd. ................. 142,000 347,290
HSBC Holdings PLC ................ 142,903 3,522,654
Hutchison Whampoa Ltd. ........... 667,000 4,183,669
----------
9,178,661
----------
SHARES VALUE
--------- ------------
IRELAND -- 4.0%
Allied Irish Banks PLC ........... 521,427 $ 5,053,811
Bank of Ireland PLC .............. 369,100 5,692,302
CRH PLC .......................... 481,957 5,646,726
----------
16,392,839
----------
ITALY -- 1.4%
Ente Nazionale Idrocarburi SPA ... 1,027,164 5,827,192
----------
JAPAN -- 10.4%
Canon, Inc. ...................... 175,000 4,091,644
Circle K Japan Co. Ltd. .......... 60,500 2,908,182
Hirose Electric Ltd. ............. 22,200 1,138,846
Kao Corp. ........................ 279,000 4,034,115
Murata Manufacturing Co. Ltd. .... 64,000 1,614,507
Nikko Securities Co. Ltd. ........ 796,000 2,118,241
Nomura Securities Co. Ltd. ....... 283,000 3,787,232
Promise Co. Ltd. ................. 59,750 3,327,076
Ricoh Co. Ltd. ................... 147,000 1,831,549
Rohm Co. ......................... 42,000 4,296,226
Sankyo Co. Ltd. .................. 107,000 2,427,683
Santen Pharmaceutical Ltd. ....... 700 8,076
Sony Corp. ....................... 88,200 7,868,877
Tokyo Electron Ltd. .............. 103,000 3,311,309
----------
42,763,563
----------
MEXICO -- 0.7%
Cemex SA de CV* .................. 658,700 2,990,448
----------
NETHERLANDS -- 5.6%
ABN Amro Holding NV .............. 163,384 3,183,491
AKZO Nobel NV .................... 30,226 5,212,536
ING Groep NV ..................... 147,182 6,200,255
Philips Electronics NV ........... 108,270 6,494,395
Vendex International NV .......... 35,300 1,948,506
----------
23,039,183
----------
PHILIPPINES -- 0.0%
Philippine Long Distance Telephone
Co. ............................ 6,500 143,363
----------
POLAND -- 0.1%
Bank Handlowy W. Warszawie
144A* .......................... 24,900 329,427
----------
PORTUGAL -- 2.4%
Banco Totta & Acores SA .......... 122,500 2,408,096
Electricidade de Portugal SA ..... 221,868 4,205,785
Portugal Telecom SA .............. 67,300 3,126,241
----------
9,740,122
----------
SINGAPORE -- 2.4%
DBS Land Ltd. .................... 491,000 751,825
Developmental Bank of Singapore
Ltd. Cl-F ...................... 199,000 1,700,713
Keppel Land Ltd. ................. 711,000 978,978
Overseas -- Chinese Banking Corp.
Ltd. ........................... 312,000 1,814,664
Overseas Union Bank Ltd. Cl-F .... 702,000 2,687,277
United Overseas Bank Ltd. ........ 380,000 2,108,680
----------
10,042,137
----------
|
SHARES VALUE
--------- ------------
SWEDEN -- 3.1%
Astra AB Cl-A .................... 76,975 $ 1,333,953
Ericsson, (L.M.) Telephone Co.
Cl-B ........................... 151,045 5,682,491
Pharmacia & Upjohn, Inc. ......... 79,898 2,940,403
Sandvik AB Cl-B .................. 105,750 3,025,480
----------
12,982,327
----------
SWITZERLAND -- 9.8%
ABB AG ........................... 550 691,954
Ciba Specialty Chemicals AG* ..... 33,885 4,042,364
Georg Fischer AG ................. 2,400 3,290,940
Julius Baer Holdings AG Cl-B ..... 2,870 5,332,488
Nestle SA ........................ 5,591 8,391,004
Novartis AG ...................... 3,172 5,154,187
Publi Groupe SA .................. 11,786 2,577,720
Union Bank of Switzerland ........ 6,473 9,372,991
Zurich
Versicherungs-Gesellschaft ..... 2,895 1,381,454
----------
40,235,102
----------
UNITED KINGDOM -- 19.8%
Avis Europe PLC .................. 1,513,531 4,308,365
B.A.T. Industries PLC ............ 749,728 6,834,213
Bass PLC ......................... 367,100 5,705,075
British Petroleum Co. PLC ........ 392,034 5,160,464
BTR PLC .......................... 1,431,337 4,333,460
Burmah Castrol PLC ............... 201,400 3,502,753
Cookson Group PLC ................ 326,200 1,049,315
Dixons Group PLC ................. 201,600 2,026,781
General Electric Co. PLC ......... 496,775 3,224,644
Glaxo Wellcome PLC ............... 259,242 6,142,468
Molins PLC ....................... 84,700 415,312
Peninsular & Oriental Steam
Navigation Co. ................. 178,300 2,031,637
Rolls-Royce PLC .................. 1,350,904 5,223,570
Rio Tinto PLC .................... 312,000 3,845,134
Securicor PLC .................... 460,800 2,172,262
Shell Transport & Trading Co.
PLC ............................ 692,700 5,015,023
Siebe PLC ........................ 70,300 1,382,287
Smith Industries PLC ............. 231,700 3,232,935
Tomkins PLC ...................... 478,790 2,292,520
Unilever PLC ..................... 504,400 4,324,021
Vodafone Group PLC ............... 1,328,385 9,595,410
----------
81,817,649
----------
TOTAL FOREIGN STOCK
(COST $352,657,161)................. 388,859,751
----------
|
PAR
MATURITY (000) VALUE
--------- ------- ------------
REPURCHASE AGREEMENTS -- 4.1%
UBS Securities Funding,
Inc., 6.45%, dated
12/31/97, repurchase
price $16,957,074
(Collateralized by
U.S. Treasury Notes,
par value $12,679,000,
market value
$17,316,740 due
02/15/19)
(COST $16,951,000)... 01/02/98 $16,951 $ 16,951,000
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.2%
Federal Home Loan
Mortgage Corp. 5.62%
(COST $4,989,853).... 01/14/98 5,000 4,989,853
TOTAL INVESTMENTS -- 99.6%
(COST $374,598,014)................. 410,800,604
------------
OTHER ASSETS LESS
LIABILITIES -- 0.4%................. 1,469,177
------------
NET ASSETS -- 100.0%.................. $412,269,781
============
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
-----------------------------------------------------------------------------------------------
01/98 Buy FRF 5,438,535 $ 909,454 $ 906,574 $ (2,880)
02/98 Buy FRF 234,069,000 39,874,118 39,043,256 (830,862)
01/98 Buy GBP 156,393 260,944 257,271 (3,673)
01/98 Buy JPY 75,583,744 581,749 581,813 64
01/98 Buy PTE 136,608,608 749,940 743,209 (6,731)
----------- ----------- -------
$42,376,205 $41,532,123 $ (844,082)
========== ========== ===============
|
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
-------------------------------------------------------------------------------------------------
01/98 Sell ATS 9,036,123 $ 724,048 $ 714,357 $ 9,691
01/98 Sell CHF 1,867,672 1,281,629 1,281,635 (6)
02/98 Sell FRF 234,069,000 37,814,055 39,043,255 (1,229,200)
01/98 Sell ITL 575,943,732 325,548 325,849 (301)
01/98 Sell JPY 6,544,620 50,289 50,372 (83)
06/98 Sell JPY 3,274,000,000 25,957,434 25,802,146 155,288
01/98 Sell MXP 1,558,642 192,771 193,314 (543)
----------- ----------- --------------
$66,345,774 $67,410,928 $ (1,065,154)
========== ========== ===============
|
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 0.4% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
SHARES VALUE
---------- ------------
COMMON STOCK -- 93.8%
AEROSPACE -- 0.1%
Raytheon Co. Cl-A ............... 15,305 $ 754,718
----------
AUTOMOBILE MANUFACTURERS -- 1.6%
General Motors Corp. ............ 240,000 14,550,000
----------
AUTOMOTIVE PARTS -- 1.0%
Eaton Corp. ..................... 110,000 9,817,500
----------
BUILDING MATERIALS -- 0.3%
Georgia Pacific Timber Group .... 110,000 2,495,625
----------
CHEMICALS -- 2.8%
Dow Chemical Co. ................ 65,000 6,597,500
Lyondell Petrochemical Co. ...... 270,000 7,155,000
Rohm & Haas Co. ................. 130,000 12,447,500
----------
26,200,000
----------
CLOTHING & APPAREL -- 1.8%
Liz Claiborne, Inc. ............. 250,000 10,453,125
VF Corp. ........................ 140,000 6,431,250
----------
16,884,375
----------
COMPUTER HARDWARE -- 5.9%
EMC Corp.* ...................... 330,000 9,054,375
Hewlett-Packard Co. ............. 360,000 22,500,000
International Business Machines
Corp. ......................... 150,000 15,684,375
Seagate Technology, Inc.* ....... 400,000 7,700,000
----------
54,938,750
----------
CONGLOMERATES -- 2.1%
Minnesota Mining & Manufacturing
Co. ........................... 235,000 19,284,688
----------
CONSUMER PRODUCTS & SERVICES -- 5.6%
Corning, Inc. ................... 370,000 13,736,250
Crown Cork & Seal Co., Inc. ..... 100,000 5,012,500
Fortune Brands, Inc. ............ 425,000 15,751,562
International Flavors &
Fragrances, Inc. .............. 185,000 9,527,500
Whirlpool Corp. ................. 150,000 8,250,000
----------
52,277,812
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.5%
Emerson Electric Co. ............ 250,000 14,109,375
----------
FINANCIAL-BANK & TRUST -- 8.5%
BankAmerica Corp. ............... 90,000 6,570,000
BankBoston Corp. ................ 125,000 11,742,187
Chase Manhattan Corp. ........... 100,000 10,950,000
Comerica, Inc. .................. 100,000 9,025,000
First Chicago NBD Corp. ......... 150,000 12,525,000
First Union Corp. ............... 190,000 9,737,500
Mellon Bank Corp. ............... 150,000 9,093,750
Providian Financial Corp. ....... 230,000 10,393,125
----------
80,036,562
----------
FINANCIAL SERVICES -- 3.3%
Morgan Stanley, Dean Witter,
Discover & Co. ................ 225,000 13,303,125
Washington Mutual, Inc. ......... 276,900 17,669,681
----------
30,972,806
----------
SHARES VALUE
---------- ------------
FOOD -- 6.9%
Archer-Daniels-Midland Co. ...... 370,000 $ 8,024,375
Conagra, Inc. ................... 510,000 16,734,375
Heinz, (H.J.) Co. ............... 390,000 19,816,875
Pioneer Hi-Bred International,
Inc. .......................... 75,000 8,043,750
Sara Lee Corp. .................. 220,000 12,388,750
----------
65,008,125
----------
INSURANCE -- 9.7%
Aegon N.V. [ADR] ................ 69,999 6,273,660
Aetna, Inc. ..................... 80,000 5,645,000
American General Corp. .......... 275,000 14,867,188
Chubb Corp. ..................... 330,000 24,956,250
CIGNA Corp. ..................... 40,000 6,922,500
Safeco Corp. .................... 220,000 10,725,000
St. Paul Companies, Inc. ........ 110,000 9,026,875
Transamerica Corp. .............. 120,000 12,780,000
----------
91,196,473
----------
MACHINERY & EQUIPMENT -- 3.9%
Deere & Co. ..................... 440,000 25,657,500
Snap-On, Inc. ................... 250,000 10,906,250
----------
36,563,750
----------
MEDICAL SUPPLIES & EQUIPMENT -- 2.0%
Baxter International, Inc. ...... 380,000 19,166,250
----------
METALS & MINING -- 0.6%
USX-U.S. Steel Group, Inc. ...... 180,000 5,625,000
----------
OIL & GAS -- 8.9%
Chevron Corp. ................... 80,000 6,160,000
Coastal Corp. ................... 210,000 13,006,875
Consolidated Natural Gas Co. .... 220,000 13,310,000
ENI Co. SPA [ADR] ............... 240,000 13,695,000
Mobil Corp. ..................... 260,000 18,768,750
Sonat, Inc. ..................... 400,000 18,300,000
----------
83,240,625
----------
PAPER & FOREST PRODUCTS -- 6.4%
Bowater, Inc. ................... 275,000 12,220,313
Fort James Corp. ................ 290,000 11,092,500
Georgia Pacific Corp. ........... 110,000 6,682,500
International Paper Co. ......... 260,000 11,212,500
Kimberly-Clark Corp. ............ 380,000 18,738,750
----------
59,946,563
----------
PHARMACEUTICALS -- 4.4%
American Home Products Corp. .... 210,000 16,065,000
Pharmacia & Upjohn, Inc. ........ 200,000 7,325,000
Smithkline Beecham PLC [ADR] .... 220,000 11,316,250
Warner-Lambert Co. .............. 50,000 6,200,000
----------
40,906,250
----------
|
SHARES VALUE
---------- ------------
PRINTING & PUBLISHING -- 1.0%
Deluxe Corp. .................... 270,000 $ 9,315,000
----------
RETAIL & MERCHANDISING -- 2.3%
Penney, (J.C.) Co., Inc. ........ 22,900 1,381,156
Toys 'R' Us, Inc.* .............. 220,000 6,916,250
Wal-Mart Stores, Inc. ........... 335,000 13,211,563
----------
21,508,969
----------
SEMICONDUCTORS -- 1.6%
Motorola, Inc. .................. 260,000 14,836,250
----------
TELECOMMUNICATIONS -- 2.8%
Bell Atlantic Corp. ............. 130,000 11,830,000
SBC Communications, Inc. ........ 200,000 14,650,000
----------
26,480,000
----------
UTILITIES -- 8.8%
Baltimore Gas & Electric Co. .... 390,000 13,284,375
Carolina Power & Light Co. ...... 340,000 14,428,750
Cinergy Corp. ................... 340,000 13,026,250
Duke Energy Corp. ............... 230,000 12,736,250
Firstenergy Corp.* .............. 300,000 8,700,000
FPL Group, Inc. ................. 225,000 13,317,188
PacifiCorp ...................... 270,000 7,374,375
----------
82,867,188
----------
TOTAL COMMON STOCK
(COST $725,978,973)................ 878,982,654
----------
SHARES VALUE
---------- ------------
PREFERRED STOCK -- 2.9%
INSURANCE -- 1.4%
Aetna, Inc. Cl-C 6.25% [CVT] .... 190,000 $ 13,585,000
----------
OIL & GAS -- 1.5%
Occidental Petroleum Corp.
$3.875 [CVT] .................. 210,000 13,545,000
----------
TOTAL PREFERRED STOCK
(COST $27,631,007)................. 27,130,000
----------
SHORT-TERM INVESTMENTS -- 3.4%
Temporary Investment Cash
Fund .......................... 15,995,986 15,995,986
Temporary Investment Fund ....... 15,995,986 15,995,986
----------
(COST $31,991,972)............... 31,991,972
----------
TOTAL INVESTMENTS -- 100.1%
(COST $785,601,952)................ 938,104,626
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.1%)................... (1,118,749)
----------
NET ASSETS -- 100.0%................. $936,985,877
==========
|
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
--------- ------------
COMMON STOCK -- 82.0%
AEROSPACE -- 1.6%
Textron, Inc. ................... 388,850 $ 24,303,125
------------
AIRLINES -- 3.5%
UAL Corp.*....................... 564,575 52,223,187
------------
BEVERAGES -- 7.7%
Coca-Cola Co. ................... 497,200 33,125,950
Coca-Cola Enterprises, Inc. ..... 2,353,275 83,688,342
------------
116,814,292
------------
CHEMICALS -- 6.9%
Cytec Industries, Inc.*.......... 743,950 34,919,153
Monsanto Co. .................... 1,438,675 60,424,350
Solutia, Inc. ................... 307,735 8,212,678
------------
103,556,181
------------
COMPUTER HARDWARE -- 6.9%
Compaq Computer Corp. ........... 660,125 37,255,805
Dell Computer Corp.* ............ 789,300 66,301,200
------------
103,557,005
------------
COMPUTER SERVICES & SOFTWARE -- 9.0%
America Online, Inc.*............ 314,100 28,013,794
Cisco Systems, Inc.*............. 278,950 15,551,462
Edwards, (J.D.) & Co.* .......... 470,475 13,879,013
Microsoft Corp.* ................ 588,950 76,121,788
Sapient Corp.* .................. 34,000 2,082,500
------------
135,648,557
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.9%
AES Corp.*....................... 384,600 17,931,975
General Electric Co. ............ 781,550 57,346,231
Texas Instruments, Inc. ......... 296,650 13,349,250
------------
88,627,456
------------
FARMING & AGRICULTURE -- 1.1%
Delta & Pine Land Co. ........... 525,300 16,021,650
------------
FINANCIAL-BANK & TRUST -- 5.0%
Citicorp ........................ 403,445 51,010,577
Mercantile Bancorporation,
Inc. .......................... 166,800 10,258,200
Wells Fargo & Co. ............... 40,758 13,834,794
------------
75,103,571
------------
FINANCIAL SERVICES -- 9.6%
Fannie Mae ...................... 776,135 44,288,203
Freddie Mac ..................... 692,300 29,033,331
Merrill Lynch & Co., Inc. ....... 493,400 35,987,363
SLM Holding Corp. ............... 252,825 35,174,278
------------
144,483,175
------------
OIL & GAS -- 7.1%
Diamond Offshore Drilling,
Inc. .......................... 629,850 30,311,531
Schlumberger Ltd. ............... 755,300 60,801,650
TransCoastal Marine Services,
Inc. .......................... 30,925 440,681
Transocean Offshore, Inc. ....... 331,150 15,957,291
------------
107,511,153
------------
SHARES VALUE
--------- ------------
PHARMACEUTICALS -- 11.6%
Lilly, (Eli) & Co. .............. 1,033,350 $ 71,946,994
Pfizer, Inc. .................... 785,475 58,566,980
Warner-Lambert Co. .............. 362,925 45,002,700
------------
175,516,674
------------
REAL ESTATE -- 1.1%
Starwood Lodging Trust [REIT] ... 298,575 17,280,028
------------
RETAIL & MERCHANDISING -- 0.7%
Meyer, (Fred), Inc.* ............ 278,500 10,130,438
------------
TELECOMMUNICATIONS -- 4.3%
Lucent Technologies, Inc. ....... 565,325 45,155,334
Qwest Communications
International, Inc.* .......... 339,050 20,173,475
------------
65,328,809
------------
TOTAL COMMON STOCK
(COST $870,204,211)................ 1,236,105,301
------------
FOREIGN STOCK -- 1.5%
AUTOMOBILE MANUFACTURERS -- 1.5%
Porsche AG Pfd. -- (DEM) ........ 13,419 22,538,641
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.0%
Philips Electronics
NV -- (NLG) ................... 8,827 529,473
------------
TOTAL FOREIGN STOCK
(COST $8,934,875).................. 23,068,114
------------
|
PAR
MATURITY (000)
--------- --------
CORPORATE OBLIGATIONS -- 3.3%
Venetian Casino Notes 144A
12.25%
(COST $49,805,844) ...... 11/15/04 $ 49,725 49,973,625
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.9%
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 6.6%
5.61%.................... 1/16/98 25,000 24,941,563
5.70%.................... 1/21/98 25,000 24,920,833
5.55%.................... 2/23/98 50,000 49,584,649
-----------
99,447,045
-----------
FEDERAL MORTGAGE CORP. DISC.
NOTES -- 3.3%
5.70%.................... 01/02/98 50,000 49,992,083
-----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $149,445,937).......... 149,439,128
-----------
|
PAR
MATURITY (000) VALUE
--------- -------- --------------
COMMERCIAL PAPER -- 4.3%
General Electric Capital
Corp.
6.70%.................. 01/02/98 $ 15,600 $ 15,597,097
Prudential Funding Corp.
6.40%.................. 01/02/98 50,000 49,991,111
--------------
TOTAL COMMERCIAL PAPER
(COST $65,588,208)......... 65,588,208
--------------
TOTAL INVESTMENTS -- 100.8%
(COST $1,143,979,075)...... 1,524,174,376
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.8%)..... (12,611,467)
--------------
NET ASSETS -- 100.0%......... $1,511,562,909
=============
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION
-----------------------------------------------------------------------------------------------
01/98 Buy DEM 5,000,000 $ 2,815,791 $ 2,781,920 $ (33,871)
02/98 Buy DEM 5,000,000 2,922,951 2,788,514 (134,437)
03/98 Buy DEM 10,500,000 6,025,439 5,858,394 (167,045)
04/98 Buy DEM 14,000,000 8,200,851 7,832,080 (368,771)
01/98 Buy NLG 47,200,000 23,609,678 23,293,768 (315,910)
03/98 Buy NLG 8,950,000 4,575,921 4,433,507 (142,414)
04/98 Buy NLG 2,000,000 1,025,641 991,955 (33,686)
05/98 Buy GBP 3,200,000 5,265,288 5,230,304 (34,984)
---------- ---------- ----------
$54,441,560 $53,210,442 $ (1,231,118)
========== ========== ==========
|
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
-------------------------------------------------------------------------------------------
01/98 Sell DEM 5,000,000 $ 2,877,367 $ 2,781,920 $ 95,447
02/98 Sell DEM 8,000,000 4,503,110 4,461,622 41,488
03/98 Sell DEM 36,200,000 20,744,259 20,197,512 546,747
04/98 Sell DEM 20,300,000 11,779,381 11,356,516 422,865
05/98 Sell DEM 3,200,000 1,810,877 1,791,453 19,424
01/98 Sell NLG 50,087,012 24,762,887 24,718,305 44,582
03/98 Sell NLG 9,350,000 4,672,026 4,631,812 40,214
04/98 Sell NLG 2,000,000 1,018,900 991,955 26,945
05/98 Sell GBP 3,200,000 5,307,521 5,230,297 77,224
---------- ---------- ----------
$77,476,328 $76,161,392 $1,314,936
========== ========== ==========
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 3.3% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
PAR
MATURITY (000) VALUE
--------- -------- ------------
CORPORATE OBLIGATIONS -- 14.0%
FINANCIAL-BANK & TRUST
Abbey National Treasury
Services PLC
5.75% [VR].............. 02/05/98 $ 4,000 $ 4,000,000
CoreStates Bank NA
6.38917% [VR]........... 04/21/98 5,000 5,000,000
5.6475%................. 03/16/98 20,000 20,000,000
First USA Bank
6.015%.................. 05/07/98 27,000 27,008,257
Key Bank NA
5.6125%................. 07/31/98 25,000 24,990,129
Old Kent Bank
5.70%................... 11/04/98 25,000 25,000,000
------------
TOTAL CORPORATE OBLIGATIONS
(COST $105,998,386)................... 105,998,386
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.2%
Federal Home Loan Bank
5.75%
(COST $9,391,500)........... 01/02/98 9,393 9,391,500
------------
CERTIFICATES OF DEPOSIT -- 21.2%
Bank of Boston N.A.
5.87%................... 10/14/98 15,000 14,994,379
Bank of Tokyo
6.50%................... 03/04/98 30,000 30,000,000
Canadian Imperial Bank of
Commerce
5.80%................... 03/18/98 30,000 30,000,000
Deutsche Bank
5.79%................... 03/04/98 10,000 10,000,000
NationsBank N.A.
5.83%................... 12/22/98 5,000 4,997,208
Norinchukin Bank NY
6.02%................... 02/13/98 26,000 26,000,306
Rabobank Nederland NV NY
5.99%................... 03/24/98 10,000 9,998,927
Short Term Card Account
Trust 144A
5.98%................... 01/15/98 20,000 20,000,000
Swiss Bank Corp.
5.76%................... 03/19/98 15,000 15,000,000
------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $160,990,820)................... 160,990,820
------------
COMMERCIAL PAPER -- 63.6%
CHEMICALS -- 3.6%
Bayer Co.
5.75%................... 02/20/98 27,250 27,032,378
------------
FINANCIAL-BANK & TRUST -- 12.2%
Abbey National North
America Corp.
5.735%.................. 03/10/98 25,000 24,729,181
Cregem North America, Inc.
5.69%................... 02/23/98 29,000 28,757,069
PAR
MATURITY (000) VALUE
--------- -------- ------------
NationsBank Corp.
5.75%................... 02/23/98 $ 30,000 $ 29,746,042
SunTrust Banks, Inc.
5.87%................... 01/23/98 10,000 9,964,128
------------
93,196,420
------------
FINANCIAL SERVICES -- 40.5%
American Express Co.
6.45%................... 01/02/98 38,000 37,993,192
Ameritech Capital
Funding Corp.+
5.90%................... 01/28/98 30,000 29,867,250
Associates Corp.
5.72%................... 03/10/98 25,000 24,729,889
Bankers Trust NY
5.6125% [VR]............ 07/07/98 7,000 6,996,188
5.69%................... 04/23/98 20,000 19,997,030
Bayerische Landesbank NY
5.71%................... 02/06/98 10,000 9,999,716
Bayerische Landesbank NY
5.87% [VR].............. 06/26/98 10,000 9,996,249
British Gas International
Finance
5.66%................... 03/23/98 35,000 34,554,275
Ford Motor Credit Corp.
5.70%................... 03/26/98 20,735 20,459,224
General Electric Capital
Corp.
5.70%................... 02/06/98 15,000 14,914,500
KFW International Finance
Inc.
5.74%................... 01/29/98 12,000 11,946,427
5.70%................... 02/12/98 25,000 24,883,750
Landesbank Hess
6.08%................... 06/09/98 10,000 9,998,336
National Australia
Funding, Inc.
5.74%................... 02/18/98 30,000 29,770,400
National Westminster Bank
NY
6.06%................... 05/26/98 5,000 4,999,621
Providence of Quebec
5.615%.................. 03/06/98 5,500 5,445,098
Rabobank Nederland NV NY
5.55%................... 04/29/98 12,000 11,781,700
------------
308,282,845
------------
PHARMACEUTICALS -- 3.3%
Pfizer Inc.+
5.95%................... 01/28/98 25,000 24,888,437
------------
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
UTILITIES -- 4.0%
Southern Co.+
5.70%................... 02/23/98 $ 30,500 $ 30,244,054
------------
TOTAL COMMERCIAL PAPER
(COST $483,644,134)................... 483,644,134
------------
TOTAL INVESTMENTS -- 100.0%
(COST $760,024,840)................... 760,024,840
LIABILITIES IN EXCESS OF OTHER
ASSETS -- 0.0%........................ (136,725)
------------
NET ASSETS -- 100.0%.................... $759,888,115
===========
|
+ Security is restricted as to resale and may not be resold except to qualified institutional buyers. At the end of the period, these securities amounted to 11.2% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 84.7%
MACHINERY & EQUIPMENT -- 0.7%
Federal Signal Corp. .............. 64,900 $ 1,403,462
----------
METALS & MINING -- 0.5%
Barrick Gold Corp. ................ 50,500 940,562
----------
OIL & GAS -- 4.3%
Atlantic Richfield Co. ............ 11,400 913,425
Burlington Resources, Inc. ........ 33,100 1,483,294
Sonat, Inc. ....................... 82,300 3,765,225
Ultramar Diamond Shamrock Corp. ... 80,100 2,553,187
----------
8,715,131
----------
REAL ESTATE -- 8.6%
Associated Estates Realty Corp.
[REIT] .......................... 74,900 1,774,194
Avalon Properties, Inc. [REIT] .... 56,000 1,732,500
Boston Properties, Inc. [REIT] .... 58,500 1,934,156
Duke Realty Investments, Inc.
[REIT] .......................... 98,100 2,378,925
Equity Residential Properties Trust
[REIT] .......................... 34,300 1,734,294
Liberty Property Trust [REIT] ..... 56,700 1,619,494
Meditrust Corp. Paired Stock
[REIT] .......................... 99,250 3,635,031
Security Capital Pacific Trust
[REIT] .......................... 73,500 1,782,375
The Price REIT, Inc. [REIT] ....... 18,200 745,062
----------
17,336,031
----------
TELECOMMUNICATIONS -- 16.1%
Ameritech Corp. ................... 25,600 2,060,800
Bell Atlantic Corp. ............... 40,000 3,640,000
BellSouth Corp. ................... 49,600 2,793,100
Cincinnati Bell, Inc. ............. 33,500 1,038,500
GTE Corp. ......................... 76,500 3,997,125
MCI Communications Corp. .......... 78,700 3,369,344
SBC Communications, Inc. .......... 66,500 4,871,125
Sprint Corp. ...................... 98,500 5,774,562
U.S. West Communications Group .... 105,800 4,774,225
----------
32,318,781
----------
UTILITIES -- COMBINATION -- 10.3%
Enron Corp. ....................... 104,754 4,353,838
LG&E Corporation .................. 36,200 895,950
MAPCO, Inc. ....................... 19,900 920,375
Montana Power Co. ................. 59,600 1,896,025
New Century Energies, Inc. ........ 49,000 2,348,937
PECO Energy Co. ................... 27,100 657,175
Public Service Enterprise Group,
Inc. ............................ 56,100 1,777,669
Puget Sound Energy, Inc. .......... 88,500 2,671,594
SCANA Corp. ....................... 69,000 2,065,687
Union Electric Co. ................ 47,500 2,054,375
UtiliCorp United, Inc. ............ 27,900 1,082,869
----------
20,724,494
----------
UTILITIES -- ELECTRIC -- 34.0%
Central & South West Corp. ........ 44,000 1,190,750
Cinergy Corp. ..................... 72,500 2,777,656
SHARES VALUE
------- ------------
CMS Energy Corp. .................. 143,000 $ 6,300,937
DPL, Inc. ......................... 125,800 3,616,750
DQE, Inc. ......................... 117,000 4,109,625
Duke Energy Corp. ................. 86,000 4,762,250
Entergy Corp. ..................... 170,000 5,089,375
Florida Progress Corp. ............ 52,600 2,064,550
FPL Group, Inc. ................... 94,400 5,587,300
Houston Industries, Inc. .......... 74,500 1,988,219
NIPSCO Industries, Inc. ........... 100,500 4,968,469
Pacificorp ........................ 194,500 5,312,281
PG&E Corp. ........................ 95,500 2,906,781
Pinnacle West Capital Co. ......... 87,300 3,699,337
Potomac Electric Power Co. ........ 60,500 1,561,656
Southern Co. ...................... 130,000 3,363,750
Teco Energy, Inc. ................. 131,000 3,684,375
Texas Utilities Co. ............... 129,000 5,361,563
----------
68,345,624
----------
UTILITIES -- GAS -- 10.2%
AGL Resources, Inc. ............... 3,400 69,488
Columbia Gas System, Inc. ......... 11,000 864,188
Consolidated Natural Gas Co. ...... 80,800 4,888,400
El Paso Natural Gas Co. ........... 77,500 5,153,750
KeySpan Energy Corp. .............. 10,100 371,806
MCN Energy Group, Inc. ............ 139,500 5,632,313
Pacific Enterprises ............... 96,200 3,619,525
----------
20,599,470
----------
TOTAL COMMON STOCK
(COST $145,739,371).................. 170,383,555
----------
PREFERRED STOCK -- 5.9%
FINANCIAL-BANK & TRUST -- 0.7%
Unocal Corp. 6.25% [CVT] .......... 26,100 1,458,338
----------
FINANCIAL SERVICES -- 2.1%
Merrill Lynch & Co., Inc. 6.25%
[CVT] ........................... 45,600 1,573,200
Salomon Smith Barney Holdings, Inc.
6.25% [CVT] ..................... 45,400 2,689,950
----------
4,263,150
----------
METALS & MINING -- 0.4%
Coeur D'alene Mines Corp. 7.00%
[CVT] ........................... 59,900 726,288
----------
OIL & GAS -- 2.2%
Williams Companies, Inc. $3.50
[CVT] ........................... 32,400 4,372,186
----------
UTILITIES -- ELECTRIC -- 0.1%
Cal Energy Co., Inc. 6.25%
[CVT] ........................... 3,000 135,375
----------
UTILITIES -- GAS -- 0.5%
MCN Energy Group, Inc. 8.00%
[CVT] ........................... 15,700 983,213
----------
TOTAL PREFERRED STOCK
(COST $10,934,858)................... 11,938,550
----------
|
SHARES VALUE
------- ------------
FOREIGN STOCK -- 1.0%
UTILITIES - COMBINATION
Viag AG -- (DEM)
(COST $1,636,861) .................. 3,500 $ 1,917,366
------------
|
PAR
MATURITY (000)
-------- -------
REPURCHASE AGREEMENTS -- 8.2%
Greenwich Capital
Markets, Inc., 6.10%,
dated 12/31/97,
repurchase price
$16,591,621
(Collateralized by
U.S. Treasury Notes,
par value
$16,374,000, market
value $16,932,747 due
02/15/98)
(COST $16,586,000)... 01/02/98 $16,586 16,586,000
TOTAL INVESTMENTS -- 99.8% -------------
(COST $174,897,090).............. 200,825,471
OTHER ASSETS LESS
LIABILITIES -- 0.2%................ 317,701
-------------
NET ASSETS -- 100.0%................. $ 201,143,172
=============
|
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 48.8%
ADVERTISING -- 0.2%
Omnicom Group, Inc. ............... 15,400 $ 652,575
----------
AEROSPACE -- 1.1%
Boeing Co. ........................ 33,035 1,616,650
General Motors Corp. Cl-H ......... 18,943 699,707
Northrop Grumman Corp. ............ 9,978 1,147,470
Raytheon Co. Cl-A ................. 11,047 544,766
----------
4,008,593
----------
AIRLINES -- 0.4%
Delta Air Lines, Inc. ............. 10,766 1,281,154
----------
AUTOMOBILE MANUFACTURERS -- 0.2%
Chrysler Corp. .................... 19,765 695,481
----------
AUTOMOTIVE PARTS -- 1.8%
Dana Corp. ........................ 34,345 1,631,387
Eaton Corp. ....................... 11,455 1,022,359
Goodyear Tire & Rubber Co. ........ 29,448 1,873,629
Magna International, Inc. Cl-A .... 8,769 550,803
TRW, Inc. ......................... 22,823 1,218,178
----------
6,296,356
----------
BEVERAGES -- 0.4%
Pepsico, Inc. ..................... 37,445 1,364,402
----------
BROADCASTING -- 0.4%
Chancellor Media Corp. Cl-A* ...... 7,000 522,375
Clear Channel Communications,
Inc.* ........................... 6,300 500,456
Sinclair Broadcasting Group, Inc.
A* .............................. 7,200 335,700
----------
1,358,531
----------
BUILDING MATERIALS -- 0.6%
Lowe's Companies, Inc. ............ 29,135 1,389,375
Masco Corp. ....................... 16,750 852,156
Terex Corp. Appreciation Rights* .. 600 12,300
----------
2,253,831
----------
BUSINESS SERVICES -- 0.3%
Accustaff, Inc.* .................. 11,600 267,162
Norrell Corp. ..................... 10,700 212,662
Quintiles Transnational Corp.* .... 9,200 351,900
Robert Half International, Inc.* .. 8,700 348,000
----------
1,179,724
----------
CHEMICALS -- 1.0%
Dupont, (E.I.) de Nemours & Co. ... 21,125 1,268,820
Eastman Chemical Co. .............. 20,522 1,222,342
Witco Corp. ....................... 26,723 1,090,632
----------
3,581,794
----------
CLOTHING & APPAREL -- 0.2%
Jones Apparel Group, Inc.* ........ 9,800 421,400
WestPoint Stevens, Inc.* .......... 8,200 387,450
----------
808,850
----------
COMPUTER HARDWARE -- 1.5%
Hewlett-Packard Co. ............... 38,140 2,383,750
International Business Machines
Corp. ........................... 23,036 2,408,702
Seagate Technology, Inc.* ......... 31,400 604,450
----------
5,396,902
----------
SHARES VALUE
------- ------------
COMPUTER SERVICES & SOFTWARE -- 1.7%
BMC Software, Inc.* ............... 7,600 $ 498,750
Computer Associates International,
Inc. ............................ 39,175 2,071,378
Compuware Corp.* .................. 15,100 483,200
Fiserv, Inc.* ..................... 6,700 329,137
HNC Software, Inc.* ............... 5,900 253,700
NCR Corp.* ........................ 29,765 827,839
Peoplesoft, Inc.* ................. 15,000 585,000
Security Dynamics Technologies,
Inc.* ........................... 6,400 228,800
SIPEX Corp.* ...................... 8100 245,025
VERITAS Software Corp.* ........... 3,600 183,600
Viasoft, Inc.* .................... 3,100 130,975
----------
5,837,404
----------
CONGLOMERATES -- 1.3%
Minnesota Mining & Manufacturing
Co. ............................. 15,348 1,259,495
Philip Morris Companies, Inc. ..... 41,937 1,900,270
Tenneco, Inc. ..................... 39,340 1,553,930
----------
4,713,695
----------
CONSUMER PRODUCTS & SERVICES -- 1.7%
Apollo Group, Inc. Cl-A* .......... 9,300 439,425
Clorox Co. ........................ 11,205 885,895
Colgate-Palmolive Co. ............. 1,600 117,600
Eastman Kodak Co. ................. 27,915 1,697,581
Hedstrom Holdings 144A* ........... 303 379
Rexall Sundown, Inc.* ............. 10,400 313,950
RJR Nabisco Holdings Corp. ........ 28,950 1,085,625
Sunbeam Oster Corp. ............... 7,900 332,787
Whitman Corp. ..................... 51,671 1,346,675
----------
6,219,917
----------
CONTAINERS & PACKAGING -- 0.7%
Owens-Illinois, Inc.* ............. 54,425 2,064,748
Temple-Inland, Inc. ............... 8,296 433,984
----------
2,498,732
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.2%
AES Corp.* ........................ 11,400 531,525
Altera Corp.* ..................... 6,400 212,000
Diebold, Inc. ..................... 7,600 384,750
Emerson Electric Co. .............. 24,405 1,377,357
Genrad, Inc.* ..................... 7,900 238,481
Linear Technology Corp. ........... 4,000 230,500
Maxim Integrated Products,
Inc.* ........................... 7,600 262,200
Molex, Inc. ....................... 8,650 277,881
Polaroid Corp. .................... 30,753 1,497,287
SCI Systems, Inc.* ................ 7,700 335,431
SGS-Thomson Microelectronics
NV [ADR]* ....................... 4,700 286,994
Solectron Corp.* .................. 7,000 290,937
Teradyne, Inc.* ................... 10,500 336,000
Texas Instruments, Inc. ........... 39,035 1,756,575
----------
8,017,918
----------
|
SHARES VALUE
------- ------------
ENTERTAINMENT & LEISURE -- 0.2%
Harley-Davidson, Inc. ............. 13,300 $ 364,087
Royal Caribbean Cruises Ltd. ...... 6,400 341,200
----------
705,287
----------
ENVIRONMENTAL SERVICES -- 0.5%
Browning-Ferris Industries,
Inc. ............................ 36,055 1,334,035
USA Waste Services, Inc.* ......... 7,225 283,581
----------
1,617,616
----------
FARMING & AGRICULTURE -- 0.1%
Dekalb Genetics Corp. Cl-B ........ 8,700 341,475
----------
FINANCIAL-BANK & TRUST -- 5.1%
Banc One Corp. .................... 22,365 1,214,699
BankBoston Corp. .................. 8,100 760,894
Bankers Trust New York Corp. ...... 12,617 1,418,624
Crestar Financial Corp. ........... 800 45,600
First Chicago NBD Corp. ........... 14,440 1,205,740
First Tennessee National Corp. .... 6,790 453,232
Firstar Corp. ..................... 6,600 280,087
GreenPoint Financial Corp. ........ 6,200 449,887
Mercantile Bancorporation, Inc. ... 18,670 1,148,205
Morgan, (J.P.) & Co., Inc. ........ 12,539 1,415,340
National City Corp. ............... 10,585 695,964
Northern Trust Corp. .............. 7,300 509,175
PNC Bank Corp. .................... 55,353 3,158,581
Providian Financial Corp. ......... 8,300 375,056
Regions Financial Corp. ........... 14,600 615,937
Star Banc Corp. ................... 7,900 453,262
State Street Boston Corp. ......... 7,300 424,769
Summit Bancorp .................... 13,795 734,584
Suntrust Banks, Inc. .............. 8,330 594,554
Union Planters Corp. .............. 12,985 882,168
Wells Fargo & Co. ................. 3,500 1,188,031
Westamerica Bancorporation ........ 3,400 347,650
----------
18,372,039
----------
FINANCIAL SERVICES -- 1.4%
Ahmanson, (H.F.) & Co. ............ 29,765 1,992,395
Beneficial Corp. .................. 9,800 814,625
Capital One Financial Corp. ....... 5,900 319,706
Esat Holdings Ltd. Warrants* ...... 35 0
Finova Group, Inc. ................ 10,200 506,812
Lehman Brothers, Inc. ............. 4,100 209,100
SunAmerica, Inc. .................. 10,700 457,425
Washington Mutual, Inc. ........... 10,200 650,887
----------
4,950,950
----------
FOOD -- 2.1%
General Mills, Inc. ............... 26,746 1,915,682
Giant Food, Inc. Cl-A ............. 5,500 185,281
Heinz, (H.J.) Co. ................. 28,000 1,422,750
International Home Foods, Inc.* ... 10,100 282,800
Quaker Oats Co. ................... 29,480 1,555,070
Ralston Purina Group .............. 9,750 906,141
Sara Lee Corp. .................... 23,160 1,304,197
----------
7,571,921
----------
HEALTHCARE SERVICES -- 0.6%
Health Care & Retirement Corp.* ... 7,800 313,950
Health Management Associates,
Inc.* ........................... 15,750 397,687
Healthsouth Corp.* ................ 12,900 $ 357,975
Omnicare, Inc. .................... 18,300 567,300
Wellpoint Health Networks, Inc. ... 7,200 304,200
----------
1,941,112
----------
HOTELS & MOTELS -- 0.3%
ITT Corp.* ........................ 13,300 1,102,237
----------
INDUSTRIAL PRODUCTS -- 0.0%
Cellnet Data Systems Warrants* .... 95 10
----------
INSURANCE -- 1.8%
American General Corp. ............ 28,866 1,560,568
AON Corp. ......................... 25,351 1,486,202
CIGNA Corp. ....................... 7,347 1,271,490
Hartford Life, Inc. Cl-A* ......... 7,400 335,312
Reliastar Financial Corp. ......... 8,400 345,975
USF&G Corp. ....................... 62,973 1,389,342
----------
6,388,889
----------
MACHINERY & EQUIPMENT -- 1.1%
Caterpillar, Inc. ................. 23,245 1,128,835
Cooper Industries, Inc. ........... 25,020 1,225,980
Deere & Co. ....................... 16,585 967,113
Precision Castparts Corp. ......... 6,800 410,125
Smith International, Inc.* ........ 4,300 263,912
----------
3,995,965
----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.4%
Baxter International, Inc. ........ 38,176 1,925,502
Gulf South Medical Supply,
Inc.* ........................... 2,900 108,025
Johnson & Johnson Co. ............. 25,545 1,682,777
Mentor Corp. ...................... 8,700 317,550
Schein, (Henry), Inc.* ............ 6,900 241,500
Sofamor Danek Group, Inc. ......... 5,400 351,337
Stryker Corp. ..................... 8,700 324,075
Urohealth System, Inc. Warrants
144A*............................ 30 75
----------
4,950,841
----------
OFFICE EQUIPMENT -- 1.3%
Pitney Bowes, Inc. ................ 16,055 1,443,947
Xerox Corp. ....................... 42,156 3,111,640
----------
4,555,587
----------
OIL & GAS -- 4.5%
Amoco Corp. ....................... 18,272 1,555,404
Atlantic Richfield Co. ............ 18,170 1,455,871
British Petroleum Co. PLC [ADR] ... 15,966 1,272,291
Camco International, Inc. ......... 6,900 439,444
Coastal Corp. ..................... 18,275 1,131,908
Enron Corp. ....................... 10,300 428,094
Ensco International, Inc. ......... 10,000 335,000
Exxon Corp. ....................... 21,831 1,335,784
Global Marine, Inc.* .............. 10,500 257,250
Kerr-McGee Corp. .................. 12,220 773,679
Mobil Corp. ....................... 19,066 1,376,327
Occidental Petroleum Corp. ........ 39,831 1,167,546
Petroleo Brasileiro SA [ADR]
144A* ........................... 5,100 119,274
|
SHARES VALUE
------- ------------
Societe Nationale Elf Aquitaine
SA [ADR] ........................ 34,780 $ 2,038,977
Tosco Corp. ....................... 38,430 1,453,134
Western Atlas, Inc.* .............. 5,300 392,200
YPF SA [ADR] ...................... 19,900 680,331
----------
16,212,514
----------
PAPER & FOREST PRODUCTS -- 1.2%
Boise Cascade Corp. ............... 35,665 1,078,866
Kimberly-Clark Corp. .............. 43,567 2,148,398
Willamette Industries, Inc. ....... 27,615 888,858
----------
4,116,122
----------
PERSONAL SERVICES -- 0.0%
Sylvan Learning Systems, Inc.* .... 1,100 42,900
----------
PHARMACEUTICALS -- 3.4%
American Home Products Corp. ...... 25,718 1,967,427
Biochem Pharma, Inc. .............. 11,000 229,625
Bristol-Meyers Squibb Co. ......... 22,597 2,138,241
Dura Pharmaceutical, Inc.* ........ 7,000 321,125
Elan Corp. PLC [ADR]* ............. 7,700 394,144
Glaxo Wellcome PLC [ADR] .......... 15,240 729,615
ICN Pharmaceuticals, Inc. ......... 5,700 278,231
Incyte Pharmaceuticals, Inc. ...... 6,000 270,000
McKesson Corp. .................... 4,200 454,387
Merck & Co., Inc. ................. 23,485 2,495,281
Pharmacia & Upjohn, Inc. .......... 78,132 2,861,584
----------
12,139,660
----------
PRINTING & PUBLISHING -- 0.6%
Belo, (A.H.) Corp. Cl-A ........... 7,900 443,387
Central Newspapers, Inc. Cl-A ..... 3,800 280,962
McGraw-Hill Co., Inc. ............. 15,295 1,131,830
Times Mirror Co. Cl-A ............. 7,200 442,800
----------
2,298,979
----------
RAILROADS -- 0.7%
Canadian National Railway Co. ..... 15,280 721,980
Norfolk Southern Corp. ............ 487 15,006
Union Pacific Corp. ............... 27,186 1,697,426
----------
2,434,412
----------
RESTAURANTS -- 0.1%
AmeriKing, Inc.* .................. 25 1,250
CKE Restaurants, Inc. ............. 7,900 332,787
----------
334,037
----------
RETAIL & MERCHANDISING -- 2.3%
Arbor Drugs, Inc. ................. 11,550 213,675
Bed, Bath & Beyond, Inc.* ......... 7,400 284,900
Borders Group, Inc.* .............. 12,000 375,750
Consolidated Stores Corp.* ........ 10,106 444,032
Family Dollar Stores, Inc. ........ 16,700 489,519
Kmart Corp.* ...................... 106,350 1,229,672
Kohls Corp.* ...................... 6,400 436,000
Linens 'N Things, Inc.* ........... 6,900 301,012
Meyer, (Fred), Inc.* .............. 10,100 367,387
Miller, (Herman), Inc. ............ 6,400 349,200
Payless Shoesource, Inc.* ......... 5,500 369,187
SHARES VALUE
------- ------------
Penney (J.C.) Co., Inc. ........... 900 $ 54,281
Pier 1 Imports, Inc. .............. 22,650 512,456
Rite Aid Corp. .................... 7,500 440,156
Starbucks Corp. ................... 6,900 264,787
TJX Companies, Inc. ............... 16,700 574,062
Toys 'R' Us, Inc.* ................ 51,025 1,604,098
----------
8,310,174
----------
SEMICONDUCTORS -- 0.7%
Intel Corp. ....................... 30,085 2,113,471
Xilinx, Inc.* ..................... 5,900 206,869
----------
2,320,340
----------
TELECOMMUNICATIONS -- 3.3%
ADC Telecommunications, Inc.* ..... 11,100 463,425
AT&T Corp. ........................ 22,215 1,360,669
Bell Atlantic Corp. ............... 17,485 1,591,135
BellSouth Corp. ................... 30,293 1,705,875
Globalstar Telecommunications
Warrants 144A* .................. 45 489
Intercel, Inc. Warrants 144A* ..... 640 4,608
Jacor Communications, Inc.* ....... 3,800 201,875
McCaw International Ltd.
Warrants* ....................... 10 0
Nextel Communications, Inc.
Cl-A* ........................... 503 13,078
SBC Communications, Inc. .......... 23,309 1,707,384
Sprint Corp. ...................... 38,611 2,263,570
Tele-Communications TCI Ventures
Group Cl-A ...................... 11,000 311,437
Teleport Communications Group, Inc.
Cl-A* ........................... 9,600 526,800
Tellabs, Inc.* .................... 6,500 343,687
U.S. West Communications Group .... 32,340 1,459,342
----------
11,953,374
----------
TRANSPORTATION -- 0.4%
Consolidated Freightways, Inc. .... 4,500 172,687
Expeditors International of
Washington, Inc. ................ 7,300 281,050
Ryder Systems, Inc. ............... 33,400 1,093,850
----------
1,547,587
----------
TOTAL COMMON STOCK
(COST $149,677,775).................. 174,369,887
----------
PREFERRED STOCK -- 0.1%
BROADCASTING -- 0.0%
American Radio Systems Corp.
$11.375 Cl-B [PIK] .............. 2 232
Capstar Broadcasting 12.00%
[PIK] ........................... 200 23,000
Chancellor Media Corp. 12.00%
[PIK] ........................... 423 48,433
Citadel Broadcasting Co. 13.25%
[PIK] 144A ...................... 200 23,300
Echostar Communications Corp.
12.125% 144A .................... 100 10,450
----------
105,415
----------
ENTERTAINMENT & LEISURE -- 0.1%
Time Warner, Inc. Cl-M 10.25% ..... 120 135,297
----------
|
SHARES VALUE
------- ------------
INDUSTRIAL PRODUCTS -- 0.0%
Anvil Holding, Inc. 13.00%
[PIK] ........................................... 13 $ 312
----------
RESTAURANTS -- 0.0%
AmeriKing, Inc. 13.00% ............................ 1,135 29,123
----------
TELECOMMUNICATIONS -- 0.0%
Cablevision Systems Corp. Cl-M
11.125% [PIK] ................................... 345 40,405
Nextlink Communications, Inc.
14.00% [PIK] .................................... 425 26,350
----------
66,755
----------
UTILITIES -- 0.0%
El Paso Electric Co. 11.40%
[PIK] ........................................... 414 45,954
Public Service Co. of New Hampshire
Cl-A 10.60% ..................................... 1,410 34,897
----------
80,851
----------
TOTAL PREFERRED STOCK
(COST $351,967)...................................... 417,753
----------
FOREIGN STOCK -- 8.5%
AEROSPACE -- 0.1%
Rolls-Royce PLC -- (GBP) .......................... 49,251 190,441
----------
AUTOMOBILE MANUFACTURERS -- 0.1%
Bayerische Motoren Werke AG --
(DEM) ........................................... 653 488,468
----------
AUTOMOTIVE PARTS -- 0.2%
Bridgestone Corp. -- (JPY) ........................ 7,000 152,360
Michelin C.G.D.E. Cl-B -- (FRF) ................... 9,077 457,180
Renault SA -- (FRF) ............................... 1,710 48,123
----------
657,663
----------
BEVERAGES -- 0.2%
Bass PLC -- (GBP) ................................. 28,204 438,316
Fomento Economico Mexicano SA
Cl-B -- (MXP) ................................... 21,900 174,943
----------
613,259
----------
BUILDING MATERIALS -- 0.3%
Cemex SA de CV -- (MXP) ........................... 42,861 194,586
CRH PLC -- (IEP) .................................. 38,634 452,645
Lafarge SA -- (FRF) ............................... 5,087 333,927
----------
981,158
----------
CHEMICALS -- 0.3%
AKZO Nobel NV -- (NLG) ............................ 2,612 450,445
Bayer AG -- (DEM) ................................. 11,514 427,443
Ciba Specialty Chemicals AG --
(CHF)* .......................................... 2,744 327,350
----------
1,205,238
----------
CLOTHING & APPAREL -- 0.0%
Onward Kashiyama Co.
Ltd. -- (JPY) ................................... 8,000 92,908
----------
CONGLOMERATES -- 0.7%
Alfa SA de C.V. -- (MXP) .......................... 43,909 297,381
B.A.T. Industries PLC -- (GBP) .................... 62,646 571,055
BTR PLC -- (GBP) .................................. 93,090 281,836
Compagnie Generale des Eaux --
(FRF) ........................................... 2,998 418,613
SHARES VALUE
------- ------------
Compagnie Generale des Eaux
Warrants -- (FRF)* .............................. 480 $ 326
Hutchison Whampoa Ltd. -- (HKD) ................... 26,000 163,082
Securicor PLC -- (GBP) ............................ 31,236 147,250
Smith Industries PLC -- (GBP) ..................... 22,697 316,694
Tomkins PLC -- (GBP) .............................. 80,495 385,422
----------
2,581,659
----------
CONSUMER PRODUCTS & SERVICES -- 0.4%
Bombardier, Inc. Cl-B -- (CAD) .................... 11,800 243,253
Cookson Group PLC -- (GBP) ........................ 26,000 83,636
Fuji Photo Film Co. -- (JPY) ...................... 7,000 269,187
Kao Corp. -- (JPY) ................................ 23,000 332,561
Unilever PLC -- (GBP) ............................. 40,400 346,333
----------
1,274,970
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.7%
General Electric Co. PLC -- (GBP) ................. 59,197 384,257
Hirose Electric Ltd. -- (JPY) ..................... 2,400 123,118
Murata Manufacturing Co. Ltd. -- (JPY) ............ 4,000 100,907
Omron Corp. -- (JPY) .............................. 16,000 251,036
Philips Electronics NV -- (NLG) .................. 7,030 421,683
Rohm Co. -- (JPY) ................................. 2,000 204,582
SGS-Thomson Microelectronics -- (FRF)* ............ 5,643 349,413
Siebe PLC -- (GBP) ................................ 5600 110,111
Sony Corp. -- (JPY) ............................... 4,700 419,317
Tokyo Electron Ltd. -- (JPY) ...................... 4,000 128,595
----------
2,493,019
----------
ENERGY SERVICES -- 0.1%
VA Technologie AG -- (ATS) ........................ 1,884 285,634
----------
FINANCIAL-BANK & TRUST -- 1.3%
ABN Amro Holding NV -- (NLG) ...................... 7,221 140,699
Allied Irish Banks PLC -- (IEP) ................... 45,730 443,228
Bank of Nova Scotia -- (CAD) ...................... 8,173 384,657
Banque Nationale de Paris -- (FRF) ................ 3,160 168,036
Commonwealth Bank of Australia -- (AUD) ........... 14,575 167,140
Dao Heng Bank Group Ltd. -- (HKD) ................. 26,500 66,179
Deutsche Bank AG -- (DEM) ......................... 5550 388306
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD) .............................. 22,000 188,019
HSBC Holdings PLC -- (HKD) ........................ 17,165 423,129
ING Groep NV -- (NLG) ............................. 11,355 478,346
Julius Baer Holdings AG Cl-B -- (CHF) ............. 188 349,306
Overseas-Chinese Banking Corp. Ltd. (SGD) ......... 12,000 69,795
Overseas Union Bank Ltd. C1-F (SGD) ............... 19,000 72,733
Royal Bank of Canada -- (CAD) ..... 3,250 171,696
Union Bank of Switzerland -- (CHF) ................ 452 654,502
|
SHARES VALUE
------- ------------
United Overseas Bank
Ltd. -- (SGD) ................... 43,000 $ 238,614
Westpac Banking Corp.
Ltd. -- (AUD) ................... 53,400 341,535
----------
4,745,920
----------
FINANCIAL SERVICES -- 0.4%
Bank of Ireland PLC -- (IEP) ...... 32,499 501,203
Cetelem -- (FRF) .................. 1,634 222,725
Guoco Group Ltd. -- (HKD) ......... 23,000 56,251
Nikko Securities Co.
Ltd. -- (JPY) ................... 46,000 122,411
Promise Co. Ltd. -- (JPY) ......... 3,190 177,630
Societe Generale -- (FRF) ......... 1,944 264,980
----------
1,345,200
----------
FOOD -- 0.4%
Goodman Fielder Ltd. -- (AUD) ..... 114,923 182,707
Greencore Group PLC -- (IEP) ...... 35,697 167,904
Ito-Yokado Co. Ltd. -- (JPY) ...... 5,000 255,728
Nestle SA -- (CHF) ................ 503 754,905
----------
1,361,244
----------
INSURANCE -- 0.1%
QBE Insurance Group
Ltd. -- (AUD).................... 14,350 62,443
Royal & Sun Alliance Insurance
Group PLC -- (GBP) ............. 8,300 83,717
Zurich
Versicherungs-Gesellschaft --
(CHF) ........................... 314 149,836
----------
295,996
----------
MACHINERY & EQUIPMENT -- 0.3%
ABB AG -- (CHF) ................... 66 83,035
Kurita Water Industries
Ltd. -- (JPY) ................... 6,000 61,375
Mannesmann AG -- (DEM) ............ 800 401,771
Rieter Holdings AG -- (CHF)* ...... 236 100,966
Sandvik AB Cl-A -- (SEK) .......... 976 27,800
Sandvik AB Cl-B -- (SEK) .......... 9,858 282,035
----------
956,982
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.2%
Glaxo Wellcome PLC -- (GBP) ....... 16,554 392,230
Novartis AG -- (CHF) .............. 192 311,981
Sankyo Co. Ltd. -- (JPY) .......... 6,000 136,132
----------
840,343
----------
METALS & MINING -- 0.1%
Rio Tinto PLC -- (GBP) ............ 25,909 319,306
----------
OFFICE EQUIPMENT -- 0.1%
Canon, Inc. -- (JPY) .............. 15,000 350,712
Ricoh Co. Ltd. -- (JPY) ........... 7,000 87,217
----------
437,929
----------
OIL & GAS -- 0.8%
British Petroleum Co.
PLC -- (GBP) .................... 29,622 389,923
Burmah Castrol PLC -- (GBP) ....... 24,221 421,252
Ente Nazionale Idrocarburi SPA --
(ITL) ........................... 82,472 467,871
Hong Kong & China Gas Co. Ltd. --
(HKD) ........................... 50,200 97,183
Shell Transport & Trading Co.
PLC -- (GBP) .................... 53,150 384,796
SHARES VALUE
------- ------------
Societe Nationale Elf Aquitaine
SA -- (FRF) ..................... 4,069 $ 473,465
Total SA Cl-B -- (FRF) ............ 4,653 506,613
----------
2,741,103
----------
PAPER & FOREST PRODUCTS -- 0.1%
Svenska Cellulosa AB
Cl-B -- (SEK) ................... 13,112 294,982
----------
PHARMACEUTICALS -- 0.1%
Astra AB Cl-A -- (SEK) ............ 6,080 105,365
Pharmacia & Upjohn,
Inc. -- (SEK) ................... 4,804 176,797
Santen Pharmaceutical
Ltd. -- (JPY) ................... 700 8,076
Yamanouchi Pharmaceutical Co.
Ltd. -- (JPY) ................... 7,000 150,745
----------
440,983
----------
PRINTING & PUBLISHING -- 0.1%
Dai Nippon Printing Co.
Ltd. -- (JPY) ................... 16,000 301,490
----------
REAL ESTATE -- 0.1%
Amoy Properties Ltd. -- (HKD) ..... 132,000 115,845
Cheung Kong Holdings
Ltd. -- (HKD) ................... 39,000 255,444
Sun Hung Kai Properties Ltd. --
(HKD) ........................... 15,000 104,539
----------
475,828
----------
RETAIL & MERCHANDISING -- 0.1%
Dixons Group PLC -- (GBP) ......... 16,000 160,856
Vendex International
NV -- (NLG) ..................... 5,652 311,982
----------
472,838
----------
TELECOMMUNICATIONS -- 0.7%
Deutsche Telekom AG -- (DEM) ...... 28,619 530,029
Ericsson, (L.M.) Telephone Co.
Cl-B -- (SEK) ................... 7,401 278,434
Newbridge Networks
Corp. -- (CAD)* ................. 4,000 139,900
Nokia AB Cl-A -- (FIM) ............ 4,663 331,391
Northern Telecom Ltd. -- (CAD) .... 3,674 326,445
Philippine Long Distance Telephone
Co. -- (PHP) .................... 500 11,028
Portugal Telecom SA -- (PTE) ...... 5,310 246,662
Vodafone Group PLC -- (GBP) ....... 104,002 751,244
----------
2,615,133
----------
TRANSPORTATION -- 0.1%
Peninsular & Oriental Steam
Navigation Co. -- (GBP) ......... 14,200 161,802
Yamato Transport Co.
Ltd. -- (JPY) ................... 12,000 161,512
----------
323,314
----------
UTILITIES -- 0.4%
Electricidade de Portugal
SA -- (PTE) ..................... 17,700 335,526
Hong Kong Electric Holdings Ltd. --
(HKD) ........................... 15,000 57,013
Scottish Power PLC -- (GBP) ....... 57,359 507,760
Veba AG -- (DEM) .................. 7,805 531,753
----------
1,432,052
----------
TOTAL FOREIGN STOCK
(COST $27,328,180)................... 30,265,060
----------
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
CORPORATE OBLIGATIONS -- 13.0%
ADVERTISING -- 0.1%
Lamar Advertising Co. Sr.
Sub. Notes 8.625%
144A ................... 09/15/07 $ 25 $ 25,719
9.625%.................. 12/01/06 35 37,800
Outdoor Communications Sr.
Sub. Notes
9.25%................... 08/15/07 10 10,250
Outdoor Systems, Inc. Sr.
Sub. Notes
8.875%.................. 06/15/07 75 78,562
Universal Outdoor, Inc.
Sr. Sub. Notes
9.75%................... 10/15/06 43 48,375
------------
200,706
------------
AEROSPACE -- 0.2%
Argo-Tech Corp. Sr. Sub.
Notes 144A
8.625%.................. 10/01/07 10 10,000
BE Aerospace, Inc. Sr.
Sub. Notes
9.875%.................. 02/01/06 35 37,012
K&F Industries Sr. Sub.
Notes 144A
9.25%................... 10/15/07 10 10,275
Lockheed Martin Corp.
Notes
7.25%................... 05/15/06 455 481,731
------------
539,018
------------
AIRLINES -- 0.1%
Continental Airlines
Series 97CI
7.42%................... 04/01/07 175 176,969
Trans World Airlines Sr.
Notes 144A
11.50%.................. 12/15/04 10 10,050
------------
187,019
------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Consorcio Grupo Dina SA
[ZCB]
6.251%.................. 11/15/02 20 18,025
------------
AUTOMOTIVE PARTS -- 0.0%
Delco Remy International,
Inc. Sr. Notes
8.625%.................. 12/15/07 10 10,125
Hayes Wheel International,
Inc. Cl-B*
9.125%.................. 07/15/07 85 88,187
PAR
MATURITY (000) VALUE
--------- -------- ------------
Lear Corp. Sub. Notes
9.50%................... 07/15/06 $ 35 $ 38,500
Safety Components
International Sr. Sub.
Notes Cl-B
10.125%................. 07/15/07 10 10,337
------------
147,149
------------
BEVERAGES -- 0.0%
Canandaigua Wine Sr. Sub.
Notes
8.875%.................. 12/15/03 55 56,237
------------
BROADCASTING -- 0.5%
Acme Television Finance
Sr. Disc. Notes [STEP]
144A
11.164%................. 09/30/04 15 11,025
Antenna TV SA Sr. Notes
9.00%................... 08/01/07 10 10,012
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................... 11/01/05 56 62,160
Capstar Broadcasting Sr.
Disc. Notes [STEP]
10.789%................. 02/01/09 60 42,750
Central European Media
Enterprises Sr. Notes
9.375%.................. 08/15/04 10 9,700
Citadel Broadcasting Co.
Sr. Sub. Notes 144A
10.25%.................. 07/01/07 10 10,800
Fox Liberty Networks LLC
Sr. Notes 144A
8.875%.................. 08/15/07 40 40,000
Frontiervision Holdings
[STEP]
10.287%................. 09/15/07 100 73,750
Granite Broadcasting Corp.
Sr. Sub. Debs.
10.375%................. 05/15/05 75 78,469
News America Holdings
Debs.
7.70%................... 10/30/25 835 874,662
7.75%................... 12/01/45 365 381,881
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%.................. 09/30/05 80 84,200
Spanish Broadcasting
System Sr. Notes
12.50%.................. 06/15/02 50 57,375
Spanish Broadcasting
System Sr. Notes Cl-B
11.00%.................. 03/15/04 25 27,562
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
Sullivan Broadcasting
Holdings Co. Sr. Sub.
Notes
10.25%.................. 12/15/05 $ 75 $ 80,156
Young Broadcasting, Inc.
Sr. Sub. Notes Cl-B
9.00%................... 01/15/06 5 4,987
------------
1,849,489
------------
BUILDING MATERIALS -- 0.1%
Atrium Companies, Inc. Sr.
Sub. Notes
10.50%.................. 11/15/06 10 10,487
Building Materials Corp.
Sr. Notes
8.625%.................. 12/15/06 10 10,300
Cemex SA 144A
12.75%.................. 07/15/06 10 12,025
Koppers Industry, Inc. Sr.
Sub. Notes 144A
9.875%.................. 12/01/07 10 10,300
Polytama International
Notes
11.25%.................. 06/15/07 25 21,250
Southdown, Inc. Sr. Sub.
Notes
10.00%.................. 03/01/06 75 81,844
Terex Corp. Sr. Notes
13.25%.................. 05/15/02 23 26,277
------------
172,483
------------
BUSINESS SERVICES -- 0.1%
Affinity Group Holdings
Sr. Notes
11.00%.................. 04/01/07 65 69,306
Affinity Group Holdings
Sr. Sub. Notes
11.50%.................. 10/15/03 55 58,781
Iron Mountain, Inc. Sr.
Sub. Notes 144A
8.75%................... 09/30/09 20 20,550
Outsourcing Solutions
Corp. Sr. Sub. Notes
Cl-B
11.00%.................. 11/01/06 20 22,100
Primark Corp. Sr. Notes
8.75%................... 10/15/20 75 76,219
------------
246,956
------------
CHEMICALS -- 0.3%
Harris Chemical North
American Sr. Sub. Notes
10.75%.................. 10/15/03 40 42,800
Huntsman Corp. Sr. Sub.
Notes 144A
9.1875%................. 01/01/98 40 42,000
Solutia, Inc. Bonds
6.72%................... 10/15/37 890 903,350
Sovereign Specialty
Chemicals Sr. Sub. Notes
144A
9.50%................... 08/01/07 $ 20 $ 20,600
Sterling Chemicals
Holdings Sr. Disc. Notes
[STEP]
12.408%................. 08/15/08 35 23,756
Trikem SA 144A
10.625%................. 07/24/07 15 13,687
------------
1,046,193
------------
CLOTHING & APPAREL -- 0.0%
GFSI, Inc. Sr. Sub. Notes
Cl-B
9.625%.................. 03/01/07 10 10,300
Glenoit Corp. Sr. Sub.
Notes 144A
11.00%.................. 04/15/07 10 10,775
Sassco Fashions Ltd. Sr.
Notes
12.75%.................. 03/31/04 25 26,562
Worldtex, Inc. Senior
Notes 144A
9.625%.................. 12/15/07 10 10,300
------------
57,937
------------
COMPUTER SERVICES & SOFTWARE -- 0.0%
DecisionOne Corp. Sr. Sub.
Notes
9.75%................... 08/01/07 5 5,212
Printpack, Inc. Sr. Notes
9.875%.................. 08/15/04 25 26,625
------------
31,837
------------
CONGLOMERATES -- 0.5%
Perez Companc SA 144A
9.00%................... 01/30/04 15 15,337
Philip Morris Co., Inc.
Debs.
7.50%................... 01/15/02 425 440,406
7.50%................... 04/01/04 710 745,500
7.75%................... 01/15/27 480 520,200
------------
1,721,443
------------
CONSTRUCTION -- 0.0%
Altos Hornos de Mexico
11.875%................. 04/30/04 15 15,675
American Architectural Sr.
Notes 144A
11.75%.................. 12/01/07 10 10,050
MDC Holdings Notes Cl-B
11.125%................. 12/15/03 25 27,688
Newport News Shipbuilding,
Inc. Sr. Notes
8.625%.................. 12/01/06 20 21,100
------------
74,513
------------
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
CONSUMER PRODUCTS & SERVICES -- 0.1%
Alaris Medical Systems Sr.
Notes
9.75%................... 12/01/06 $ 40 $ 41,850
Consumers International
Corp. Sr. Notes 144A
10.25%.................. 04/01/05 10 10,950
Foamex L.P. Sr. Sub. Notes
9.875%.................. 06/15/07 10 10,100
French Fragrances, Inc.
Sr. Notes
10.375%................. 05/15/07 10 10,550
Herff Jones, Inc. Sr. Sub.
Notes
11.00%.................. 08/15/05 45 48,825
MacAndrews & Forbes Debs.
13.00%.................. 03/01/99 100 100,000
Pierce Leahy Corp. Sr.
Sub. Notes
11.125%................. 07/15/06 3 3,405
Polymer Group Holdings
Notes
10.75%.................. 11/15/06 35 37,275
Polymer Group Holdings Sr.
Sub. Notes
9.00%................... 07/01/07 15 15,000
------------
277,955
------------
CONTAINERS & PACKAGING -- 0.0%
AEP Industries, Inc. Sr.
Sub. Notes 144A
9.875%.................. 11/15/07 15 15,450
Huntsman Packaging Corp.
Sr. Sub. Notes 144A
9.125%.................. 10/01/07 15 15,488
Owens-Illinois, Inc. Sr.
Notes
8.10%................... 05/15/07 20 21,450
Riverwood International
Co. Notes
10.25%.................. 04/01/06 50 50,375
10.875%................. 04/01/08 10 9,650
Stone Container Corp.
First Mtge.
10.75%.................. 10/01/02 5 5,175
------------
117,588
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Celestica International
Sr. Sub. Notes
10.50%.................. 12/31/03 20 21,700
Details, Inc. Sr. Sub.
Notes 144A
10.00%.................. 11/15/05 15 15,413
DII Group, Inc. Sr. Sub.
Notes 144A
8.50%................... 09/15/07 10 9,850
PAR
MATURITY (000) VALUE
--------- -------- ------------
Flextronics International
Ltd. Sr. Sub. Notes 144A
8.75%................... 10/15/07 $ 10 $ 9,975
HCC Industries, Inc. Sr.
Sub. Notes
10.75%.................. 05/15/07 15 15,600
Pioneer Americas
Acquistics Sr. Notes
9.25%................... 06/15/07 10 10,025
Raytheon Co. Notes
6.45%................... 08/15/02 905 912,919
RCN Corp. Sr. Notes 144A
10.00%.................. 10/15/07 10 10,325
Tracor, Inc. Sr. Sub.
Notes
8.50%................... 03/01/07 5 5,075
Viasystems, Inc. Sr. Sub.
Notes
9.75%................... 06/01/07 10 10,337
Wavetek Corp. Sr. Sub.
Notes
10.125%................. 06/15/07 10 10,388
------------
1,031,607
------------
ENTERTAINMENT &
LEISURE -- 0.7%
AMC Entertainment, Inc.
Sr. Sub. Notes
9.50%................... 03/15/09 40 41,450
Boyd Gaming Corp. Sr. Sub.
Notes
9.50%................... 07/15/07 50 52,625
Cinemark USA, Inc. Sr.
Sub. Notes
9.625%.................. 08/01/08 65 67,600
Coast Hotels & Casino
Notes Cl-B
13.00%.................. 12/15/02 55 62,150
Colorado Gaming &
Entertainment Corp.
[PIK]
12.00%.................. 06/01/03 159 172,190
Fitzgeralds Gaming Corp.
Sr. Sub. Notes 144A
12.25%.................. 12/15/04 40 40,400
Fox Kids Worldwide, Inc.
Sr. Disc. Notes [STEP]
144A
10.675%................. 11/01/07 40 23,800
Fox Kids Worldwide, Inc.
Sr. Notes 144A
9.25%................... 11/01/07 50 48,500
Greate Bay Property
Funding First Mtge.
10.875%................. 01/15/04 25 21,250
Lady Luck Gaming First
Mtge.
11.875%................. 03/01/01 45 45,900
Louisiana Casino Cruises
First Mtge.
11.50%.................. 12/01/98 100 101,750
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
Mohegan Tribal Gaming Cl-B
Sr. Notes
13.50%.................. 11/15/02 $ 30 $ 38,813
Players International Sr.
Notes
10.875%................. 04/15/05 25 27,000
Premier Parks Corp. Sr.
Notes Cl-A
12.00%.................. 08/15/03 40 44,500
Showboat Marina Casinos
First Mtge.
13.50%.................. 03/15/03 25 29,750
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
10.324%................. 06/15/05 90 94,050
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 385 403,769
8.875%.................. 10/01/12 425 501,500
8.375%.................. 07/15/33 590 674,813
------------
2,491,810
------------
ENVIRONMENTAL SERVICES -- 0.3%
Allied Waste Industries
Sr. Disc. Notes [STEP]
9.57%................... 06/01/07 50 35,313
Allied Waste North America
Notes
10.25%.................. 12/01/06 35 38,325
WMX Technologies, Inc.
Notes
7.10%................... 08/01/26 925 967,781
------------
1,041,419
------------
EQUIPMENT SERVICES -- 0.0%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 10 11,075
------------
FINANCIAL-BANK & TRUST -- 1.2%
Allstate Financing II
7.83%................... 12/01/45 125 131,719
Banponce Corp. Medium-Term
Notes
7.125%.................. 05/02/02 410 421,788
Chevy Chase Savings Bank
Sub. Debs.
9.25%................... 12/01/05 45 46,238
Dime Capital Trust I Cl-A
9.33%................... 05/06/27 10 11,313
First Nationwide Holdings
Sr. Notes
12.50%.................. 04/15/03 55 62,700
First Nationwide Holdings
Sr. Sub. Notes
10.625%................. 10/01/03 35 39,200
Greenpoint Bank Sr. Notes
6.70%................... 07/15/02 290 291,813
PAR
MATURITY (000) VALUE
--------- -------- ------------
Greenpoint Capital Trust I
9.10%................... 06/01/27 $ 10 $ 11,038
Korea Development Bank
Notes
7.125%.................. 09/17/01 25 20,344
7.90%................... 02/01/02 350 301,875
Long Island Savings Bank
Notes
7.00%................... 06/13/02 690 703,800
Merita Bank Ltd. Sub.
Notes
6.50%................... 01/15/06 500 497,500
North Fork Bancorp
8.70%................... 12/15/26 5 5,363
Peoples Bank-Bridgeport
Sub. Notes
7.20%................... 12/01/06 305 311,481
Provident Capital Trust
8.60%................... 12/01/26 20 21,300
Riggs Capital Trust 144A
8.625%.................. 12/31/26 15 15,919
Societe Generale 144A
7.85%................... 04/30/07 130 136,988
Sovereign Capital Trust I
Capital Securities
9.00%................... 04/01/27 15 16,297
St. Paul Bancorp. Sr.
Notes
7.125%.................. 02/15/04 350 357,875
State Development Bank of
China Notes
7.375%.................. 02/01/07 495 493,763
Swedbank Sub. Notes 144A
7.50%................... 11/29/49 360 369,263
Williams Scotsman, Inc.
Sr. Notes
9.875%.................. 06/01/07 15 15,525
------------
4,283,102
------------
FINANCIAL SERVICES -- 3.1%
Aames Financial Corp. Sr.
Notes
9.125%.................. 11/01/03 40 39,400
AFC Capital Trust I Cl-B
8.207%.................. 02/03/27 270 300,038
American General Institute
Capital Trust Co.
Guarantee 144A
8.125%.................. 03/15/46 765 845,325
APP Global Finance V Ltd.
[CVT] 144A
2.00%................... 07/25/00 20 16,800
CIA Latino Americana 144A
11.625%................. 06/01/04 10 10,000
Colonial Capital I Notes
Guaranteed
8.92%................... 01/15/27 15 16,481
Commercial Credit Notes
7.75%................... 03/01/05 430 463,325
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
Consorcio Equatoriano
Notes 144A
14.00%.................. 05/01/02 $ 10 $ 10,163
Contifinancial Corp. Sr.
Notes
8.375%.................. 08/15/03 45 47,475
Delta Financial Corp. Sr.
Notes
9.50%................... 08/01/04 15 15,000
Dine S.A. de C.V. 144A
8.75%................... 10/05/07 10 9,700
Dollar Financial Group Sr.
Notes
10.875%................. 11/15/06 15 16,069
Esat Holdings Ltd. [STEP]
10.565%................. 02/01/07 35 24,675
First Financial Caribbean
Corp. Sr. Notes
7.84%................... 10/10/06 200 208,500
Firstar Bank Milwaukee Sr.
Notes
6.25%................... 12/01/02 380 380,000
FRD Acquisition Sr. Notes
Cl-B
12.50%.................. 07/15/04 10 10,850
General Motor Acceptance
Corp. Medium-Term Notes
6.40%................... 05/19/99 835 839,175
Hartford Life Notes
7.10%................... 06/15/07 450 464,063
Imperial Credit Capital
Trust I 144A
10.25%.................. 06/14/02 20 19,800
Imperial Credit
Industries, Inc. Sr.
Notes
9.875%.................. 01/15/07 20 19,700
Intertek Finance PLC Sr.
Sub. Notes Cl-B
10.25%.................. 11/01/06 25 26,188
Isle of Capri Capital
Corp. 144A
13.00%.................. 08/31/04 10 10,138
Lehman Brothers Holdings,
Inc. Notes
6.40%................... 12/27/99 465 467,325
6.50%................... 10/01/02 550 551,375
Merrill Lynch & Co., Inc.
Medium-Term Notes
6.25%................... 09/02/99 1,835 1,841,881
Netia Holdings B.V. Sr.
Series 144A
10.25%.................. 11/01/07 10 9,475
Ocwen Capital Trust I
10.875%................. 08/01/27 10 10,838
Pindo Deli Financial
Mauritius 144A
10.75%.................. 10/01/07 25 21,500
PAR
MATURITY (000) VALUE
--------- -------- ------------
Quebec Province Debs.
7.125%.................. 02/09/24 $ 1,320 $ 1,364,550
Railcar Leasing LLC 144A
6.75%................... 07/15/06 653 663,153
Salomon, Inc. Sr. Notes
7.30%................... 05/15/02 465 479,885
Southern Investments UK
Sr. Notes
6.80%................... 12/01/06 790 805,800
The Money Store, Inc.
Notes
8.05%................... 04/15/02 710 736,625
Tjiwi Kimia Financial
Mauritius 144A
10.00%.................. 08/01/04 25 20,750
Travelers Capital II Corp.
7.75%................... 12/01/36 160 169,200
Vicap SA 144A
10.25%.................. 05/15/02 20 20,900
Webster Capital Trust I
144A
9.36%................... 01/29/27 10 11,175
------------
10,967,297
------------
FOOD -- 0.1%
Ameriserv Food Distributor
Notes
8.875%.................. 10/15/06 20 20,250
Ameriserv Food Distributor
Sr. Sub. Notes
10.125%................. 07/15/07 5 5,250
Aurora Foods, Inc. Sr.
Sub. Notes Cl-B
9.875%.................. 02/15/07 10 10,550
Chiquita Brands Sr. Notes
9.625%.................. 01/15/04 10 10,650
Del Monte Corp. Sr. Sub.
Notes Cl-B
12.25%.................. 04/15/07 10 10,788
Southern Foods Sr. Sub.
Notes 144A
9.875%.................. 09/01/07 10 10,388
Stater Brothers Holdings
Sr. Sub. Notes
9.00%................... 07/01/04 70 72,975
Stater Brothers, Inc. Sr.
Notes
11.00%.................. 03/01/01 100 110,000
Windy Hill Pet Food Co.
Sr. Sub. Notes
9.75%................... 05/15/07 5 5,213
------------
256,064
------------
FURNITURE -- 0.0%
Sealy Mattress Co. Sr.
Disc. Notes [STEP] 144A
10.561%................. 12/15/07 15 9,113
------------
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
HEALTHCARE SERVICES -- 0.3%
Genesis Eldercare Co. Sr.
Sub. Notes 144A
9.00%................... 08/01/07 $ 20 $ 19,650
Genesis Health Ventures,
Inc. Sr. Sub. Notes
9.25%................... 10/01/06 45 46,013
Integrated Health
Services, Inc. Sr. Sub.
Notes 144A
9.25%................... 01/15/08 30 30,600
9.50%................... 09/15/07 25 25,813
Kinetic Concepts, Inc. Sr.
Sub. Notes 144A
9.625%.................. 11/01/07 10 10,175
Manor Care, Inc. Sr. Notes
7.50%................... 06/15/06 305 324,063
Merit Behavioral Care Sr.
Sub. Notes
11.50%.................. 11/15/05 40 46,150
National Health Investors,
Inc.
7.30%................... 07/16/07 295 308,275
Paracelsus Healthcare
Corp. Sr. Sub. Notes
10.00%.................. 08/15/06 40 41,100
Paragon Health Networks
Sr. Sub. Notes 144A
9.50%................... 11/01/07 50 50,125
Tenet Healthcare Corp. Sr.
Sub. Notes
8.00%................... 01/15/05 75 76,406
Urohealth Systems, Inc.
Sr. Sub. Notes
12.50%.................. 04/01/04 30 28,763
------------
1,007,133
------------
HOTELS & MOTELS -- 0.0%
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 40 42,600
Prime Hospitality Corp.
First Mtge.
9.25%................... 01/15/06 50 53,188
Prime Hospitality Corp.
Sr. Sub. Notes
9.75%................... 04/01/07 35 37,625
------------
133,413
------------
INDUSTRIAL PRODUCTS -- 0.1%
Carson, Inc. Sr. Sub.
Notes 144A
10.375%................. 11/01/07 20 20,425
Cellnet Data Systems, Inc.
Sr. Disc. Notes [STEP]
144A
14.63%.................. 10/01/07 95 47,500
PAR
MATURITY (000) VALUE
--------- -------- ------------
Concentric Network Corp.
Sr. Notes 144A
12.75%.................. 12/15/07 $ 10 $ 10,275
Continental Global Group
Sr. Notes Cl-B
11.00%.................. 04/01/07 25 26,750
FWT, Inc. Sr. Sub. Notes
144A
9.875%.................. 11/15/07 15 15,413
Hedstrom Corp. Sr. Sub.
Notes
10.00%.................. 06/01/07 15 15,150
Hedstrom Holdings, Inc.
Sr. Disc. Notes
11.788%................. 06/01/09 5 3,044
ITC Deltacom, Inc. Sr.
Notes
11.00%.................. 06/01/07 30 33,150
Jones Intercable, Inc. Sr.
Sub. Notes
9.625%.................. 03/15/02 50 53,688
Knology Holdings, Inc.
Units [STEP] 144A
12.425%................. 10/15/07 45 24,750
PCI Chemicals Canada, Inc.
Sr. Notes 144A
9.25%................... 10/15/07 50 50,063
Pharmaceutical Fine
Chemicals Sr. Sub. Notes
144A
9.75%................... 11/15/07 10 10,150
TransAmerican Refining
Corporation Units 144A
16.00%.................. 06/30/03 20 20,400
Unisys Corp. Sr. Sub.
Debs.
9.75%................... 09/15/16 75 75,281
------------
406,039
------------
INSURANCE -- 0.5%
Aegon NV Sub. Notes
8.00%................... 08/15/06 1,155 1,276,275
Conseco, Inc. Sr. Notes
10.50%.................. 12/15/04 430 515,463
------------
1,791,738
------------
MACHINERY & EQUIPMENT -- 0.1%
Agco Corp. Sr. Sub. Notes
8.50%................... 03/15/06 40 41,100
Johnstown America
Industries, Inc. Sr.
Sub. Notes Cl-C
11.75%.................. 08/15/05 15 16,500
Millipore Corp. Notes
7.20%................... 04/01/02 340 349,775
------------
407,375
------------
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.0%
Fresenius Medical Care AG
Guaranteed
9.00%................... 12/01/06 $ 20 $ 20,900
Graphic Controls Corp. Sr.
Sub. Notes Cl-A
12.00%.................. 09/15/05 35 39,113
------------
60,013
------------
METALS & MINING -- 0.3%
Acindar Industria
Argentina de Aceros SA
11.25%.................. 02/15/04 10 9,850
AK Steel Corp. Sr. Notes
9.125%.................. 12/15/06 30 30,900
Anker Coal Group, Inc. Sr.
Notes 144A
9.75%................... 10/01/07 10 10,000
Freeport-McMoran C&G Sr.
Notes
7.50%................... 11/15/06 125 125,469
Hylsa SA de CV 144A
9.25%................... 09/15/07 30 30,000
Noranda, Inc. Debs.
7.00%................... 07/15/05 680 694,450
Potash Corp. Notes
7.125%.................. 06/15/07 300 310,125
WCI Steel, Inc. Sr. Notes
Cl-B
10.00%.................. 12/01/04 35 35,963
------------
1,246,757
------------
OFFICE EQUIPMENT -- 0.0%
Axiohm Transaction
Solutions, Inc. Sr. Sub.
Notes 144A
9.75%................... 10/01/07 10 10,175
United Stationery Supply
Sr. Sub. Notes
12.75%.................. 05/01/05 3 3,341
------------
13,516
------------
OIL & GAS -- 0.6%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%.................. 11/01/04 25 27,250
Citgo Petroleum Corp. Sr.
Notes
7.875%.................. 05/15/06 170 182,750
Dailey International, Inc.
Notes 144A
9.75%................... 08/15/07 5 5,231
Flores & Rucks, Inc. Sr.
Sub. Notes
9.75%................... 10/01/06 40 44,000
Newpark Resources, Inc.
Sr. Sub. Notes 144A
8.625%.................. 12/15/07 10 10,200
PAR
MATURITY (000) VALUE
--------- -------- ------------
Pacalta Resource Ltd. Sr.
Notes Cl-B
10.75%.................. 06/15/04 $ 10 $ 9,900
Panaco, Inc. Sr. Notes
144A
10.625%................. 10/01/04 10 10,075
Panda Global Energy Co.
Sr. Notes
12.50%.................. 04/15/04 10 9,300
Parker Drilling Corp.
Notes
9.75%................... 11/15/06 30 32,400
Petroleum Geo-Services
Notes
7.50%................... 03/31/07 175 185,500
Petsec Energy, Inc. Sr.
Sub. Notes Cl-B
9.50%................... 06/15/07 35 36,050
Pogo Producing Co. Sr.
Sub. Notes Cl-B
8.75%................... 05/15/07 5 5,069
Pride Petroleum Services,
Inc. Sr. Notes
9.375%.................. 05/01/07 15 16,163
Saga Petroleum ASA Debs.
7.25%................... 09/23/27 325 338,813
Snyder Oil Corp. Sr. Sub.
Notes
8.75%................... 06/15/07 15 15,225
Transamerican Energy Sr.
Disc. Notes [STEP] 144A
14.045%................. 06/15/02 160 128,000
Transamerican Energy Sr.
Notes 144A
11.50%.................. 06/15/02 70 68,775
Transtexas Gas Corp. Sr.
Sub. Notes Cl-D
13.75%.................. 12/31/01 75 83,906
Wiser Oil Co. Sr. Sub.
Notes
9.50%................... 05/15/07 10 9,800
YPF Sociedad Anonima
7.75%................... 08/27/07 920 933,800
------------
2,152,207
------------
PAPER & FOREST
PRODUCTS -- 0.0%
Florida Coast Paper LLC
First Mtge.
12.75%.................. 06/01/03 35 37,275
Maxxam Group Holdings,
Inc. Sr. Notes
12.00%.................. 08/01/03 5 5,431
Radnor Holdings Sr. Notes
10.00%.................. 12/01/03 5 5,200
------------
47,906
------------
PHARMACEUTICALS -- 0.0%
ICN Pharmaceuticals, Inc.
Sr. Notes Cl-B
9.25%................... 08/15/05 15 15,938
------------
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
PRINTING & PUBLISHING -- 0.0%
America Media Operation
Sr. Sub. Notes
11.625%................. 11/15/04 $ 40 $ 43,400
Garden State Newspapers,
Inc. Sr. Sub. Notes 144A
8.75%................... 10/01/09 10 10,050
Hollinger International
Publishing Co. Notes
8.625%.................. 03/15/05 15 15,544
9.25%................... 03/15/07 15 15,825
Von Hoffman Press, Inc.
Sr. Sub. Notes 144A
10.375%................. 05/15/07 10 10,688
------------
95,507
------------
RAILROADS -- 0.6%
Norfolk Southern Corp.
6.95%................... 05/01/02 425 437,750
7.80%................... 05/15/27 815 924,006
7.05%................... 05/01/37 755 801,244
TFM SA de CV 144A
10.25%.................. 06/15/07 10 10,300
TFM SA de CV 144A [STEP]
11.135%................. 06/15/09 50 31,750
------------
2,205,050
------------
REAL ESTATE -- 0.0%
Continental Homes Holding
Corp. Sub. Notes
10.00%.................. 04/15/06 15 16,200
HMH Properties, Inc. Sr.
Notes Cl-B
8.875%.................. 07/15/07 25 26,375
------------
42,575
------------
RESORTS -- 0.0%
Club Regina Resorts Inc.
Sr. Notes 144A
13.00%.................. 12/01/04 20 20,500
------------
RETAIL & MERCHANDISING -- 0.3%
Federated Department
Stores Sr. Notes
8.50%................... 06/15/03 720 785,700
Fleming Co., Inc. Sr. Sub.
Notes. 144A
10.50%.................. 12/01/04 20 21,000
Ralph's Grocery Co.
10.45%.................. 06/15/04 5 5,625
Rite Aid Corp. Notes
6.70%................... 12/15/01 170 172,763
Southland Corp. Sr. Sub.
Debs. Cl-A
4.50%................... 06/15/04 95 77,188
Specialty Retailer Group,
Inc. Sr. Notes Cl-B
8.50%................... 07/15/05 10 10,200
PAR
MATURITY (000) VALUE
--------- -------- ------------
William Carter Holdings
Sr. Sub. Notes 144A
12.00%.................. 10/01/08 $ 20 $ 20,975
Zale Corp. Sr. Notes 144A
8.50%................... 10/01/07 20 19,800
------------
1,113,251
------------
SEMICONDUCTORS -- 0.0%
Fairchild Semiconductor
Sr. Sub. Notes
10.125%................. 03/15/07 75 79,313
Fairchild Semiconductor
Sr. Sub. Notes [PIK]
144A.................... 03/15/07 25 25,750
International Semi-Tech
Microelectronics Sr.
Disc. Notes [STEP]
25.644%................. 08/15/03 50 19,000
------------
124,063
------------
STEEL -- 0.0%
Armco, Inc. Sr. Notes
9.00%................... 09/15/07 10 9,825
------------
TELECOMMUNICATIONS -- 1.5%
Adelphia Communications
Corp. Cl-B Sr. Notes
10.25%.................. 07/15/00 10 10,450
American Communications
Services, Inc. Sr. Notes
144A
13.75%.................. 07/15/07 15 17,775
Benedek Communications Sr.
Disc. Notes [STEP]
10.871%................. 05/15/06 75 57,188
BTI Telecom Corp. Sr.
Notes 144A
10.50%.................. 09/15/07 20 20,500
Centennial Cellular Sr.
Notes
8.875%.................. 11/01/01 25 25,500
Century Communications
Corp. Sr. Notes
9.50%................... 03/01/05 35 36,925
Cia Telecom Chile Notes
7.625%.................. 07/15/06 995 1,019,875
Comcast Cellular Holdings
Sr. Notes C1-B
9.50%................... 05/01/07 45 47,138
Comcast U.K. Cable Corp.
Debs. [STEP]
9.659%.................. 11/15/07 60 49,275
Comcast U.K. Cable Corp.
Sr. Sub. Debs.
9.50%................... 01/15/08 25 26,625
Commodore Media, Inc. Sr.
Sub. Notes [STEP]
9.958%.................. 05/01/03 80 89,200
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
Diamond Cable
Communications PLC Sr.
Disc. Notes [STEP]
10.383%................. 12/15/05 $ 60 $ 46,800
Dobson Communications
Corp. Sr. Notes
11.75%.................. 04/15/07 40 42,300
Esprit Telecom Group PLC
Sr. Notes
11.50%.................. 12/15/07 10 10,300
Globalstar LP/Capital Sr.
Notes
11.375%................. 02/15/04 45 45,450
Hermes Europe Railtel BV
Sr. Notes 144A
11.50%.................. 08/15/07 10 11,100
Innova S de R.L. Sr. Notes
12.875%................. 04/01/07 30 30,450
Intercel, Inc. Sr. Disc.
Notes [STEP]
11.243%................. 02/01/06 70 51,363
Intermedia Communications,
Inc. Sr. Notes 144A
8.50%................... 01/15/08 25 25,063
8.875%.................. 11/01/07 85 87,763
International Cabletel,
Inc. Sr. Notes [STEP]
10.102%................. 02/01/06 65 50,538
Iridium LLC Capital Corp.
Sr. Notes Cl-B
14.00%.................. 07/15/05 55 60,363
Iridium LLC Capital Corp.
Sr. Notes 144A
11.25%.................. 07/15/05 10 9,900
Jacor Communications Co.
Notes
9.75%................... 12/15/06 10 10,775
JCAC Communications, Inc.
Sr. Sub. Notes
10.125%................. 06/15/06 45 49,050
Jones Intercable Sr. Sub.
Debs.
10.50%.................. 03/01/08 30 32,850
Kitty Hawk, Inc. Senior
Notes 144A
9.95%................... 11/15/04 20 20,450
L-3 Communications Corp.
Sr. Sub. Notes Cl-B
10.375%................. 05/01/07 20 21,700
LCI International, Inc.
Sr. Notes
7.25%................... 06/15/07 610 634,400
Marcus Cable Operating Co.
Sr. Disc. Notes [STEP]
10.86%.................. 08/01/04 50 46,500
McCaw International Ltd.
Sr. Disc. Notes [STEP]
12.942%................. 04/15/07 10 5,850
PAR
MATURITY (000) VALUE
--------- -------- ------------
McLeod USA, Inc. Sr. Disc.
Notes [STEP]
9.111%.................. 03/01/07 $ 55 $ 40,013
Metronet Communications
Corp. Sr. Disc. Notes
[STEP] 144A
10.557%................. 11/01/07 10 6,125
Millicom International
Cellular S.A. Sr. Disc.
Notes [STEP]
11.314%................. 06/01/06 80 59,400
Mobile Telecommunications
Corp. Sr. Notes
13.50%.................. 12/15/02 20 23,300
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
11.50%.................. 09/01/03 5 4,950
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
10.032%................. 08/15/04 205 182,450
Omnipoint Corp. Sr. Notes
11.625%................. 08/15/06 25 26,500
Orbcomm Global LP Cl-B Sr.
Notes
14.00%.................. 08/15/04 40 43,600
Pegasus Media &
Communications, Inc.
Notes
12.50%.................. 07/01/05 45 51,413
PriCellular Wireless Sr.
Notes
10.75%.................. 11/01/04 40 43,500
Qwest Communications
International, Inc. Sr.
Disc. Notes [STEP] 144A
8.792%.................. 10/15/07 20 13,600
Radio One, Inc.
7.00%................... 05/15/04 10 9,675
Radnor Holdings, Inc. Sr.
Notes
10.00%.................. 12/01/03 10 10,400
RCN Corp. Sr. Disc. Notes
[STEP] 144A
10.443%................. 10/15/07 40 25,200
Rogers Cablesystems Ltd.
Notes
11.00%.................. 12/01/15 60 69,600
South Korea Telecom
7.75%................... 04/29/04 185 143,838
TCI Satellite
Entertainment Sr. Sub.
Notes 144A
10.875%................. 02/15/07 5 5,300
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
8.776%.................. 07/01/07 40 32,800
|
PAR
MATURITY (000) VALUE
--------- -------- ------------
Telesystem International
Wireless, Inc. Sr. Disc.
Notes [STEP] 144A
11.621%................. 11/01/07 $ 10 $ 5,550
Transtel SA Sr. Notes 144A
12.50%.................. 11/01/07 15 14,100
U.S. West Capital Funding
Inc. Notes
6.95%................... 01/15/37 710 732,188
UIH Australia/Pacific Inc.
Sr. Disc. Notes [STEP]
144A
12.83%.................. 05/15/06 50 34,250
Viacom, Inc. Sub. Debs.
8.00%................... 07/07/06 40 40,200
WinStar Communications,
Inc. 144A
15.0%................... 03/01/07 30 31,200
Worldcom, Inc. Sr. Notes
7.75%................... 01/01/07 965 1,037,375
------------
5,379,943
------------
TRANSPORTATION -- 0.0%
Atlantic Express Sr. Notes
144A
10.75%.................. 02/01/04 10 10,625
Chemical Leaman Corp. Sr.
Notes
10.375%................. 06/15/05 10 10,500
Eletson Holdings, Inc.
Mortgage Notes
9.25%................... 11/15/03 50 51,188
Trico Marine Services Sr.
Notes 144A
8.50%................... 08/01/05 10 10,075
------------
82,388
------------
UTILITIES -- 1.0%
AES China Generating Co.
Ltd. Sr. Notes
10.125%................. 12/15/06 10 9,725
AES Corp. Sr. Sub. Notes
8.375%.................. 08/15/07 20 20,000
Arizona Public Service Sr.
Notes
6.75%................... 11/15/06 415 423,819
Baltimore Gas & Electric
Medium-Term Notes
6.90%................... 02/01/05 705 730,556
Cleveland Electric
Illumination Co. First
Mtge. Cl-B
9.50%................... 05/15/05 25 27,906
Coho Energy, Inc. Sr. Sub.
Notes
8.875%.................. 10/15/07 10 10,050
Columbia Gas Systems, Inc.
Debs.
6.61%................... 11/28/02 480 487,800
Connecticut Light & Power
First Mtge.
7.875%.................. 06/01/01 290 299,425
PAR
MATURITY (000) VALUE
--------- -------- ------------
El Paso Electric Co. First
Mtge. Cl-E
9.40%................... 05/01/11 $ 10 $ 11,375
Enersis SA Notes
7.40%................... 12/01/16 520 540,800
6.60%................... 12/01/26 220 222,200
Espirito Santo Centrais
Sr. Notes 144A
10.00%.................. 07/15/07 15 13,650
Illinova Corp. Notes
7.125%.................. 02/01/04 385 393,663
Long Island Lighting Debs.
9.00%................... 11/01/22 40 44,550
Niagara Mohawk Power Corp.
Notes
9.95%................... 06/01/00 50 50,028
Northeast Utilities System
Notes
8.38%................... 03/01/05 31 30,667
8.58%................... 12/01/06 9 8,918
------------
3,325,132
------------
TOTAL CORPORATE OBLIGATIONS
(COST $45,043,997).......... 46,516,304
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 12.5%
FEDERAL HOME LOAN MORTGAGE CORP. -- 5.8%
5.77%................... 01/09/98 10,000 9,987,178
5.62%................... 01/14/98 5,000 4,989,853
5.72%................... 01/14/98 5,000 4,989,672
9.50%................... 05/01/05 386 406,766
8.50%................... 06/01/27 387 403,836
------------
20,777,305
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION. -- 1.9%
5.50%.......... 02/01/11-05/01/11 2,743 2,652,489
6.50%.......... 02/01/26-07/01/26 1,058 1,045,216
7.00%.......... 03/18/02-10/01/27 1,974 1,991,020
7.50%.......... 10/15/23-06/01/27 188 192,693
8.50%.................. 10/15/08 949 1,000,620
------------
6,882,038
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 4.8%
6.50%.................. 08/01/25 86 84,585
6.875%......... 11/20/21-10/20/25 1,294 1,324,673
7.00%.......... 08/15/10-11/15/25 3,028 3,076,573
7.375%......... 05/20/24-06/20/26 895 915,999
7.50%.......... 10/15/26-10/15/27 5,850 5,996,958
10.00%................. 06/15/13 498 543,538
5.50% [TBA]............ 02/16/28 2,930 2,926,338
5.50% [TBA]............ 03/15/28 585 584,269
6.00% [TBA]............ 01/16/28 685 661,881
7.00% [VR]............. 09/20/23 58 59,214
7.00% [TBA]............ 01/16/28 615 623,639
7.375% [VR]............ 04/20/23 310 317,748
------------
17,115,415
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $44,591,767).................. 44,774,758
------------
|
PAR
MATURITY (000) VALUE
-------- -------- ------------
U.S. TREASURY OBLIGATIONS -- 7.4%
U.S. TREASURY BILLS -- 0.5%
5.205%#................ 01/22/98 $1,930 $ 1,924,392
------------
U.S. TREASURY BONDS -- 2.4%
6.625%................. 02/15/27 1,270 1,378,522
6.375%................. 08/15/27 6,670 7,042,652
------------
8,421,174
------------
U.S. TREASURY NOTES -- 4.5%
5.625%................. 10/31/99 3,305 3,302,720
6.25%.................. 06/30/02 7,405 7,555,618
5.75%.................. 10/31/02 2,920 2,923,387
5.75%.................. 11/30/02 1,900 1,902,280
6.125%................. 08/15/07 520 534,596
------------
16,218,601
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $26,014,713).................. 26,564,167
------------
COLLATERALIZED MORTGAGE & ASSET-BACKED OBLIGATIONS -- 3.2%
Advanta Mtge. Loan Trust
1997-2 Cl-A2
7.05%.................. 05/25/21 805 815,319
Advanta Mtge. Loan Trust
Series 1997-3 Cl-A3
6.69%.................. 04/25/17 655 659,557
Amresco Residential
Securities Mtge. Loan
Trust Series 1997-3
Cl-A3
6.60%.................. 01/25/18 440 441,925
Capital Equipment
Receivables Trust
Series 1996-1 Cl-A4
6.28%.................. 06/15/00 600 601,380
Carco Auto Loan Master
Trust Series 1997-1
Cl-A
6.689%................. 08/15/06 615 618,801
CMAC 97-Ml1 Cl-A2
6.57%.................. 12/15/30 255 257,231
CMAC 97-Ml1 Cl-A3
6.57%.................. 12/15/30 700 705,906
Federal National Mtge.
Assoc. REMIC Series
1989-71 Cl-J
8.50%.................. 10/25/19 880 953,150
Federal National Mtge.
Assoc. REMIC Series
1993-240 Cl-B
6.25%.................. 12/25/13 548 539,649
Federal National Mtge.
Assoc. REMIC Series
1997-61 Cl-ZC
7.00%.................. 02/25/23 317 310,818
First Union-Lehman Bros.
Commercial Mortgage
Series 1997-C2 Cl-A3
6.65%.................. 06/18/08 470 474,259
Green Tree Financial
Corp. Series 1997-2
Cl-A6
7.24%.................. 03/15/25 635 654,739
PAR
MATURITY (000) VALUE
-------- -------- ------------
Green Tree Financial
Corp. Series 1997-3
Cl-A4
6.93%.................. 07/15/28 $1,095 $ 1,124,154
Green Tree Recreational,
Equipment & Consumer
Trust Series 1997-B
Cl-A1
6.55%.................. 07/15/28 1,321 1,332,585
PNC Mtge. Securities
Corp. Series 1997-6
Cl-A2
6.60%.................. 01/01/00 551 554,811
Provident Bank Home
Equity Loan Trust
6.91%.................. 01/25/29 455 456,493
Securitized Asset Sales,
Inc.
6.808%................. 11/28/23 973 951,458
------------
TOTAL COLLATERALIZED MORTGAGE & ASSET-
BACKED OBLIGATIONS
(COST $11,286,177).................. 11,452,235
------------
SOVEREIGN ISSUES -- 0.0%
NETHERLANDS
Asia Pulp & Paper
International Finance
Co. Notes 11.75%
(COST $47,559)......... 10/01/05 45 41,625
------------
COMMERCIAL PAPER -- 2.8%
Corporate Receivables
Corp. 5.625% (COST
$9,982,583)............ 01/12/98 10,000 9,982,583
------------
REPURCHASE AGREEMENTS -- 3.7%
UBS Securities Funding, Inc.,
6.45% dated 12/31/97,
repurchase price
$13,089,689
(Collateralized by U.S.
Treasury Notes, par
value $9,787,000,
market value
$13,366,901, due
02/15/19)
(COST $13,085,000)..... 01/02/98 13,085 13,085,000
------------
SHARES
--------
SHORT-TERM INVESTMENTS -- 0.5%
Temporary Investment Cash
Fund .................. 877,099 877,099
Temporary Investment
Fund .................. 877,099 877,099
------------
(COST $1,754,198)........ 1,754,198
------------
TOTAL INVESTMENTS -- 100.5%
(COST $329,164,146)................. 359,223,570
------------
|
PAR
MATURITY (000) VALUE
-------- -------- ------------
SALE COMMITMENTS -- (0.1%)
Federal National Mortgage
Assoc. [TBA] 6.50%
(COST $(207,113)).......... 01/16/28 $210 $ (207,375)
LIABILITIES IN EXCESS OF
ASSETS -- (0.4%).................... (1,425,321)
------------
NET ASSETS -- 100.0%.................. $357,590,874
===========
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
---------------------------------------------------------------------------------------------
01/98 Buy JPY 327,231 $ 2,514 $ 2,518 $ 4
01/98 Buy FRF 219,328 36,893 36,561 (332)
02/98 Buy FRF 18,630,000 2,258,564 2,206,795 (51,769)
01/98 Buy GBP 20,014 33,388 32,918 (470)
01/98 Buy PTE 14,913,731 81,865 81,137 (728)
---------- ---------- ------
$2,413,224 $2,359,929 $(53,295)
========== ========== ===============
|
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
---------------------------------------------------------------------------------------------
01/98 Sell CHF 38,065 $ 26,121 $ 26,120 $ 1
02/98 Sell FRF 13,230,000 2,137,318 2,206,795 (69,477)
01/98 Sell ITL 64,667,366 36,553 36,836 (283)
06/98 Sell JPY 260,000,000 2,061,372 2,049,040 12,332
---------- ---------- ------
$4,261,364 $4,318,791 $(57,427)
========== ========== ===============
|
#Securities with an aggregate market value of $1,804,740 have been segregated with the custodian to cover margin requirements for the following open futures contracts at December 31, 1997:
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) DEPRECIATION
------------------------------------------------------------------------
FTSE 100 Index....................... 03/98 2,050 $ (5,386)
NASDAQ 100........................... 03/98 1,800 (166,950)
Russell 2000......................... 03/98 4,500 (29,925)
S & P 500............................ 03/98 5,750 (75,038)
U.S. Treasury 10 Year Note
(Shorted)........................... 03/98 (1,800) (12,188)
------------
$ (289,487)
=============
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 1.1% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
PAR
MATURITY (000) VALUE
--------- -------- -------------
CORPORATE OBLIGATIONS -- 88.9%
ADVERTISING -- 1.2%
Larmar Advertising Co.
Sr. Sub. Notes
9.625%.................. 12/01/06 $ 1,700 $ 1,840,250
Outdoor Systems, Inc.
Sr. Sub. Notes
8.875%.................. 06/15/07 3,025 3,176,250
-------------
5,016,500
-------------
AEROSPACE -- 0.1%
United Defense Sr. Sub.
Notes 144A
8.75%................... 11/15/07 600 606,750
-------------
AUTOMOTIVE PARTS -- 2.0%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%.................. 08/01/04 1,938 2,160,870
Delco Remy International,
Inc. Sr. Notes
8.625%.................. 12/15/07 400 407,000
Exide Corp. Sr. Notes
10.00%.................. 04/15/05 1,225 1,304,625
Lear Corp. Sub. Notes
9.50%................... 07/15/06 2,500 2,762,500
Lear Seating Sub. Notes
8.25%................... 02/01/02 550 560,312
Oxford Automotive, Inc.
Notes
10.125%................. 06/15/07 1,300 1,378,000
-------------
8,573,307
-------------
BROADCASTING -- 7.8%
Acme Television Finance
Sr. Disc. Notes [STEP]
144A
11.017%................. 09/30/04 3,100 2,297,875
Australis Media Ltd. Sr.
Disc. Notes [STEP]
28.52%.................. 05/15/03 6 2,214
Australis Media Ltd. Units
[STEP]
15.83%.................. 05/15/03 625 250,000
Capstar Radio Broadcasting
Sr. Sub. Notes
9.25%................... 07/01/07 1,000 1,032,500
Chancellor Media Corp.
Notes Cl-B
8.75%................... 06/15/07 600 610,500
Chancellor Media Corp.
Sr. Sub. Notes.
8.125%.................. 12/15/07 1,000 980,000
9.375%.................. 10/01/04 1,150 1,198,875
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
10.944%................. 03/15/04 4,525 3,823,625
PAR
MATURITY (000) VALUE
--------- -------- -------------
Fox Liberty Networks LLC
Sr. Notes 144A
8.875%.................. 08/15/07 $ 1,125 $ 1,127,812
Fox Liberty Networks LLC
Sr. Notes [STEP] 144A
9.728%.................. 08/15/07 4,825 3,112,125
Frontiervision Holdings
[STEP] 144A
10.243%................. 09/15/07 2,100 1,554,000
Heritage Media Corp.
Sr. Sub. Notes
8.75%................... 02/15/06 3,200 3,465,888
Katz Media Corp. Sr. Sub.
Notes Cl-B
10.50%.................. 01/15/07 1,700 1,878,500
NWCG Holding Corp.
Sr. Disc. Notes [ZCB]
5.614%.................. 06/15/99 300 275,415
SCI Television, Inc. Sr.
Notes
11.00%.................. 06/30/05 1,150 1,193,228
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%.................. 05/15/06 1,175 1,295,437
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%.................. 09/30/05 2,000 2,130,000
9.00%................... 07/15/07 2,000 2,030,000
8.75%................... 12/15/07 1,100 1,102,750
Sullivan Broadcasting
Holdings Co.
Sr. Sub. Notes
10.25%.................. 12/15/05 1,800 1,935,000
13.25%.................. 12/15/06 150 158,250
TCI Communications, Inc.
Sr. Notes
6.875%.................. 02/15/06 550 552,959
Young Broadcasting Corp.
Sr. Sub. Notes
11.75%.................. 11/15/04 250 278,125
10.125%................. 02/15/05 1,175 1,245,500
Young Broadcasting Corp.
Sr. Sub Notes Cl-B
9.00%................... 01/15/06 500 502,500
-------------
34,033,078
-------------
BUILDING MATERIALS -- 0.6%
American Builders &
Contractors Notes Cl-B
10.625%................. 05/15/07 1,175 1,224,937
Falcon Building Products
Sr. Sub. Notes
9.50%................... 06/15/07 350 358,750
Falcon Building Products
[STEP] Cl-B
9.855%.................. 06/15/07 1,500 1,001,250
-------------
2,584,937
-------------
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
BUSINESS SERVICES -- 1.3%
Coinmach Corporation
Sr. Notes Cl-C 144A
11.75%.................. 11/15/05 $ 1,200 $ 1,338,000
Dialog Corp. PLC Sr. Sub.
Notes 144A
11.00%.................. 11/15/07 2,425 2,528,062
Outsourcing Solutions
Corp. Sr. Sub. Notes
Cl-B
11.00%.................. 11/01/06 1,575 1,752,187
-------------
5,618,249
-------------
CAPITAL GOODS -- 0.8%
Buckeye Cellulos Corp.
Sr. Sub. Notes
8.50%................... 12/15/05 1,500 1,530,000
9.25%................... 09/15/08 1,750 1,828,750
-------------
3,358,750
-------------
CHEMICALS -- 2.8%
Foamex Capital Corp.
Sr. Sub Notes
13.50%.................. 08/15/05 500 572,500
Harris Chemical North
America Sr. Notes
10.25%.................. 07/15/01 1,850 1,961,000
ISP Holdings, Inc.
Sr. Notes Cl-B
9.75%................... 02/15/02 1,000 1,061,250
9.00%................... 10/15/03 1,475 1,535,844
Polymer Group Holdings Sr.
Sub. Notes Cl-B
9.00%................... 07/01/07 4,275 4,296,375
RBX Corp. Notes Cl-B
11.25%.................. 10/15/05 1,000 890,000
Sterling Chemicals
Holdings Sr. Disc. Notes
[STEP]
13.87%.................. 08/15/08 2,350 1,421,750
Uniroyal Technology Corp.
Sr. Notes
11.75%.................. 06/01/03 425 444,125
-------------
12,182,844
-------------
CLOTHING & APPAREL -- 2.2%
Brylane L.P. Sr. Sub.
Notes Cl-B
10.00%.................. 09/01/03 1,325 1,412,781
Dyersburg Corp. Guarantee
Cl-B
9.75%................... 09/01/07 1,725 1,798,312
GFSI, Inc. Sr. Sub. Notes
Cl-B
9.625%.................. 03/01/07 850 875,500
Glenoit Corp. Sr. Sub.
Notes 144A
11.00%.................. 04/15/07 1,650 1,782,000
Hosiery Corp. of America,
Inc. Sr. Sub. Notes
13.75%.................. 08/01/02 500 542,500
PAR
MATURITY (000) VALUE
--------- -------- -------------
Pillowtex Corp.
Sr. Sub. Notes
10.00%.................. 11/15/06 $ 1,950 $ 2,096,250
Pillowtex Corp. Sr. Sub.
Notes 144A
9.00%................... 12/15/07 850 875,500
-------------
9,382,843
-------------
COMPUTER SERVICES & SOFTWARE -- 0.3%
DecisionOne Corp.
Sr. Sub. Notes
9.75%................... 08/01/07 1,200 1,242,000
-------------
CONGLOMERATES -- 0.1%
Climachem, Inc.
Sr. Notes 144A
10.75%.................. 12/01/07 500 517,500
-------------
CONSTRUCTION -- 0.8%
American Architectural
Sr. Notes 144A
11.75%.................. 12/01/07 1,100 1,113,750
Building Materials Corp.
Sr. Notes 144A
8.00%................... 10/15/07 2,250 2,255,625
-------------
3,369,375
-------------
CONSUMER PRODUCTS & SERVICES -- 5.4%
American Safety Razor Co.
Sr. Notes
9.875%.................. 08/01/05 1,250 1,343,750
Amscan Holdings, Inc.
Sr. Sub. Notes 144A
9.875%.................. 12/15/07 550 565,125
Cabot Safety Corp.
Sr. Sub. Notes
12.50%.................. 07/15/05 1,500 1,687,500
Collins & Aikman
Floorcovering
Sr. Sub. Notes
10.00%.................. 01/15/07 1,025 1,081,375
Collins & Aikman Products
Sr. Sub. Notes
11.50%.................. 04/15/06 2,700 3,047,625
Herff Jones, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/05 550 600,875
NBTY, Inc. Sr. Sub. Notes
144A
8.625%.................. 09/15/07 2,350 2,361,750
Playtex Family Products
Corp. Sr. Sub. Notes
9.00%................... 12/15/03 2,100 2,142,000
Playtex Products, Inc.
Cl-B
8.875%.................. 07/15/04 350 358,750
Renaissance Cosmetics,
Inc. Sr. Notes
11.75%.................. 02/15/04 650 601,250
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Revlon Consumer Products
Corp. Sr. Notes Cl-B
9.375%.................. 04/01/01 $ 500 $ 517,500
10.50%.................. 02/15/03 1,375 1,457,500
Simmons Co. Sr. Sub. Notes
10.75%.................. 04/15/06 1,250 1,328,125
Syratech Corp. Sr. Notes
11.00%.................. 04/15/07 1,250 1,168,750
Westpoint Stevens, Inc.
Sr. Sub. Debs.
9.375%.................. 12/15/05 4,700 4,958,500
-------------
23,220,375
-------------
CONTAINERS & PACKAGING -- 1.5%
Container Corp. of America
Sr. Notes
9.75%................... 04/01/03 250 271,250
11.25%.................. 05/01/04 250 275,000
Four M Corp. Sr. Notes
12.00%.................. 06/01/06 1,300 1,384,500
Owens-Illinois, Inc. Sr.
Notes
8.10%................... 05/15/07 1,000 1,074,010
Plastic Containers, Inc.
Sr. Notes Cl-B
10.00%.................. 12/15/06 450 481,500
Stone Container Corp. Sr.
Notes
11.50%.................. 10/01/04 1,200 1,281,000
12.58% [VR]............. 08/01/16 1,550 1,712,750
-------------
6,480,010
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.0%
Advanced Micro Devices,
Inc. Sr. Notes
11.00%.................. 08/01/03 750 805,312
Amphenol Corp.
Sr. Sub. Notes
9.875%.................. 05/15/07 2,000 2,140,000
Electronic Retailing
Systems, Inc. Sr. Disc.
Notes [STEP]
15.94%.................. 02/01/04 875 586,250
Viasystems, Inc.
Sr. Sub. Notes
9.75%................... 06/01/07 725 752,187
-------------
4,283,749
-------------
ENTERTAINMENT &
LEISURE -- 2.7%
AMF Group, Inc. Sr. Disc.
Notes [STEP]
10.064%................. 03/15/06 3,137 2,482,151
Cobblestone Golf Group Sr.
Notes
11.50%.................. 06/01/03 750 817,500
PAR
MATURITY (000) VALUE
--------- -------- -------------
KSL Recreation Group, Inc.
Sr. Sub. Notes Cl-B
10.25%.................. 05/01/07 $ 400 $ 430,000
Livent, Inc. Sr. Notes
144A
9.375%.................. 10/15/04 1,800 1,809,000
Premier Parks Corp. Sr.
Notes
9.75%................... 01/15/07 450 481,500
Premier Parks Corp.
Sr. Notes Cl-A
12.00%.................. 08/15/03 1,600 1,784,000
Six Flags Theme Parks
Sr. Sub. Notes
Cl-A [STEP]
9.87%................... 06/15/05 3,625 3,878,750
-------------
11,682,901
-------------
ENVIRONMENTAL SERVICES -- 1.8%
Allied Waste Industries,
Inc. Sr. Disc. Notes
[STEP] 144A
9.548%.................. 06/01/07 4,200 2,971,500
Allied Waste North America
Sr. Sub. Notes
10.25%.................. 12/01/06 2,700 2,976,750
Envirosource, Inc. Sr.
Notes
9.75%................... 06/15/03 1,400 1,429,750
ICF Kaiser International,
Inc. Sr. Sub. Notes
13.00%.................. 12/31/03 600 622,500
-------------
8,000,500
-------------
EQUIPMENT SERVICES -- 0.2%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 781 870,815
-------------
FARMING & AGRICULTURE -- 0.4%
Dimon, Inc. Sr. Notes
8.875%.................. 06/01/06 1,750 1,870,312
-------------
FINANCIAL-BANK & TRUST -- 1.2%
First Nationwide Holdings
Sr. Sub. Notes
9.125%.................. 01/15/03 275 288,750
10.625%................. 10/01/03 4,525 5,079,312
-------------
5,368,062
-------------
FINANCIAL SERVICES -- 1.0%
Contifinancial Corp. Sr.
Notes
8.375%.................. 08/15/03 1,500 1,566,000
Intertek Finance PLC
Sr. Sub. Notes Cl-B
10.25%.................. 11/01/06 1,000 1,055,000
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Unifrax Investment Corp.
Sr. Notes
10.50%.................. 11/01/03 $ 1,650 $ 1,707,750
-------------
4,328,750
-------------
FOOD -- 4.7%
Ameriserv Food Distributor
Sr. Sub. Notes
8.875%.................. 10/15/06 1,200 1,218,000
10.125%................. 07/15/07 2,800 2,954,000
Aurora Foods, Inc.
Sr. Sub. Notes Cl-B
9.875%.................. 02/15/07 1,775 1,881,500
Carr-Gottstein Foods Co.
Sr. Sub. Notes
12.00%.................. 11/15/05 900 999,000
Community Distributors,
Inc. Sr. Notes 144A
10.25%.................. 10/15/04 1,000 1,025,000
Curtice-Burns Foods, Inc.
Sr. Sub. Notes
12.25%.................. 02/01/05 1,100 1,218,250
Di Giorgio Corp.
Sr. Notes Cl-B
10.00%.................. 06/15/07 1,350 1,333,125
International Home Foods,
Inc. Sr. Sub. Notes
10.375%................. 11/01/06 2,750 3,038,750
Jitney-Jungle Stores
Sr. Sub. Notes
10.375%................. 09/15/07 2,000 2,100,000
Nebco Evans Holding Co.
Sr. Disc. Notes [STEP]
10.842%................. 07/15/07 1,250 818,750
PMI Acquisition Corp.
Sr. Sub. Notes
10.25%.................. 09/01/03 750 800,625
Stater Brothers Holdings,
Inc. Sr. Sub. Notes
9.00%................... 07/01/04 1,125 1,179,844
Van de Kamps, Inc.
Sr. Sub. Notes
12.00%.................. 09/15/05 1,450 1,624,000
-------------
20,190,844
-------------
FURNITURE -- 0.5%
Sealy Mattress Co.
Sr. Disc. Notes
10.513% [STEP] 144A..... 12/15/07 1,000 610,000
9.875% 144A............. 12/15/07 500 515,000
Werner Holdings Co., Inc.
Sr. Sub. Notes 144A
10.00%.................. 11/15/07 1,100 1,135,750
-------------
2,260,750
-------------
HEALTHCARE SERVICES -- 2.8%
Alliance Imaging
Sr. Sub. Notes
9.625%.................. 12/15/05 750 765,000
PAR
MATURITY (000) VALUE
--------- -------- -------------
Genesis Health Ventures,
Inc. Sr. Sub. Notes
9.75%................... 06/15/05 $ 1,250 $ 1,303,125
9.25%................... 10/01/06 350 358,312
Icon Fitness Corp. Sr.
Disc. Notes Cl-B [STEP]
14.165%................. 11/15/06 1,100 643,500
Icon Health & Fitness
Corp. Sr. Sub. Notes
Cl-B
13.00%.................. 07/15/02 530 594,925
Tenet Healthcare Corp.
Sr. Sub. Notes
8.00%................... 01/15/05 3,450 3,519,000
10.125%................. 03/01/05 1,700 1,861,500
8.625%.................. 01/15/07 3,000 3,105,000
-------------
12,150,362
-------------
HOTELS & MOTELS -- 0.4%
Courtyard by Marriott Sr.
Notes
10.75%.................. 02/01/08 1,500 1,642,500
-------------
INDUSTRIAL PRODUCTS -- 1.1%
Capstar Hotel Co.
Sr. Sub. Notes
8.75%................... 08/15/07 725 752,187
Continental Global Group,
Inc. Sr. Notes Cl-B
11.00%.................. 04/01/07 1,100 1,177,000
Elgin National Industries
Sr. Notes 144A
11.00%.................. 11/01/07 475 495,188
Leslie's Poolmart Sr.
Notes
10.375%................. 07/15/04 950 988,000
MMI Products, Inc.
Sr. Sub. Notes Cl-B
11.25%.................. 04/15/07 1,400 1,533,000
-------------
4,945,375
-------------
MACHINERY & EQUIPMENT -- 2.4%
Alvey Systems, Inc.
Sr. Sub. Notes
11.375%................. 01/31/03 1,750 1,868,125
Clark Materials Handling
Corp. Sr. Notes
10.75%.................. 11/15/06 1,925 2,069,375
Fairfield Manufacturing
Co. Sr. Sub. Notes
11.375%................. 07/01/01 900 954,000
Hawk Corp. Sr. Notes
10.25%.................. 12/01/03 250 267,500
International Knife & Saw,
Inc. Sr. Sub. Notes
11.375%................. 11/15/06 1,050 1,139,250
Johnstown America
Industries, Inc. Sr.
Sub. Notes Cl-C
11.75%.................. 08/15/05 700 770,000
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
National Equipment
Services, Sr. Sub. Notes
144A
10.00%.................. 11/30/04 $ 1,275 $ 1,268,625
Roller Bearing Co. Sr.
Sub. Notes 144A
9.625%.................. 06/15/07 500 506,250
Ryder TRS, Inc.
Sr. Sub. Notes
10.00%.................. 12/01/06 300 302,250
Tokheim Corp. Sr. Sub.
Notes Cl-B
11.50%.................. 08/01/06 1,100 1,254,000
-------------
10,399,375
-------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.6%
Dade International, Inc.
Sr. Sub. Notes Cl-B
11.125%................. 05/01/06 2,225 2,469,750
-------------
METALS & MINING -- 2.5%
AEI Holding Co.
Sr. Notes 144A
10.00%.................. 11/15/07 1,250 1,293,750
Anker Coal Group, Inc.
Sr. Notes 144A
9.75%................... 10/01/07 450 457,875
Bayou Steel Corp. First
Mtge. Notes
10.25%.................. 03/01/01 750 776,250
Euramax International Ltd.
Sr. Sub. Notes
11.25%.................. 10/01/06 1,250 1,359,375
GS Technologies Operating
Corp. Sr. Notes
12.00%.................. 09/01/04 975 1,071,281
12.25%.................. 10/01/05 1,525 1,711,813
Neenah Corp.
Sr. Sub. Notes Cl-B
11.125%................. 05/01/07 1,375 1,515,938
Royal Oak Mines, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/06 1,150 833,750
Ryerson Tull, Inc. Notes
8.50%................... 07/15/01 1,000 1,040,000
9.125%.................. 07/15/06 900 969,750
-------------
11,029,782
-------------
OFFICE EQUIPMENT -- 0.5%
Knoll, Inc. Sr. Sub. Notes
10.875%................. 03/15/06 910 1,032,850
United Stationers Supply
Co. Sr. Sub. Notes
12.75%.................. 05/01/05 1,169 1,335,583
-------------
2,368,433
-------------
OIL & GAS -- 4.6%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%.................. 11/01/04 3,000 3,300,000
PAR
MATURITY (000) VALUE
--------- -------- -------------
Dailey International, Inc.
Notes 144A
9.75%................... 08/15/07 $ 975 $ 1,028,625
DI Industries, Inc. Sr.
Notes
8.875%.................. 07/01/07 1,500 1,567,500
Falcon Drilling Co., Inc.
Sr. Notes
9.75%................... 01/15/01 350 368,375
12.50%.................. 03/15/05 300 343,500
Forcenergy, Inc.
Sr. Sub. Notes
9.50%................... 11/01/06 2,650 2,828,875
8.50%................... 02/15/07 1,450 1,464,500
Giant Industries, Inc.
Sr. Sub. Notes
9.75%................... 11/15/03 550 569,250
Newpark Resources, Inc.
Sr. Sub. Notes 144A
8.625%.................. 12/15/07 250 255,000
Pacalta Resource Ltd.
Sr. Notes Cl-B
10.75%.................. 06/15/04 1,050 1,040,813
Petsec Energy, Inc.
Sr. Sub. Notes Cl-B
9.50%................... 06/15/07 700 721,875
Pride Petroleum Services,
Inc. Sr. Notes
9.375%.................. 05/01/07 2,500 2,700,000
United Meridian Corp.
Sr. Sub. Notes
10.375%................. 10/15/05 1,775 1,970,250
United Refining Co.
Sr. Notes 144A
10.75%.................. 06/15/07 1,000 1,057,500
XCL Ltd. Units 144A
13.50%.................. 05/01/04 750 903,750
-------------
20,119,813
-------------
PAPER & FOREST
PRODUCTS -- 0.4%
Repap New Brunswick Sr.
Notes
10.625%................. 04/15/05 500 477,500
S.D. Warren Co.
Sr. Sub. Notes
12.00%.................. 12/15/04 1,300 1,456,000
-------------
1,933,500
-------------
PRINTING & PUBLISHING -- 2.2%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
10.795%................. 07/01/06 2,200 2,101,000
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Garden State Newspapers,
Inc. Sr. Sub. Notes
12.00%.................. 07/01/04 $ 200 $ 225,000
8.75% 144A.............. 10/01/09 2,575 2,594,313
Hollinger International
Publishing Co. Notes
9.25%................... 02/01/06 800 848,000
9.25%................... 03/15/07 1,950 2,067,000
K-III Communications Corp.
Sr. Notes
8.50%................... 02/01/06 1,000 1,042,810
Petersen Publishing Co.
Sr. Sub. Notes Cl-B
11.125%................. 11/15/06 600 681,000
-------------
9,559,123
-------------
REAL ESTATE -- 0.4%
Trizec Finance Ltd. Sr.
Notes
10.875%................. 10/15/05 1,457 1,639,125
-------------
RETAIL & MERCHANDISING -- 1.0%
Ralph's Grocery Co. Sr.
Notes
10.45%.................. 06/15/04 3,675 4,148,156
-------------
SEMICONDUCTORS -- 0.4%
Fairchild Semiconductor
Corp. Sr. Sub. Notes
10.125%................. 03/15/07 1,600 1,700,000
-------------
TELECOMMUNICATIONS -- 25.2%
American Communications
Services, Inc.
Sr. Notes [STEP]
10.564%................. 04/01/06 1,400 1,085,000
13.75%.................. 07/15/07 875 1,045,625
Arch Communications Group
Sr. Disc. Notes [STEP]
12.758%................. 03/15/08 1,200 738,000
Brooks Fiber Properties,
Inc. Sr. Disc. Notes
[STEP]
8.52%................... 03/01/06 3,650 3,066,000
8.825%.................. 11/01/06 1,400 1,127,000
Cablevision Systems Corp.
Sr. Sub. Debs.
7.875%.................. 12/15/07 1,700 1,744,625
9.875%.................. 02/15/13 500 555,000
9.25%................... 11/01/05 3,750 3,993,750
9.875%.................. 05/15/06 300 330,000
Call-Net Enterprises, Inc.
Sr. Disc. Notes [STEP]
8.87%................... 08/15/07 3,100 2,108,000
CCPR Services, Inc.
Sr. Sub. Notes
10.00%.................. 02/01/07 500 482,500
PAR
MATURITY (000) VALUE
--------- -------- -------------
Cellular Communications
International, Inc.
Notes [ZCB]
6.952%.................. 08/15/00 $ 1,550 $ 1,263,250
CF Cable TV, Inc. Sr.
Notes
11.625%................. 02/15/05 500 568,960
Charter Communications
Southeast Holdings
Capital Corp. Cl-B
[STEP]
11.28%.................. 03/15/07 650 510,250
Charter Communications
Southeast Holdings
Capital Corp. L.P. Sr.
Notes Cl-B
11.25%.................. 03/15/06 1,150 1,282,250
Comcast Cellular Holdings
Sr. Notes Cl-B
9.50%................... 05/01/07 1,975 2,073,750
Comcast Corp. Sr. Sub.
Debs.
9.375%.................. 05/15/05 2,500 2,668,750
Comcast U.K. Cable Corp.
Debs. [STEP]
9.719%.................. 11/15/07 2,900 2,370,750
Diamond Cable
Communications PLC
Sr. Disc. Notes [STEP]
10.988%................. 09/30/04 250 225,000
10.432%................. 12/15/05 4,000 3,110,000
10.056%................. 02/15/07 1,125 770,625
Esprit Telecom Group PLC
Sr. Notes
11.50%.................. 12/15/07 1,000 1,035,000
Hermes Europe Railtel BV
Sr. Notes 144A
11.50%.................. 08/15/07 1,575 1,756,125
Highwaymaster
Communications, Inc. Sr.
Notes
13.75%.................. 09/15/05 1,050 1,073,625
Intermedia Communications
of Florida, Inc. Sr.
Disc. Notes [STEP]
9.979%.................. 05/15/06 4,650 3,673,500
Intermedia Communications
Inc. Sr. Notes 144A
8.875%.................. 11/01/07 1,000 1,030,000
9.128% [STEP]........... 07/15/07 500 361,250
International Cabletel,
Inc. Sr. Notes [STEP]
9.987%.................. 10/15/03 500 478,750
10.928%................. 04/15/05 1,050 879,375
9.864%.................. 02/01/06 38,000 3,002,000
Jacor Communications Co.
Notes
9.75%................... 12/15/06 500 540,000
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Lenfest Communications,
Inc. Sr. Sub. Notes
8.375%.................. 11/01/05 $ 2,150 $ 2,225,250
McLeodUSA, Inc.
Sr. Notes 144A
9.25%................... 07/15/07 1,300 1,361,750
McLeodUSA, Inc.
Sr. Disc. Notes [STEP]
9.111%.................. 03/01/07 2,150 1,564,125
Metronet Communications
Corp. Sr. Disc. Notes
[STEP] 144A
10.269%................. 11/01/07 1,925 1,207,938
Metronet Communications
Corp. Units 144A
12.00%.................. 08/15/07 1,525 1,765,188
Millicom International
Cellular S.A. Sr. Disc.
Notes [STEP]
11.462%................. 06/01/06 4,075 2,995,125
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
9.876%.................. 08/15/04 3,100 2,766,750
8.402% 144A............. 09/15/07 1,575 994,219
Nextlink Communications,
Inc. Sr. Notes
9.625%.................. 10/01/07 1,250 1,290,625
Paging Network, Inc.
Sr. Sub. Notes
10.00%.................. 10/15/08 3,600 3,753,000
Pegasus Communications
Corp.
Sr. Notes 144A
9.625%.................. 10/15/05 1,050 1,076,250
Pegasus Media &
Communications, Inc.
Notes
12.50%.................. 07/01/05 975 1,116,375
Qwest Communications
International, Inc. Sr.
Disc. Notes [STEP] 144A
8.792%.................. 10/15/07 3,100 2,108,000
Qwest Communications
International, Inc.
Sr. Notes Cl-B
10.875%................. 04/01/07 1,750 1,986,250
RCN Corp. Sr. Disc. Notes
[STEP] 144A
9.53%................... 10/15/07 2,000 1,265,000
Rogers Cablesystems of
America Sr. Notes
10.00%.................. 03/15/05 2,500 2,775,000
10.00%.................. 12/01/07 1,350 1,491,750
11.00%.................. 12/01/15 750 870,000
Rogers Communications,
Inc. Sr. Notes
8.875%.................. 07/15/07 750 753,750
PAR
MATURITY (000) VALUE
--------- -------- -------------
Source Media, Inc.
Sr. Sec'd. Notes 144A
12.00%.................. 11/01/04 $ 350 $ 348,250
Sygnet Wireless, Inc. Sr.
Notes
11.50%.................. 10/01/06 1,425 1,546,125
Teleport Communications
Group, Inc. Sr. Notes
9.875%.................. 07/01/06 225 254,250
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
8.678%.................. 07/01/07 5,375 4,441,094
Telesystem International
Wireless, Inc. Sr. Disc.
Notes [STEP] 144A
11.513%................. 11/01/07 800 448,000
Telesystem International
Wireless, Inc. [STEP]
144A
11.779%................. 06/30/07 3,425 2,157,750
Telewest Communication PLC
Debs. [STEP]
9.379%.................. 10/01/07 7,075 5,536,188
Teligent, Inc. Sr. Notes
11.50%.................. 12/01/07 1,750 1,763,125
UIH Australia Pacific,
Inc. Sr. Disc. Notes
[STEP]
13.271%................. 05/15/06 3,100 2,061,500
USA Mobile Communications
Holdings, Inc. Sr. Notes
9.50%................... 02/01/04 1,050 1,034,250
Vanguard Cellular Systems,
Inc. Debs.
9.375%.................. 04/15/06 2,000 2,090,000
Viacom, Inc. Sub. Debs.
8.00%................... 07/07/06 8,300 8,424,500
Videotron Holdings PLC Sr.
Notes
10.625%................. 02/15/05 1,000 1,115,000
-------------
109,535,087
-------------
TRANSPORTATION -- 3.0%
Allied Holdings, Inc.
Notes Cl-B
8.625%.................. 10/01/07 1,000 1,020,000
Ameritruck Distribution
Corp. Sr. Sub. Notes
12.25%.................. 11/15/05 1,950 1,940,250
Chemical Leaman Corp. Sr.
Notes
10.375%................. 06/15/05 1,000 1,065,000
Gearbulk Holding Ltd. Sr.
Notes
11.25%.................. 12/01/04 1,400 1,543,500
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Johnstown America
Industries, Inc.
Sr. Sub. Notes
11.75%.................. 08/15/05 $ 600 $ 660,000
Statia Terminals First
Mtge. Cl-A
11.75%.................. 11/15/03 1,000 1,050,000
Stena AB Sr. Notes
10.50%.................. 12/15/05 3,275 3,577,938
8.75%................... 06/15/07 1,125 1,139,063
Trism, Inc. Sr. Sub. Notes
10.75%.................. 12/15/00 1,250 1,231,250
-------------
13,227,001
-------------
UTILITIES -- 1.0%
California Energy Co.,
Inc. Disc. Notes
10.25%.................. 01/15/04 1,825 1,971,000
California Energy Co.,
Inc. Sr. Notes
9.50%................... 09/15/06 1,000 1,097,500
El Paso Electric Co. First
Mtge. Cl-E
9.40%................... 05/01/11 1,075 1,215,610
-------------
4,284,110
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $369,060,694)................... 386,194,693
-------------
U.S. TREASURY OBLIGATIONS -- 0.9%
U.S. Treasury Notes
5.75%
(COST $3,792,445)......... 08/15/03 4,000 4,005,040
-------------
|
SHARES
---------
COMMON STOCK -- 0.1%
BROADCASTING -- 0.0%
Sullivan Broadcasting Holdings
Co.* ............................ 2,400 25,200
------------
CAPITAL GOODS -- 0.0%
Australis Holdings Warrants*....... 1,000 0
CHEMICALS -- 0.0%
Sterling Chemicals Holdings
Warrants*........................ 1,075 32,250
Uniroyal Technology Corp.
Warrants* ....................... 2,500 9,063
------------
41,313
------------
CLOTHING & APPAREL -- 0.0%
Hosiery Corp. of America, Inc.* ... 400 2,800
------------
ELECTRONIC COMPONENTS & EQUIPMENT --
0.0%
Electronic Retailing, Inc. 144A ... 875 17,500
------------
ENVIRONMENTAL SERVICES -- 0.0%
ICF Kaiser International, Inc.
Warrants* ....................... 1,200 300
------------
HEALTHCARE SERVICES -- 0.0%
Icon Health & Fitness Corp.
Warrants 144A* .................. 250 12,625
------------
SHARES VALUE
--------- -------------
METALS & MINING -- 0.0%
Bar Technologies, Inc. Warrants
144A*............................ 300 $ 18,000
------------
PRINTING & PUBLISHING -- 0.0%
Affiliated Newspaper Investments,
Inc.*............................ 1,000 110,500
------------
TELECOMMUNICATIONS -- 0.1%
Cellular Communications
International, Inc. Warrants* ... 1,100 22,000
HighwayMaster Communications, Inc.
Warrants* ....................... 1,050 1,050
Metronet Communications Corp.
Warrants*........................ 1,525 0
Nextel Communications, Inc.
Cl-A* ........................... 3,330 86,580
Pegasus Communications Corp.
144A............................. 1,128 22,983
Pegasus Communications Corp.
Warrants*........................ 1,500 49,500
Wireless One, Inc. Warrants*....... 1,500 0
------------
182,113
------------
TOTAL COMMON STOCK
(COST $85,722)....................... 410,351
------------
PREFERRED STOCK -- 4.3%
BROADCASTING -- 2.4%
American Radio Systems Corp.
$11.375 Cl-B [PIK] .............. 18,357 2,129,412
Capstar Broadcasting Partner 12.00%
[PIK] ........................... 6,500 749,125
Chancellor Broadcasting Co. 12.25%
[PIK]............................ 7,500 978,750
Chancellor Media Corp. 12.00%
[PIK] ........................... 19,376 2,218,552
Echostar Communications Corporation
12.125% 144A .................... 575 606,625
SFX Broadcasting, Inc. Cl-E 12.625%
[PIK] ........................... 16,106 1,864,301
Sinclair Broadcast Group, Inc.
Cl-A $11.625 .................... 18,500 2,025,750
------------
10,572,515
------------
FINANCIAL SERVICES -- 0.2%
California Federal Capital Corp.
9.125% Cl-A [PIK] ............... 30,000 793,140
------------
MACHINERY & EQUIPMENT -- 0.1%
Fairfield Manufacturing Co., Inc.
$11.25 .......................... 650 698,750
------------
PRINTING & PUBLISHING -- 0.4%
Primedia, Inc. $10.00 Cl-D ........ 10,750 1,131,438
Primedia, Inc. $9.20 144A ......... 5,000 502,500
------------
1,633,938
------------
REAL ESTATE -- 0.2%
Crown American Realty Trust $1.375
Cl-A ............................ 15,000 791,250
------------
TELECOMMUNICATIONS -- 0.7%
Nextel Communication, Inc. 13.00%
[PIK] ........................... 875 1,001,875
Pegasus Communications Corp. Cl-A
12.75% [PIK] .................... 1,904 2,065,840
------------
3,067,715
------------
|
SHARES VALUE
--------- -------------
UTILITIES -- 0.3%
El Paso Electric Co. 11.40%
[PIK] ........................... 11,523 $ 1,279,053
------------
TOTAL PREFERRED STOCK
(COST $16,711,678)................... 18,836,361
------------
|
PAR
MATURITY (000) VALUE
--------- ------- ------------
REPURCHASE AGREEMENTS -- 4.7%
Greenwich Capital
Markets, Inc., 6.10%
dated 12/31/97,
repurchase price
$20,383,905
(Collateralized by
U.S. Treasury Notes,
par value
$20,116,000, market
value $20,802,440 due
02/15/98)
(COST $20,377,000)... 01/02/98 $20,377 $ 20,377,000
------------
TOTAL INVESTMENTS -- 98.9%
(COST $410,027,539).......................... 429,823,445
OTHER ASSETS LESS LIABILITIES -- 1.1%.......... 4,596,237
------------
NET ASSETS -- 100.0%........................... $434,419,682
============
|
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 13.1% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 46.8%
ADVERTISING -- 0.1%
Omnicom Group, Inc. ............... 3,800 $ 161,025
----------
AEROSPACE -- 0.8%
AlliedSignal, Inc. ................ 8,200 319,287
Boeing Co. ........................ 9,568 468,234
Lockheed Martin Corp. ............. 2,300 226,550
Northrop Grumman Corp. ............ 1,100 126,500
Primex Technologies, Inc. ......... 420 14,175
Raytheon Co. Cl-A.................. 536 26,415
Raytheon Co. Cl-B.................. 2,500 126,250
Rockwell International Corp. ...... 2,800 146,300
United Technologies Corp. ......... 3,600 262,125
----------
1,715,836
----------
AIRLINES -- 0.2%
Alaska Air Group, Inc.*............ 2,700 104,625
AMR Corp.*......................... 1,900 244,150
Delta Air Lines, Inc. ............. 800 95,200
----------
443,975
----------
AUTOMOBILE MANUFACTURERS -- 0.8%
Chrysler Corp. .................... 3,500 123,157
Ford Motor Co. .................... 13,600 662,150
General Motors Corp. .............. 8,400 509,250
Honda Motor Co. Ltd. [ADR]......... 4,800 354,600
----------
1,649,157
----------
AUTOMOTIVE PARTS -- 0.4%
Arvin Industries, Inc. ............ 1,300 43,306
Eaton Corp. ....................... 800 71,400
Echlin, Inc. ...................... 3,100 112,181
Federal-Mogul Corp. ............... 800 32,400
Genuine Parts Co. ................. 5,750 195,141
Goodyear Tire & Rubber Co. ........ 1,700 108,162
Mark IV Industries, Inc. .......... 1,600 35,000
Superior Industries International,
Inc. ............................ 700 18,769
TRW, Inc. ......................... 3,400 181,475
----------
797,834
----------
BEVERAGES -- 1.5%
Anheuser-Busch Companies, Inc. .... 5,400 237,600
Cadbury Schweppes PLC [ADR]........ 3,473 143,695
Coca-Cola Co. ..................... 25,500 1,698,937
Coca-Cola Enterprises, Inc. ....... 6,900 245,381
Diageo PLC [ADR]................... 4,800 181,800
PepsiCo, Inc. ..................... 17,300 630,369
----------
3,137,782
----------
BROADCASTING -- 0.2%
CBS Corp. ......................... 4,500 132,469
Chris-Craft Industries, Inc.*...... 1,339 70,046
Clear Channel Communications,
Inc.*............................ 2,200 174,762
TCA Cable TV, Inc. ................ 1,600 73,600
----------
450,877
----------
BUILDING MATERIALS -- 0.2%
Calmat Co. ........................ 1,700 47,387
Georgia Pacific Corp. ............. 1,500 34,031
Martin Marietta Materials Corp. ... 1,400 51,187
SHARES VALUE
------- ------------
Masco Corp. ....................... 3,600 $ 183,150
Modine Manufacturing Co. .......... 600 20,475
Vulcan Materials Co. .............. 600 61,275
----------
397,505
----------
BUSINESS SERVICES -- 0.2%
Cognizant Corp. ................... 3,500 155,969
Equifax, Inc. ..................... 2,500 88,594
Olsten Corp. ...................... 2,000 30,000
Robert Half International, Inc.*... 2,250 90,000
----------
364,563
----------
CHEMICALS -- 1.4%
AKZO Nobel NV [ADR]................ 1,000 86,875
Cabot Corp. ....................... 2,300 63,537
Crompton & Knowles Corp. .......... 3,800 100,700
Dexter Corp. ...................... 1,500 64,781
Dow Chemical Co. .................. 3,600 365,400
Dupont, (E.I.) de Nemours & Co. ... 12,600 756,787
FMC Corp.*......................... 1,600 107,700
Great Lakes Chemical Corp. ........ 2,500 112,187
Hanna, (M.A.) Co. ................. 2,100 53,025
IMC Global, Inc. .................. 2,000 65,500
Lubrizol Corp. .................... 2,200 81,125
Monsanto Co. ...................... 7,600 319,200
Morton International, Inc. ........ 4,500 154,687
Olin Corp. ........................ 2,100 98,437
Pall Corp. ........................ 5,400 111,712
PPG Industries, Inc. .............. 2,800 159,950
Rohm & Haas Co. ................... 1,600 153,200
Solutia, Inc. ..................... 1,160 30,957
Witco Corp. ....................... 3,100 126,519
----------
3,012,279
----------
CLOTHING & APPAREL -- 0.3%
Cintas Corp. ...................... 3,600 140,400
Jones Apparel Group, Inc.*......... 2,600 111,800
Nike, Inc. Cl-B.................... 2,800 109,900
Springs Industries, Inc. Cl-A...... 2,000 104,000
Unifi, Inc. ....................... 2,500 101,719
----------
567,819
----------
COMPUTER HARDWARE -- 1.3%
Bay Networks, Inc.*................ 2,800 71,575
Compaq Computer Corp. ............. 7,500 423,281
Dell Computer Corp.*............... 5,200 436,800
Digital Equipment Corp.*........... 2,400 88,800
Hewlett-Packard Co. ............... 10,800 675,000
International Business Machines
Corp. ........................... 9,900 1,035,169
Seagate Technology, Inc.*.......... 4,500 86,625
Stratus Computer, Inc.*............ 1,100 41,594
----------
2,858,844
----------
COMPUTER SERVICES & SOFTWARE -- 2.3%
Adobe Systems, Inc. ............... 600 24,750
America Online, Inc.* ............. 1,900 169,456
Automatic Data Processing, Inc. ... 4,000 245,500
BMC Software, Inc.* ............... 2,300 150,937
|
SHARES VALUE
------- ------------
Cadence Design Systems, Inc.* ..... 4,500 $ 110,250
Ceridian Corp.* ................... 2,600 119,112
Cisco Systems, Inc.* .............. 9,750 543,562
CompUSA, Inc.* .................... 2,400 74,400
Computer Associates International,
Inc. ............................ 6,562 346,966
Compuware Corp.* .................. 4,000 128,000
DST Systems, Inc.* ................ 900 38,419
First Data Corp. .................. 5,400 157,950
Informix Corp.* ................... 2,900 13,775
Microsoft Corp.* .................. 11,700 1,512,225
Network Associates, Inc.* ......... 1,300 68,737
Novell, Inc.* ..................... 9,500 71,250
Oracle Corp.* ..................... 10,950 244,322
Parametric Technology Corp.* ...... 2,500 118,437
Paychex, Inc. ..................... 3,600 182,250
Policy Management Systems
Corp.* .......................... 400 27,825
Quantum Corp.* .................... 2,900 58,181
Sterling Commerce, Inc.* .......... 2,200 84,562
Storage Technology Corp.* ......... 1,500 92,906
Structural Dynamics Research
Corp.* .......................... 1,300 29,250
Sun Microsystems, Inc.* ........... 4,900 195,387
----------
4,808,409
----------
CONGLOMERATES -- 0.9%
Hanson PLC [ADR] .................. 337 7,772
Minnesota Mining & Manufacturing
Co. ............................. 5,000 410,312
Philip Morris Companies, Inc. ..... 26,100 1,182,656
Tomkins PLC [ADR] ................. 6,000 114,750
Tyco International Ltd. ........... 4,000 180,250
----------
1,895,740
----------
CONSTRUCTION -- 0.0%
Granite Construction, Inc. ........ 1,100 25,300
Jacobs Engineering Group, Inc.* ... 1,700 43,137
----------
68,437
----------
CONSUMER PRODUCTS & SERVICES -- 1.6%
Cendant Corp. ..................... 12,169 418,309
Colgate-Palmolive Co. ............. 4,000 294,000
Corning, Inc. ..................... 3,900 144,787
Cross, (A.T.) Co. Cl-A ............ 1,400 14,175
Eastman Kodak Co. ................. 3,300 200,681
Fortune Brands, Inc. .............. 2,400 88,950
Gallaher Group PLC [ADR] .......... 2,400 51,300
Gillette Co. ...................... 6,400 642,800
Imperial Tobacco Group PLC
[ADR] ........................... 675 8,530
International Flavors & Fragrances,
Inc. ............................ 3,200 164,800
Lancaster Colony Corp. ............ 700 39,462
National Presto Industries,
Inc. ............................ 800 31,650
Ogden Corp. ....................... 1,000 28,187
Pittston Brink Group .............. 1,300 52,325
Procter & Gamble Co. .............. 14,600 1,165,262
Sotheby's Holdings, Inc. Cl-A ..... 1,000 18,500
Stewart Enterprises, Inc. ......... 900 41,962
----------
3,405,680
----------
SHARES VALUE
------- ------------
CONTAINERS & PACKAGING -- 0.2%
Bemis Co., Inc. ................... 2,700 $ 118,969
Owens-Illinois, Inc.* ............. 3,700 140,369
Sealed Air Corp.* ................. 2,400 148,200
----------
407,538
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.4%
AES Corp.* ........................ 2,600 121,225
Altera Corp.* ..................... 4,300 142,437
American Power Conversion
Corporation* .................... 2,700 63,787
Applied Materials, Inc.* .......... 5,200 156,650
Arrow Electronics, Inc.* .......... 2,500 81,094
Diebold, Inc. ..................... 2,700 136,687
Emerson Electric Co. .............. 6,000 338,625
General Electric Co. .............. 32,200 2,362,675
Hitachi Ltd. [ADR] ................ 2,400 166,050
Honeywell, Inc. ................... 2,000 137,000
Hubbell, Inc. Cl-B ................ 2,000 98,625
Linear Technology Corp. ........... 1,900 109,487
Maxim Integrated Products,
Inc.* ........................... 4,000 138,000
Molex, Inc. ....................... 4,375 140,547
Philips Electronics NV [ADR] ...... 3,600 217,800
Solectron Corp.* .................. 3,000 124,687
Sundstrand Corp. .................. 2,200 110,825
Symbol Technologies, Inc. ......... 1,050 39,637
Tandy Corp. ....................... 1,200 46,275
Teleflex, Inc. .................... 1,800 67,950
Teradyne, Inc.* ................... 1,800 57,600
Texas Instruments, Inc. ........... 3,000 135,000
Varian Associates, Inc. ........... 700 35,394
----------
5,028,057
----------
ENTERTAINMENT & LEISURE -- 0.8%
Brunswick Corp. ................... 2,000 60,625
Callaway Golf Co. ................. 1,900 54,269
Circus Circus Enterprises,
Inc.* ........................... 2,700 55,350
Disney, (Walt) Co. ................ 6,264 620,527
Harley-Davidson, Inc. ............. 3,800 104,025
Mattel, Inc. ...................... 2,800 104,300
Mirage Resorts, Inc.* ............. 3,800 86,450
President Casinos, Inc.
Warrants* ....................... 883 221
Time Warner, Inc. ................. 6,900 427,800
Viacom, Inc. Cl-B* ................ 5,000 207,187
----------
1,720,754
----------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries,
Inc. ............................ 1,840 68,080
Tetra Tech, Inc.* ................. 1,500 30,000
U.S. Filter Corp.* ................ 2,300 68,856
USA Waste Services, Inc.* ......... 5,000 196,250
Waste Management, Inc. ............ 5,323 146,382
----------
509,568
----------
EQUIPMENT SERVICES -- 0.0%
Agco, Corp. ....................... 2,100 61,425
----------
|
SHARES VALUE
------- ------------
FINANCIAL-BANK & TRUST -- 4.3%
Australia and New Zealand Banking
Group Ltd. [ADR] ................ 3,600 $ 118,350
Banc One Corp. .................... 7,300 396,481
Banco Bilbao Vizcaya [ADR] ........ 9,000 290,812
Banco Frances del Rio de la Plata
SA [ADR] ........................ 5,060 138,517
BankAmerica Corp. ................. 4,400 321,200
Chase Manhattan Corp. ............. 4,856 531,732
Citicorp .......................... 5,200 657,475
City National Corp. ............... 1,800 66,487
CoreStates Financial Corp. ........ 3,400 272,212
Crestar Financial Corp. ........... 2,600 148,200
Fifth Third Bancorp ............... 3,150 257,512
First Chicago NBD Corp. ........... 4,200 350,700
First of America Bank Corp. ....... 1,800 138,825
First Security Corp. .............. 4,725 197,859
First Tennessee National Corp. .... 2,700 180,225
First Union Corp. ................. 7,100 363,875
Firstar Corp. ..................... 2,400 101,850
Fleet Financial Group, Inc. ....... 3,600 269,775
Huntington Bancshares, Inc. ....... 3,600 129,600
Keycorp ........................... 4,000 283,250
Mellon Bank Corp. ................. 4,400 266,750
Mercantile Bancorporation, Inc. ... 2,100 129,150
Mercantile Bankshares Corp. ....... 2,700 105,637
Morgan, (J.P.) & Co., Inc. ........ 2,600 293,475
NationsBank Corp. ................. 8,600 522,987
Northern Trust Corp. .............. 3,600 251,100
Norwest Corp. ..................... 10,800 417,150
Pacific Century Financial Corp. ... 3,000 74,250
PNC Bank Corp. .................... 5,520 314,985
Regions Financial Corp. ........... 1,500 63,281
Silicon Valley Bancshares* ........ 700 39,375
Southtrust Corp. .................. 3,000 190,312
State Street Boston Corp. ......... 2,900 168,744
Summit Bancorp .................... 3,300 175,725
U.S. Bancorp ...................... 4,553 509,651
Union Planters Corp. .............. 1,200 81,525
Wells Fargo & Co. ................. 1,100 373,381
----------
9,192,415
----------
FINANCIAL SERVICES -- 1.7%
American Express Co. .............. 5,100 455,175
Bear Stearns Companies, Inc. ...... 2,415 114,712
Block, (H&R), Inc. ................ 2,500 112,031
Comdisco, Inc. .................... 2,850 95,297
Echelon International Corp.* ...... 846 18,982
Edwards, (A.G.), Inc. ............. 2,250 89,437
Fannie Mae ........................ 12,100 690,456
Finova Group, Inc. ................ 2,000 99,375
Franklin Resources, Inc. .......... 2,850 247,772
Freddie Mac ....................... 9,500 398,406
Green Tree Financial Corp. ........ 2,500 65,469
Grupo Financiero Bancomer [ADR]
144A* ........................... 1,400 18,025
Household International, Inc. ..... 1,600 204,100
SHARES VALUE
------- ------------
Merrill Lynch & Co., Inc. ......... 3,100 $ 226,106
Morgan Stanley, Dean Witter,
Discover & Co. .................. 5,485 324,301
Paine Webber Group, Inc. .......... 3,600 124,425
Schwab, (Charles) Corp. ........... 2,250 94,359
SunAmerica, Inc. .................. 4,200 179,550
Washington Mutual, Inc. ........... 2,500 159,531
----------
3,717,509
----------
FOOD -- 1.6%
American Stores Co. ............... 2,800 57,575
Archer-Daniels-Midland Co. ........ 7,782 168,772
Conagra, Inc. ..................... 6,800 223,125
CPC International, Inc. ........... 1,800 193,950
Dole Food Co. ..................... 1,700 77,775
Earthgrains Co. ................... 296 13,912
General Mills, Inc. ............... 2,500 179,062
Heinz, (H.J.) Co. ................. 5,250 266,766
IBP, Inc. ......................... 2,400 50,250
Kellogg Co. ....................... 5,800 287,825
Kroger Co.* ....................... 5,400 199,462
McCormick & Co., Inc. ............. 3,300 92,400
Ralston Purina Group .............. 2,100 195,169
Safeway, Inc.* .................... 2,280 144,210
Sara Lee Corp. .................... 6,200 349,137
Smucker, (J.M.) Co. ............... 1,600 37,800
Tyson Foods, Inc. ................. 5,300 108,650
Unilever PLC [ADR] ................ 8,400 524,475
Universal Corp. ................... 1,800 74,025
Universal Foods Corp. ............. 1,300 54,925
----------
3,299,265
----------
FURNITURE -- 0.0%
Leggett & Platt, Inc. ............. 2,400 100,500
----------
HEALTHCARE SERVICES -- 0.5%
Apria Healthcare Group, Inc.* ..... 2,000 26,875
Columbia-HCA Healthcare Corp. ..... 9,096 269,469
Concentra Managed Care, Inc.* ..... 1,600 54,000
Foundation Health Systems Cl-A* ... 1,800 40,275
Health Management Associates,
Inc.* ........................... 3,000 75,750
Healthsouth Corp.* ................ 6,200 172,050
Omnicare, Inc. .................... 2,800 86,800
Oxford Health Plans, Inc.* ........ 1,300 20,231
PacifiCare Health Systems, Inc.
Cl-A ............................ 400 20,100
PacifiCare Health Systems, Inc.
Cl-B* ........................... 1,000 52,375
United Healthcare Corp. ........... 3,400 168,937
Vencor, Inc.* ..................... 2,200 53,762
----------
1,040,624
----------
HOTELS & MOTELS -- 0.1%
ITT Corp.* ........................ 2,900 240,337
----------
INDUSTRIAL PRODUCTS -- 0.0%
Harsco Corp. ...................... 2,000 86,250
----------
INSURANCE -- 2.0%
Aetna, Inc. ....................... 2,502 176,547
AFLAC, Inc. ....................... 2,950 150,819
Allstate Corp. .................... 2,600 236,275
American Financial Group, Inc. .... 1,700 68,531
American General Corp. ............ 4,300 232,469
|
SHARES VALUE
------- ------------
American International Group, Inc.. 7,550 $ 821,062
Chubb Corp. ....................... 2,600 196,625
CIGNA Corp. ....................... 1,300 224,981
General Re Corp. .................. 1,300 275,600
HSB Group, Inc. ................... 1,100 60,706
Loews Corp. ....................... 2,100 222,862
Progressive Corp. ................. 1,400 167,825
Provident Companies, Inc. ......... 2,800 108,150
Selective Insurance Group, Inc. ... 2,000 54,000
Torchmark Corp. ................... 4,600 193,487
Transatlantic Holdings, Inc. ...... 1,050 75,075
Travelers Group, Inc. ............. 12,670 682,596
UNUM Corp. ........................ 4,200 228,375
----------
4,175,985
----------
LUMBER & WOOD PRODUCTS -- 0.0%
Deltic Timber Corp. ............... 342 9,362
Rayonier, Inc. .................... 500 21,281
----------
30,643
----------
MACHINERY & EQUIPMENT -- 0.7%
Black & Decker Corp. .............. 2,700 105,469
Caterpillar, Inc. ................. 5,600 271,950
Danaher Corp. ..................... 1,800 113,625
Deere & Co. ....................... 4,000 233,250
Federal Signal Corp. .............. 1,700 36,762
Flowserve Corp. ................... 2,900 81,019
Gencorp, Inc. ..................... 2,800 70,000
Illinois Tool Works, Inc. ......... 4,200 252,525
Kennametal, Inc. .................. 500 25,906
Precision Castparts Corp. ......... 500 30,156
Sequa Corp. Cl-A* ................. 700 45,544
Tecumseh Products Co. Cl-A ........ 1,400 68,250
Thermo Electron Corp.* ............ 3,400 151,300
----------
1,485,756
----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.0%
Baxter International, Inc. ........ 3,900 196,706
Beckman Instruments, Inc. ......... 500 20,000
Becton Dickinson & Co. ............ 3,400 170,000
Boston Scientific Corp.* .......... 3,400 155,975
Forest Laboratories, Inc.* ........ 1,000 49,312
Genzyme Corp.-Tissue Repair* ...... 63 433
Guidant Corp. ..................... 2,600 161,850
Hillenbrand Industries, Inc. ...... 1,500 76,781
Johnson & Johnson Co. ............. 12,600 830,025
Medtronic, Inc. ................... 5,000 261,562
Stryker Corp. ..................... 3,400 126,650
Sybron International Corp.* ....... 900 42,244
----------
2,091,538
----------
METALS & MINING -- 0.3%
Aluminum Company of America ....... 3,100 218,162
Barrick Gold Corp. ................ 8,000 149,000
Brush Wellman, Inc. ............... 1,300 31,850
Carpenter Technology Corp. ........ 2,200 105,737
Nucor Corp. ....................... 1,600 77,300
Placer Dome, Inc. ................. 4,700 59,631
----------
641,680
----------
SHARES VALUE
------- ------------
OFFICE EQUIPMENT -- 0.4%
Ikon Office Solutions, Inc. ....... 2,300 $ 64,687
Office Depot, Inc.* ............... 3,900 93,356
Pitney Bowes, Inc. ................ 1,900 170,881
Standard Register Co. ............. 1,700 59,075
Staples, Inc.* .................... 3,500 97,125
Viking Office Products, Inc.* ..... 2,100 45,806
Wallace Computer Service, Inc. .... 2,900 112,737
Xerox Corp. ....................... 3,900 287,869
----------
931,536
----------
OIL & GAS -- 4.7%
Amerada Hess Corp. ................ 4,700 257,912
Amoco Corp. ....................... 3,200 272,400
Anadarko Petroleum Corp. .......... 500 30,344
Apache Corp. ...................... 1,600 56,100
Atlantic Richfield Co. ............ 4,000 320,500
BJ Services Co.* .................. 4,100 294,944
British Petroleum Co. PLC [ADR] ... 3,000 239,063
Chevron Corp. ..................... 7,400 569,800
El Paso Natural Gas Co. ........... 1,400 93,100
Enron Corp. ....................... 4,400 182,875
Ensco International, Inc. ......... 4,200 140,700
Ente Nazionale Idrocarbure SPA
[ADR] ........................... 3,700 211,131
Exxon Corp. ....................... 25,400 1,554,163
Global Marine, Inc.* .............. 4,200 102,900
Halliburton Co. ................... 3,200 166,200
Helmerich & Payne, Inc. ........... 900 61,088
MCN Energy Group, Inc. ............ 2,400 96,900
Mobil Corp. ....................... 8,500 613,594
Murphy Oil Corp. .................. 1,800 97,538
Nabors Industries, Inc.* .......... 2,200 69,163
National Fuel Gas Co. ............. 1,600 77,900
Noble Affiliates, Inc. ............ 1,800 63,450
Noble Drilling Corp.* ............. 2,400 73,500
Occidental Petroleum Corp. ........ 6,600 193,463
Phillips Petroleum Co. ............ 4,000 194,500
Ranger Oil Ltd. ................... 5,400 37,125
Repsol SA [ADR] ................... 3,000 127,688
Royal Dutch Petroleum Co. ......... 26,200 1,419,713
Schlumberger Ltd. ................. 4,200 338,100
Shell Transport & Trading Co.
[ADR] ........................... 6,000 262,500
Societe Nationale Elf Aquitaine SA
[ADR] ........................... 2,000 117,250
Sonat, Inc. ....................... 3,300 150,975
Texaco, Inc. ...................... 6,200 337,125
Tidewater, Inc. ................... 2,700 148,838
Tosco Corp. ....................... 3,000 113,438
Total SA [ADR] .................... 3,000 166,500
Union Pacific Resources Group,
Inc. ............................ 5,509 133,593
Unocal Corp. ...................... 3,600 139,725
USX-Marathon Group ................ 5,400 182,250
Valero Energy Corp. ............... 2,900 91,169
|
SHARES VALUE
------- ------------
Washington Gas Light Co. .......... 2,200 $ 68,063
Weatherford Enterra, Inc.* ........ 1,300 56,875
----------
9,924,155
----------
PAPER & FOREST PRODUCTS -- 0.4%
Georgia Pacific Corp. ............. 1,500 91,125
Glatfelter, (P.H.) Co. ............ 2,600 48,425
International Paper Co. ........... 5,000 215,625
Kimberly-Clark Corp. .............. 7,000 345,188
Wausau Mosinee Paper Corp.* ....... 1,900 38,238
Weyerhaeuser Co. .................. 3,200 157,000
----------
895,601
----------
PERSONAL SERVICES -- 0.1%
Service Corp. International ....... 3,800 140,363
----------
PHARMACEUTICALS -- 3.4%
Abbott Laboratories ............... 8,000 524,500
American Home Products Corp. ...... 7,200 550,800
Amgen, Inc.* ...................... 3,800 205,675
Bristol-Meyers Squibb Co. ......... 10,200 965,175
Cardinal Health, Inc. ............. 900 67,613
Carter-Wallace, Inc. .............. 3,900 65,813
Centocor, Inc.* ................... 1,200 39,900
Genzyme Corp.* .................... 2,100 58,275
Glaxo Wellcome PLC [ADR] .......... 4,800 229,800
Ivax Corp.* ....................... 2,200 14,850
Lilly, (Eli) & Co. ................ 12,200 849,425
McKesson Corp. .................... 1,300 140,644
Merck & Co., Inc. ................. 11,300 1,200,625
Perrigo Co.* ...................... 3,600 48,150
Pfizer, Inc. ...................... 13,300 991,681
Pharmacia & Upjohn, Inc. .......... 6,400 234,400
Scherer, (R.P.) Corp.* ............ 1,000 61,000
Schering-Plough Corp. ............. 7,600 472,150
Warner-Lambert Co. ................ 3,300 409,200
Watson Pharmaceuticals, Inc.* ..... 3,000 97,313
----------
7,226,989
----------
PRINTING & PUBLISHING -- 0.3%
Banta Corp. ....................... 2,900 78,300
Belo, (A.H.) Corp. Cl-A ........... 1,300 72,963
Dun & Bradstreet Corp. ............ 1,500 46,406
Gannett Co., Inc. ................. 5,200 321,425
McGraw-Hill Co., Inc. ............. 2,900 214,600
----------
733,694
----------
RAILROADS -- 0.3%
Burlington Northern Santa Fe
Corp. ........................... 1,300 120,819
CSX Corp. ......................... 2,300 124,200
Kansas City Southern Industries,
Inc. ............................ 5,400 171,450
Norfolk Southern Corp. ............ 6,000 184,875
Union Pacific Corp. ............... 1,900 118,631
----------
719,975
----------
RESTAURANTS -- 0.3%
Brinker International, Inc.* ...... 7,300 116,800
Cracker Barrel Old Country Store,
Inc. ............................ 2,700 90,113
Darden Restaurants, Inc. .......... 6,500 81,250
McDonald's Corp. .................. 4,800 229,200
Outback Steakhouse, Inc.* ......... 1,900 54,625
Tricon Global Restaurants, Inc. ... 1,480 43,013
----------
615,001
----------
SHARES VALUE
------- ------------
RETAIL & MERCHANDISING -- 2.0%
Albertson's, Inc. ................. 4,200 $ 198,975
Bed, Bath & Beyond, Inc.* ......... 2,200 84,700
Circuit City Stores, Inc. ......... 900 32,006
Costco Companies, Inc.* ........... 3,900 174,038
CVS Corp. ......................... 2,000 128,125
Dayton-Hudson Corp. ............... 3,700 249,750
Dollar General Corp. .............. 2,250 81,563
Family Dollar Stores, Inc. ........ 1,300 38,106
Fastenal Co. ...................... 1,400 53,550
Federated Department Stores,
Inc.* ........................... 3,500 150,719
Gap, Inc. ......................... 4,350 154,153
Home Depot, Inc. .................. 9,000 529,875
Kohls Corp.* ...................... 2,800 190,750
Lands' End, Inc.* ................. 1,800 63,113
May Department Stores Co. ......... 3,900 205,481
Meyer, (Fred), Inc.* .............. 3,000 109,125
Micro Warehouse, Inc.* ............ 1,500 20,907
Payless Shoesource, Inc.* ......... 672 45,108
Penney, (J.C.) Co., Inc. .......... 3,500 211,094
Rite Aid Corp. .................... 1,300 76,294
Taylor, (Ann) Stores Corp.* ....... 1,600 21,400
Tiffany & Co. ..................... 1,200 43,275
TJX Companies, Inc. ............... 2,800 96,250
Toys 'R' Us, Inc.* ................ 4,620 145,241
Wal-Mart Stores, Inc. ............. 24,800 978,050
Walgreen Co. ...................... 7,700 241,588
----------
4,323,236
----------
SEMICONDUCTORS -- 0.9%
Analog Devices, Inc.* ............. 7,533 208,570
Atmel Corp.* ...................... 2,000 37,125
Intel Corp. ....................... 15,400 1,081,850
Motorola, Inc. .................... 6,100 348,081
Xilinx, Inc.* ..................... 4,100 143,756
----------
1,819,382
----------
TELECOMMUNICATIONS -- 4.4%
360 Communications Co.* ........... 2,300 46,431
ADC Telecommunications, Inc.* ..... 3,400 141,950
Airtouch Communications, Inc.* .... 6,000 249,375
Aliant Communications, Inc. ....... 1,800 56,475
Ameritech Corp. ................... 6,000 483,000
AT&T Corp. ........................ 16,500 1,010,625
Bell Atlantic Corp. ............... 8,157 742,287
BellSouth Corp. ................... 10,100 568,756
British Telecommunications PLC
[ADR] ........................... 3,200 257,000
Century Telephone Enterprises,
Inc. ............................ 2,800 139,475
Cia de Telecomunicaciones de Chile
SA [ADR] ........................ 1,700 50,788
Comcast Corp. Cl-A ................ 7,000 220,938
Ericsson, (L.M.) Telephone Co.
[ADR] ........................... 4,800 179,100
GTE Corp. ......................... 10,000 522,500
|
SHARES VALUE
------- ------------
Hong Kong Telecommunications Ltd.
[ADR] ........................... 9,245 $ 190,678
Lucent Technologies, Inc. ......... 7,276 581,171
MCI Communications Corp. .......... 7,700 329,656
Metronet Communications Corp.
Warrants* ....................... 100 0
Nextel Communications, Inc.
Cl-A* ........................... 3,600 93,600
Nokia Corp. Cl-A [ADR] ............ 1,800 126,000
Northern Telecom Ltd. ............. 3,400 302,600
Primus Telecommunications Group,
Inc. Warrants* .................. 150 1,500
SBC Communications, Inc. .......... 9,357 685,400
Southern New England
Telecommunications Corp. ........ 2,400 120,750
Sprint Corp. ...................... 5,400 316,575
Telebras SA [ADR] ................. 3,300 384,244
Telefonica de Espana [ADR] ........ 1,600 145,700
Telefonos de Mexico SA Cl-L
[ADR] ........................... 1,800 100,913
Telephone & Data Systems, Inc. .... 2,000 93,125
Tellabs, Inc.* .................... 2,800 148,050
U.S. West Communications Group .... 6,200 279,775
U.S. West, Inc. ................... 8,000 231,000
Vodafone Group PLC [ADR] .......... 3,200 232,000
Worldcom, Inc.* ................... 10,900 329,725
----------
9,361,162
----------
TRANSPORTATION -- 0.0%
Alexander & Baldwin, Inc. ......... 1,800 49,163
Consolidated Freightways, Inc. .... 900 34,538
----------
83,701
----------
UTILITIES -- 1.6%
Allegheny Energy, Inc. ............ 2,700 87,750
American Water Works Co., Inc. .... 2,100 57,356
Calenergy, Inc.* .................. 2,400 69,000
CMS Energy Corp. .................. 2,800 123,375
Duke Energy Corporation ........... 4,500 249,188
Edison International, Inc. ........ 7,800 212,063
Empresa Nacional de Electridad SA
[ADR] ........................... 2,000 35,375
Endesa SA [ADR] ................... 7,600 138,225
Energy Group PLC [ADR] ............ 337 15,039
Entergy Corp. ..................... 6,200 185,613
Florida Progress Corp. ............ 2,200 86,350
FPL Group, Inc. ................... 3,700 218,994
Idaho Power Co. ................... 2,600 97,825
Illinova Corp. .................... 2,700 72,731
IPALCO Enterprises, Inc. .......... 2,400 100,650
MidAmerican Energy Holdings Co. ... 3,800 83,600
New Century Energies, Inc. ........ 2,395 114,810
New York State Electric & Gas
Corp. ........................... 3,400 120,700
Niagara Mohawk Power Corp. ........ 12,700 133,350
NIPSCO Industries, Inc. ........... 2,300 113,706
PG&E Corp. ........................ 8,200 249,588
Potomac Electric Power Co. ........ 3,200 82,600
Public Service Co. of New
Mexico .......................... 1,000 23,688
SHARES VALUE
------- ------------
SCANA Corp. ....................... 2,700 $ 80,831
Southern Co. ...................... 10,500 271,688
Teco Energy, Inc. ................. 3,100 87,188
Texas Utilities Co. ............... 3,700 153,781
Unicom Corp. ...................... 4,200 129,150
----------
3,394,214
----------
TOTAL COMMON STOCK
(COST $71,122,073)................... 99,734,615
----------
FOREIGN STOCK -- 9.0%
ADVERTISING -- 0.1%
Asahi Tsushin -- (JPY) ............ 9,000 130,133
----------
AEROSPACE -- 0.0%
Mitsubishi Heavy Industries Ltd. --
(JPY) ........................... 22,000 92,047
----------
AIRLINES -- 0.1%
KLM Royal Dutch Airlines NV --
(NLG) ........................... 3,000 110,989
Singapore Airlines
Ltd. -- (SGD) ................... 7,000 45,699
----------
156,688
----------
AUTOMOBILE MANUFACTURERS -- 0.1%
MAN AG -- (DEM) ................... 1,000 288,926
----------
AUTOMOTIVE PARTS -- 0.1%
Bridgestone Corp. -- (JPY) ........ 15,000 326,485
----------
BEVERAGES -- 0.1%
Lion Nathan Ltd. -- (NZD) ......... 50,000 112,066
Louis Vuitton Moet
Hennesy -- (FRF) ................ 660 109,600
----------
221,666
----------
BUILDING MATERIALS -- 0.2%
Blue Circle Industries
PLC -- (GBP) .................... 26,513 148,979
Holderbank Financiere Glarus AG --
(CHF) ........................... 260 212,485
Malayan Cement BHD -- (MYR) ....... 51,250 34,892
----------
396,356
----------
CHEMICALS -- 0.3%
AKZO Nobel NV -- (NLG) ............ 400 68,981
BASF AG -- (DEM) .................. 6,700 239,227
Bayer AG -- (DEM) ................. 5,000 185,619
L'Air Liquide -- (FRF) ............ 1,260 197,298
Sumitomo Chemical Co. -- (JPY) .... 26,000 59,990
----------
751,115
----------
CLOTHING & APPAREL -- 0.3%
Benetton Group SPA -- (ITL) ....... 4,160 68,118
Christian Dior SA -- (FRF) ........ 1,200 123,075
Kuraray Co. Ltd. -- (JPY) ......... 21,000 174,433
Yue Yuen Industrial Holdings --
(HKD) ........................... 95,000 201,077
----------
566,703
----------
CONGLOMERATES -- 0.3%
Cycle & Carriage Ltd. -- (SGD) .... 15,000 61,872
GKN PLC -- (GBP) .................. 6,000 123,110
Hutchison Whampoa Ltd. -- (HKD) ... 56,000 351,253
Sime Darby BHD -- (MYR) ........... 50,000 48,043
Tomkins PLC -- (GBP) .............. 12,000 57,458
|
SHARES VALUE
------- ------------
United Engineers Ltd. -- (MYR) .... 15,000 $ 12,486
Valmet Corp. -- (FIM) ............. 4,000 55,238
----------
709,460
----------
CONSTRUCTION -- 0.2%
Compagnie Francaise d'Etudes et de
Construction Technip -- (FRF) ... 2,300 242,775
Matsushita Electric Works
Ltd. -- (JPY) ................... 15,000 130,363
----------
373,138
----------
CONSUMER PRODUCTS & SERVICES -- 0.3%
JUSCO Co. -- (JPY) ................ 11,000 155,667
Kao Corp. -- (JPY) ................ 26,000 375,939
Orkla ASA Cl-A -- (NOK) ........... 1,900 163,656
----------
695,262
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.5%
Johnson Electric
Holdings -- (HKD) ............... 93,600 269,387
Mitsubishi Electric
Corp. -- (JPY) .................. 27,000 69,358
Omron Corp. -- (JPY) .............. 24,000 376,554
Sharp Corp. -- (JPY) .............. 9,000 62,159
Siemans AG -- (DEM) ............... 2,000 120,687
Sony Corp. -- (JPY) ............... 3,000 267,649
----------
1,165,794
----------
FINANCIAL-BANK & TRUST -- 2.1%
Abbey National PLC -- (GBP) ....... 28,000 502,641
ABN Amro Holding NV -- (NLG) ...... 8,000 155,878
Banca Commerciale Italia NA --
(ITL) ........................... 30,000 104,355
Bank of Scotland -- (GBP) ......... 20,208 186,203
Bankgesellschaft Berlin
AG -- (DEM) ..................... 5,450 119,728
Barclays PLC -- (GBP) ............. 15,191 404,427
DCB Holdings BHD -- (MYR) ......... 33,000 15,939
Deutsche Bank AG -- (DEM) ......... 2,800 195,902
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD) .............. 4,000 34,185
Dresdner Bank AG -- (DEM) ......... 3,400 154,680
HSBC Holdings PLC -- (GBP) ........ 18,000 462,032
ING Groep NV -- (NLG) ............. 10,153 427,710
Kredietbank NV -- (BEF) ........... 400 167,882
Overseas-Chinese Banking Corp.
Ltd. -- (SGD) ................... 6,000 34,897
RHB Sakura Merchant Bankers
Berhad -- (MYR) ................. 1,650 555
Societe Generale -- (BEF) ......... 1,000 91,498
Svenska Handelsbanken
Cl-A -- (SEK) ................... 7,300 252,553
Swiss Bank Corp. -- (CHF) ......... 1,840 572,733
Toronto Dominion Bank -- (CAD) .... 4,100 154,142
Union Bank of
Switzerland -- (CHF) ............ 300 434,404
Westpac Banking Corp.
Ltd. -- (AUD) ................... 10,000 63,958
----------
4,536,302
----------
FINANCIAL SERVICES -- 0.2%
Holding Di Partecipazioni
Industriali SPA -- (ITL)* ....... 45,000 26,547
Mediobanca -- (ITL) ............... 7,000 54,994
Societe Generale -- (FRF) ......... 1,972 268,796
----------
350,337
----------
SHARES VALUE
------- ------------
FOOD -- 0.6%
Cadbury Schweppes PLC -- (GBP) .... 1,400 $ 14,132
CSM NV -- (NLG) ................... 2,400 106,549
Danisco AS -- (DKK) ............... 4,000 221,988
Eridania Beghin-Say SA -- (FRF) ... 1,400 218,988
Huhtamaki Group -- (FIM) .......... 1,500 61,978
Nestle SA -- (CHF) ................ 380 570,306
----------
1,193,941
----------
INSURANCE -- 0.3%
AXA SA -- (FRF) ................... 3,400 263,201
CKAG Colonia Konzern AG --
(DEM) ........................... 1,500 143,490
Sumitomo Marine & Fire Insurance
Co. -- (JPY) .................... 30,000 159,205
----------
565,896
----------
MACHINERY & EQUIPMENT -- 0.2%
ABB AG -- (CHF) ................... 160 201,296
SIG Holding AG -- (CHF) ........... 70 191,971
----------
393,267
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.4%
Novartis AG -- (CHF) .............. 180 292,482
Smith and Nephew PLC -- (GBP) ..... 38,000 112,859
Terumo Corp. -- (JPY) ............. 26,000 383,938
----------
789,279
----------
METALS & MINING -- 0.1%
Anglo American Platinum Corp.
Ltd. -- (ZAR) ................... 12,000 160,284
Lonrho PLC -- (GBP) ............... 57,990 88,738
Rio Tinto Ltd. -- (AUD) ........... 6,000 69,990
----------
319,012
----------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY) .............. 9,000 210,427
Ricoh Co. Ltd. -- (JPY) ........... 13,000 161,974
----------
372,401
----------
OIL & GAS -- 0.1%
Santos Ltd. -- (AUD) .............. 32,000 131,773
Societe Nationale Elf Aquitaine
SA -- (FRF) ..................... 1,100 127,995
----------
259,768
----------
PAPER & FOREST PRODUCTS -- 0.2%
Bobst SA -- (CHF) ................. 160 235,851
Kimberly-Clark de Mexico SA
Cl-A -- (MXP) ................... 10,000 47,880
Svenska Cellulosa AB
Cl-B -- (SEK) ................... 3,500 78,740
----------
362,471
----------
|
SHARES VALUE
------- ------------
PHARMACEUTICALS -- 0.5%
Altana AG -- (DEM) ................ 2,100 $ 138,634
Astra AB Cl-B -- (SEK) ............ 14,666 246,764
Gehe AG -- (DEM) .................. 2,150 108,813
Novartis AG -- (CHF) .............. 160 260,534
Takeda Chemical
Industries -- (JPY) ............. 13,000 371,940
----------
1,126,685
----------
PRINTING & PUBLISHING -- 0.3%
Dai Nippon Printing Co.
Ltd. -- (JPY) ................... 12,000 226,117
Elsevier NV -- (NLG) .............. 12,000 194,157
Pearson PLC -- (GBP) .............. 11,600 150,977
----------
571,251
----------
REAL ESTATE -- 0.1%
Cheung Kong Holdings
Ltd. -- (HKD) ................... 38,000 248,894
DBS Land Ltd. -- (SGD) ............ 25,000 38,280
----------
287,174
----------
RETAIL & MERCHANDISING -- 0.3%
Carrefour Supermarche
SA -- (FRF) ..................... 150 78,293
Marui Co. Ltd. -- (JPY) ........... 7,000 109,290
Pinault-Printemps Redoute SA --
(FRF) ........................... 250 133,439
Tesco PLC -- (GBP) ................ 33,943 276,459
----------
597,481
----------
TELECOMMUNICATIONS -- 0.5%
Nippon Telegraph & Telephone
Corp. -- (JPY) .................. 280 241,192
Telecom Corp. of New Zealand
Ltd. -- (NZD) ................... 22,000 106,666
Telecom Italia Mobile
SPA -- (ITL) .................... 75,000 346,367
Telecom Italia SPA -- (ITL) ....... 41,666 266,305
Telekom Malaysia BHD -- (MYR) ..... 24,000 70,908
----------
1,031,438
----------
TRANSPORTATION -- 0.1%
BAA PLC -- (GBP) .................. 17,600 144,217
----------
UTILITIES -- 0.2%
Electrabel SA -- (BEF) ............ 420 97,150
Hong Kong Electric Holdings Ltd. --
(HKD) ........................... 30,000 114,025
Veba AG -- (DEM) .................. 4,000 272,519
----------
483,694
----------
TOTAL FOREIGN STOCK
(COST $17,569,785).......... 19,258,387
----------
|
PAR
MATURITY (000)
--------- --------
CORPORATE OBLIGATIONS -- 14.1%
AEROSPACE -- 0.4%
BE Aerospace, Inc. Sr.
Sub. Notes
9.875%.................. 02/01/06 $ 150 158,625
Boeing Co. Notes
6.35%................... 06/15/03 120 121,350
Dyncorp, Inc. Sr. Sub.
Notes
9.50%................... 03/01/07 300 305,250
Raytheon Co. Notes
6.50%................... 07/15/05 350 353,063
-------------
938,288
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
AIRLINES -- 0.0%
Southwest Airlines Co.
Debs.
9.25%................... 02/15/98 $ 25 $ 25,082
-------------
AUTOMOTIVE PARTS -- 0.3%
Chief Auto Parts, Inc. Sr.
Notes
10.50%.................. 05/15/05 75 75,188
Safelite Glass Corp. Sr.
Sub. Notes 144A
9.875%.................. 12/15/06 250 274,375
Venture Holdings Trust Sr.
Notes Cl-B
9.50%................... 07/01/05 250 252,500
-------------
602,063
-------------
BEVERAGES -- 0.1%
Anheuser-Busch Companies,
Inc. Debs.
7.00%................... 12/01/25 150 152,250
-------------
152,250
-------------
BROADCASTING -- 0.2%
TV Azteca SA de CV Sr.
Notes Cl-B
10.50%.................. 02/15/07 250 260,625
Young Broadcasting Corp.
Sr. Sub. Notes
10.125%................. 02/15/05 150 157,500
-------------
418,125
-------------
BUILDING MATERIALS -- 0.2%
American Standard Debs.
9.25%................... 12/01/16 20 20,850
Falcon Building Products
Sr. Sub. Notes
9.50%................... 06/15/07 250 258,125
Koppers Industry, Inc. Sr.
Sub. Notes
9.875%.................. 12/01/07 75 77,250
-------------
356,225
-------------
BUSINESS SERVICES -- 0.2%
Iron Mountain, Inc. Sr.
Sub. Notes
8.75%................... 09/30/09 125 128,438
Muzak L.P. Notes
10.00%.................. 10/01/03 225 235,125
-------------
363,563
-------------
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
CHEMICALS -- 0.2%
Scotts Co. Sr. Sub. Notes
9.875%.................. 08/01/04 $ 100 $ 107,750
Sovereign Specialty
Chemicals Sr. Sub. Notes
144A
9.50%................... 08/01/07 250 257,500
-------------
365,250
-------------
CLOTHING & APPAREL -- 0.2%
Delta Mills, Inc. Sr.
Notes 144A
9.625%.................. 09/01/07 125 127,500
Dyersburg Corp. Notes Cl-B
9.75%................... 09/01/07 125 131,250
Synthetic Industries, Inc.
Sr. Sub. Notes
9.25%................... 02/15/07 250 265,000
-------------
523,750
-------------
COMPUTER SERVICES & SOFTWARE -- 0.1%
DecisionOne Corp. Sr. Sub.
Notes
9.75%................... 08/01/07 175 182,438
DecisionOne Holdings Corp.
Units [STEP]
10.549%................. 08/01/08 125 81,250
-------------
263,688
-------------
CONSTRUCTION -- 0.1%
Newport News Shipbuilding,
Inc. Sr. Notes
8.625%.................. 12/01/06 150 158,250
-------------
CONSUMER PRODUCTS & SERVICES -- 0.4%
American Safety Razor Co.
Sr. Notes
9.875%.................. 08/01/05 150 160,313
Doane Products Co. Sr.
Notes
10.625%................. 03/01/06 150 160,313
Herff Jones, Inc. Sr. Sub.
Notes
11.00%.................. 08/15/05 175 189,875
PM Holdings Corp. Sub.
Notes [STEP]
10.728%................. 09/01/05 100 77,875
Protection One, Inc. Sr.
Disc. Notes [STEP]
10.811%................. 06/30/05 200 215,500
-------------
803,876
-------------
CONTAINERS & PACKAGING -- 0.4%
Amtrol, Inc. Sr. Sub.
Notes
10.625%................. 12/31/06 150 154,875
Container Corp. of America
Sr. Notes
9.75%................... 04/01/03 150 162,000
11.25%.................. 05/01/04 100 109,250
PAR
MATURITY (000) VALUE
--------- -------- -------------
Plastic Containers Sr.
Notes Cl-B
10.00%.................. 12/15/06 $ 250 $ 263,750
U.S. Can Corp. Sr. Sub.
Notes
10.125%................. 10/15/06 150 158,625
-------------
848,500
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.6%
Ametek, Inc. Sr. Notes
9.75%................... 03/15/04 100 106,500
Celestica International,
Inc. Sr. Sub. Notes
10.50%.................. 12/31/06 125 135,625
Details, Inc. Sr. Sub.
Notes 144A
10.00%.................. 11/15/05 150 154,125
DII Group, Inc. Sr. Sub.
Notes 144A
8.50%................... 09/15/07 250 246,250
HCC Industries, Inc. Sr.
Sub. Notes
10.75%.................. 05/15/07 250 260,000
RCN Corp. Sr. Notes 144A
10.00%.................. 10/15/07 75 77,438
Stellex Industries, Inc.
Sr. Sub. Notes 144A
9.50%................... 11/01/07 125 125,625
Viasystems, Inc. Sr. Sub.
Notes
9.75%................... 06/01/07 250 258,438
-------------
1,364,001
-------------
ENTERTAINMENT & LEISURE -- 0.9%
AMC Entertainment, Inc.
Sr. Sub. Notes
9.50%................... 03/15/09 250 259,063
Grand Casinos, Inc. First
Mtge.
10.125%................. 12/01/03 150 162,000
Rio Hotel & Casino, Inc.
Notes
9.50%................... 04/15/07 100 106,250
Rio Hotel & Casino, Inc.
Sr. Sub. Notes
10.625%................. 07/15/05 150 162,375
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
9.87%................... 06/15/05 150 156,750
The Majestic Star Casino
LLC Sr. Notes
12.75%.................. 05/15/03 250 269,375
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 $ 500 $ 524,375
United Artists Theatre
Pass Through Trust
9.30%................... 07/01/15 244 249,315
-------------
1,889,503
-------------
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste Industries
Sr. Disc. Notes [STEP]
144A
9.57%................... 06/01/07 75 52,969
Allied Waste North America
Notes
10.25%.................. 12/01/06 200 219,000
-------------
271,969
-------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 250 276,875
-------------
FINANCIAL-BANK & TRUST -- 1.1%
Airplanes Pass Through
Trust
10.875%................. 03/15/19 250 281,256
Aristar, Inc. Sr. Notes
8.875%.................. 08/15/98 200 203,086
7.875%.................. 02/15/99 200 204,000
Banesto Delaware Sub.
Notes
8.25%................... 07/28/02 50 53,625
Bank of Nova Scotia Sub.
Notes
6.25%................... 09/15/08 50 49,438
BankAmerica Corp. Sub.
Notes
6.85%................... 03/01/03 150 153,750
BankUnited Capital Trust
Cl-B
10.25%.................. 12/31/26 250 258,125
CoreStates Home Equity
Trust Cl-A
6.65%................... 05/15/09 60 60,933
First Federal Financial
Notes
11.75%.................. 10/01/04 125 138,438
MBNA Corp.
6.15%................... 10/01/03 450 442,688
NationsBank Texas Sr.
Notes
6.75%................... 08/15/00 150 152,438
Provident Bank Corp. Sub.
Notes
7.125%.................. 03/15/03 175 180,031
U.S. Bancorp Notes
6.72%................... 06/01/98 100 100,307
-------------
2,278,115
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
FINANCIAL SERVICES -- 2.2%
Ahmanson, (H.F.) & Co. Sr.
Notes
9.875%.................. 11/15/99 $ 100 $ 106,125
American Express Master
Trust
7.60%................... 08/15/02 500 523,412
Associates Corp. of North
America Sr. Notes
7.70%................... 03/15/00 50 51,625
Bay View Capital
Corporation Sub. Notes
9.125%.................. 08/15/07 150 154,500
Chrysler Financial Corp.
Notes
8.46%................... 01/19/00 200 209,250
Ciesco L.P. Notes
7.375%.................. 04/19/00 250 255,938
Conseco, Inc. Sr. Notes
8.125%.................. 02/15/03 500 530,000
Enhance Financial Services
Group Debs.
6.75%................... 03/01/03 300 306,375
Household Finance Corp.
Sr. Notes
6.96%................... 04/27/98 300 301,185
Intertek Finance PLC Sr.
Sub. Notes Cl-B
10.25%.................. 11/01/06 250 261,875
ITT Publimedia Sr. Sub.
Notes 144A
9.375%.................. 09/15/07 250 263,750
Loomis Fargo & Co. Notes
10.00%.................. 01/15/04 150 151,125
Ocwen Capital Trust I
10.875%................. 08/01/27 200 216,750
Ocwen Financial Corp.
Notes
11.875%................. 10/01/03 150 169,125
Salomon Smith Barney
Holdings Notes
6.625%.................. 06/01/00 200 202,500
Salomon, Inc Sr. Notes
6.75%................... 02/15/03 500 506,875
Simon Debartolo Group L.P.
Notes
7.00%................... 07/15/09 525 537,469
-------------
4,747,879
-------------
FOOD -- 0.5%
Ameriserv Food
Distributor, Inc. Sr.
Sub. Notes
10.125%................. 07/15/07 250 262,500
Archibald Candy Corp.
Notes
10.25%.................. 07/01/04 250 261,875
Keebler Corp. Sr. Sub.
Notes
10.75%.................. 07/01/06 250 281,875
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Mrs. Fields Original
Cookies Notes 144A
10.125%................. 12/01/04 $ 100 $ 100,750
Windy Hill Pet Food Co.
Sr. Sub. Notes
9.75%................... 05/15/07 250 260,625
-------------
1,167,625
-------------
HEALTHCARE SERVICES -- 0.2%
Quest Diagnostic, Inc. Sr.
Sub. Notes
10.75%.................. 12/15/06 125 137,188
Vencor, Inc. Sr. Sub.
Notes
8.625%.................. 07/15/07 250 250,625
-------------
387,813
-------------
HOTELS & MOTELS -- 0.2%
Courtyard by Marriott Sr.
Notes
10.75%.................. 02/01/08 150 165,000
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 150 159,750
-------------
324,750
-------------
INDUSTRIAL PRODUCTS -- 0.1%
International Wire Group,
Inc. Cl-B
11.75%.................. 06/01/05 250 273,750
-------------
INSURANCE -- 0.3%
New York Life Insurance
Co. Notes 144A
7.50%................... 12/15/23 420 437,325
Superior National Capital
Trust I 144A
10.75%.................. 12/01/17 125 128,125
-------------
565,450
-------------
MACHINERY & EQUIPMENT -- 0.1%
Hawk Corp. Sr. Notes Cl-B
10.25%.................. 12/01/03 150 160,500
-------------
METALS & MINING -- 0.3%
AEI Holding Co. Sr. Notes
144A
10.00%.................. 11/15/07 225 231,188
Freeport-McMoran Resource
Partners L.P. Sr. Notes
7.00%................... 02/15/08 150 150,563
Haynes International, Inc.
Sr. Notes
11.625%................. 09/01/04 150 173,063
-------------
554,814
-------------
OFFICE EQUIPMENT -- 0.1%
Axiohm Transaction
Solutions, Inc. Sr. Sub.
Notes 144A
9.75%................... 10/01/07 125 127,188
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
OIL & GAS -- 0.4%
Ferrellgas Partners, L.P.
Financial Corp. Sr.
Notes
10.00%.................. 08/01/01 $ 100 $ 105,750
Flores & Rucks, Inc. Sr.
Sub. Notes
9.75%................... 10/01/06 50 55,000
Kelley Oil & Gas Corp. Sr.
Sub. Notes
10.375%................. 10/15/06 150 160,125
Pride Petroleum Services,
Inc. Sr. Notes
9.375%.................. 05/01/07 250 269,375
Tenneco, Inc. Notes
8.20%................... 11/15/99 55 56,994
8.075%.................. 10/01/02 150 159,938
-------------
807,182
-------------
PAPER & FOREST PRODUCTS -- 0.1%
Maxxam Group Holdings,
Inc. Sr. Notes
11.25%.................. 08/01/03 50 53,125
12.00%.................. 08/01/03 150 162,938
-------------
216,063
-------------
PHARMACEUTICALS -- 0.0%
Owens & Minor, Inc. Sr.
Sub. Notes
10.875%................. 06/01/06 75 82,875
-------------
PRINTING & PUBLISHING -- 0.1%
Sun Media Corp. Sr. Sub
Notes
9.50%................... 05/15/07 250 268,750
-------------
REAL ESTATE -- 0.3%
HMC Acquisition Properties
Sr. Notes Cl-B
9.00%................... 12/15/07 150 156,750
HMH Properties, Inc. Sr.
Notes Cl-B
8.875%.................. 07/15/07 250 263,750
Saul, (B.F.) Sr. Notes
[REIT]
11.625%................. 04/01/02 150 160,500
-------------
581,000
-------------
RESTAURANTS -- 0.0%
McDonald's Corp. Notes
6.625%.................. 09/01/05 100 102,250
-------------
102,250
-------------
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
RETAIL & MERCHANDISING -- 0.2%
Specialty Retailers, Inc.
Notes Cl-B
8.50%................... 07/15/05 $ 250 $ 255,000
Wal-Mart Stores, Inc.
Debs.
7.25%................... 06/01/13 85 91,906
-------------
346,906
-------------
SEMICONDUCTORS -- 0.1%
Fairchild Semiconductor
Corp. Sr. Sub. Notes
10.125%................. 03/15/07 250 264,375
-------------
TELECOMMUNICATIONS -- 1.8%
Comcast Cable
Communication Notes
8.125%.................. 05/01/04 400 431,500
Communication & Power
Industries Sr. Sub.
Notes
12.00%.................. 08/01/05 250 278,750
Frontiervision Sr. Sub.
Notes
11.00%.................. 10/15/06 150 167,250
Fundy Cable Ltd. Sr. Notes
11.00%.................. 11/15/05 250 270,000
L-3 Communications Corp.
Sr. Sub. Notes Cl-B
10.375%................. 05/01/07 175 189,875
Lucent Technologies, Inc.
Notes
6.90%................... 07/15/01 500 513,125
Marcus Cable Operating Co.
Sr. Disc. Notes [STEP]
10.86%.................. 08/01/04 250 232,500
Metronet Communications
Corp.
12.00%.................. 08/15/07 100 115,500
Nextlink Communications,
Inc. Sr. Notes
9.625%.................. 10/01/07 125 128,750
Pegasus Communications
Corp. Sr. Notes 144A
9.625%.................. 10/15/05 250 256,875
Rogers Cablesystems Ltd.
Sr. Notes
10.00%.................. 03/15/05 125 138,438
Sprint Spectrum L.P. Sr.
Notes
11.00%.................. 08/15/06 250 281,250
TCI Communications, Inc.
Sr. Notes
8.65%................... 09/15/04 200 219,250
Teleport Communications
Group, Inc. Sr. Notes
9.875%.................. 07/01/06 100 112,750
PAR
MATURITY (000) VALUE
--------- -------- -------------
Telewest PLC Debs. [STEP]
10.377%................. 10/01/07 $ 250 $ 195,000
United Telecommunications,
Inc. Debs.
9.75%................... 04/01/00 250 269,063
-------------
3,799,876
-------------
TRANSPORTATION -- 1.0%
Allied Holdings, Inc.
Notes Cl-B
8.625%.................. 10/01/07 250 256,875
Coach USA, Inc. Cl-B
9.375%.................. 07/01/07 175 178,938
Federal Express Corp.
Notes
6.25%................... 04/15/98 70 70,015
Global Ocean Carriers Ltd.
Sr. Notes 144A
10.25%.................. 07/15/07 225 214,875
Sea Containers Ltd. Sr.
Sub. Notes
12.50%.................. 12/01/04 70 79,450
Stena AB Sr. Notes
8.75%................... 06/15/07 250 253,750
Union Tank Car Co. Notes
7.125%.................. 02/01/07 150 157,125
-------------
1,211,028
-------------
UTILITIES -- 1.0%
Citizens Utilities Co.
Debs.
8.45%................... 09/01/01 335 360,125
Commonwealth Edison Co.
Notes
9.00%................... 10/15/99 250 260,938
Consumers Energy Co. First
Mtge.
6.625%.................. 10/01/98 50 50,000
Energy Corp. of America
Sr. Sub. Notes Cl-A
9.50%................... 05/15/07 250 250,625
Florida Power & Light
First Mtge.
5.70%................... 03/05/98 200 200,000
Monongahela Power First
Mtge.
8.50%................... 06/01/22 150 158,063
Northland Cable Television
Sr. Sub. Notes 144A
10.25%.................. 11/15/07 250 264,063
Pacific Gas & Electric Co.
First Mtge.
6.75%................... 12/01/00 200 201,000
Public Service Electric &
Gas First Mtge.
7.00%................... 09/01/24 300 295,500
|
PAR
MATURITY (000) VALUE
--------- -------- -------------
Southern California Edison
Co. Notes
6.50%................... 06/01/01 $ 100 $ 101,125
-------------
2,141,439
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $29,052,118).................... 30,030,886
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 8.3%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.0%
7.50%................... 07/15/20 15 14,986
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 0.0%
6.02%................... 01/20/98 60 60,010
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 8.3%
6.00%........... 10/15/23-05/15/26 2,681 2,590,688
6.50%........... 02/15/24-05/15/24 1,484 1,470,796
7.00%........... 09/15/23-02/15/27 8,237 8,317,813
7.50%........... 06/15/24-06/15/26 1,536 1,575,910
8.00%........... 05/15/16-06/15/26 1,190 1,236,159
8.50%........... 06/15/16-10/15/26 2,010 2,112,207
9.00%........... 07/15/16 12 13,302
9.50%........... 10/15/09-06/15/20 50 54,491
10.00%.......... 11/15/09 13 14,554
10.50%.......... 08/15/15 9 9,699
11.50%.......... 06/15/10-11/15/15 145 165,451
12.00%.......... 09/15/13-01/15/14 7 7,400
-------------
17,568,470
-------------
TENNESSEE VALLEY AUTHORITY -- 0.0%
7.75%................... 12/15/22 10 10,400
7.25%................... 07/15/43 20 21,050
6.875%.................. 12/15/43 40 40,600
-------------
72,050
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $17,204,828)............................. 17,715,516
-------------
U.S. TREASURY OBLIGATIONS -- 15.8%
U.S. TREASURY BILLS -- 1.2%
4.60%................... 01/22/98 $ 2,600 2,593,023
-------------
U.S. TREASURY BONDS -- 7.2%
11.625%................. 11/15/02 100 124,678
7.125%.................. 02/15/23 240 274,099
7.625%.................. 02/15/25 300 364,404
6.875%.................. 08/15/25 300 334,734
6.00%................... 02/15/26 100 99,857
6.75%................... 08/15/26 11,525 12,699,166
6.625%.................. 02/15/27 1,250 1,356,813
-------------
15,253,751
-------------
U.S. TREASURY NOTES -- 7.4%
6.125%.................. 05/15/98 100 100,250
6.00%................... 05/31/98 450 450,931
5.125%.................. 12/31/98 50 49,787
PAR
MATURITY (000) VALUE
--------- -------- -------------
6.375%.................. 05/15/99 $ 1,950 $ 1,968,720
6.75%................... 05/31/99 460 466,877
6.00%................... 06/30/99 3,500 3,518,795
6.875%.................. 03/31/00 250 256,242
6.25%................... 05/31/00 100 101,262
6.125%.................. 09/30/00 150 151,582
5.625%.................. 11/30/00 275 274,510
5.625%.................. 02/28/01 1,100 1,097,547
5.75%................... 08/15/03 665 665,578
7.50%................... 02/15/05 250 274,935
5.875%.................. 11/15/05 425 427,486
5.625%.................. 02/15/06 500 494,675
6.50%................... 10/15/06 1,350 1,414,179
6.25%................... 02/15/07 2,000 2,064,300
6.125%.................. 08/15/07 2,000 2,056,140
-------------
15,833,796
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $32,402,248)............................. 33,680,570
-------------
|
PRINCIPAL
IN LOCAL
CURRENCY
(000)
--------
FOREIGN BONDS -- 2.4%
AUSTRALIA -- 0.0%
Australian Government
9.50%................... 08/15/03 20 15,323
----------
BELGIUM -- 0.0%
Belgium Kingdom Government
7.25%................... 04/29/04 1,550 46,630
----------
CANADA -- 0.2%
Canadian Government
8.50%................... 04/01/02 380 296,083
6.50%................... 06/01/04 110 81,081
9.75%................... 06/01/21 10 10,344
----------
387,508
----------
DENMARK -- 0.0%
Kingdom of Denmark
7.00%................... 12/15/04 275 43,777
----------
FRANCE -- 0.4%
France O.A.T.
8.50%................... 11/25/02 1,406 270,923
8.25%................... 02/27/04 264 51,379
5.50%................... 04/25/07 3,000 506,162
8.50%................... 04/25/23 50 11,179
----------
839,643
----------
GERMANY -- 0.5%
Deutscheland Republic
8.50%................... 08/21/00 375 229,396
8.375%.................. 05/21/01 410 254,477
|
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- -------- ------------
6.50%................... 07/15/03 110 $ 65,735
6.00%................... 07/04/07 838 487,203
----------
1,036,811
----------
ITALY -- 0.1%
Italian Government
11.50%.................. 03/01/03 275 198,100
8.50%................... 08/01/04 45 29,646
----------
227,746
----------
JAPAN -- 0.8%
European Investment Bank
4.625%.................. 02/26/03 53,000 473,356
3.00%................... 09/20/06 102,000 856,073
International Bank for
Reconstruction &
Development Global Bond
6.75%................... 03/15/00 14,000 121,856
Japanese Government
4.50%................... 06/20/03 33,500 299,596
----------
1,750,881
----------
NETHERLANDS -- 0.1%
Netherlands Government
5.75%................... 01/15/04 115 58,685
----------
SPAIN -- 0.0%
Spanish Government
8.00%................... 05/30/04 6,400 48,016
----------
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- -------- ------------
UNITED KINGDOM -- 0.3%
United Kingdom Treasury
9.00%................... 03/03/00 85 $ 146,023
8.00%................... 06/10/03 91 159,886
7.50%................... 12/07/06 164 290,592
----------
596,501
----------
TOTAL FOREIGN BONDS
(COST $5,197,512)........... 5,051,521
----------
PAR
(000)
--------
COMMERCIAL PAPER -- 4.1%
Procter & Gamble Co. 5.90%
(COST $8,718,514)......... 01/16/98 $ 8,740 8,718,514
----------
SHARES
--------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Fund
(COST $9,022)...................... 9,022 9,022
----------
TOTAL INVESTMENTS -- 100.5%
(COST $181,276,100).................. 214,199,031
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.5%)..................... (1,123,615)
----------
NET ASSETS -- 100.0%................... $213,075,416
==========
|
Unless otherwise noted, all foreign stocks are common stocks.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year these securities amounted to 1.6% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
PAR
MATURITY (000) VALUE
-------- -------- ------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 53.3%
FEDERAL HOME LOAN MORTGAGE CORP. -- 14.1%
5.95%.................. 06/19/98 $1,000 $ 10,013,899
8.25%.................. 08/01/17 544 565,945
6.50% [TBA]............ 01/14/28 43,500 42,997,140
6.50% [TBA]............ 02/12/28 22,000 21,731,820
7.00% [IO]............. 04/25/19 233 21,362
7.00% [TBA]............ 01/14/28 3,000 3,026,250
7.775% [VR]............ 02/01/24 2,025 2,099,823
------------
80,456,239
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 13.2%
5.84%.................. 06/19/98 20,000 20,015,860
6.90%.................. 05/25/23 206 202,846
7.50%.................. 04/01/24 3,639 3,725,104
9.40%.................. 07/25/03 226 235,850
6.154% [VR]............ 10/01/27 971 970,077
6.154% [VR]............ 06/01/28 957 956,508
6.154% [VR]............ 10/01/28 964 963,190
6.25% [IO]............. 05/25/08 236 64,917
6.50% [IO]............. 06/25/14 915 30,174
6.50% [TBA]............ 02/12/28 12,000 11,842,560
6.50% [TBA]............ 03/12/28 36,500 35,986,810
7.799% [VR]............ 01/01/24 306 318,651
------------
75,312,547
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 22.5%
6.00%.......... 11/20/26-12/20/27 23,844 24,374,862
6.50%.......... 09/15/23-12/15/25 23,762 23,544,642
7.00%.................. 12/20/26 22,039 22,558,279
7.50%.................. 12/20/23 397 404,926
6.50% [TBA]............ 01/22/28 3,420 3,384,740
6.875% [VR]............ 10/20/23 584 596,492
6.875% [VR]............ 10/20/24 3,154 3,231,089
6.875% [VR]............ 12/20/25 14,824 15,224,980
7.00% [VR]............. 03/20/17 666 683,607
7.00% [VR]............. 08/20/23 8,801 8,971,908
7.00% [VR]............. 09/20/23 5,815 5,927,336
7.00% [VR]............. 03/20/24 13,828 14,137,154
7.00% [VR]............. 09/20/24 1,201 1,230,309
7.375% [VR]............ 06/20/22 2,074 2,129,310
7.375% [VR]............ 04/20/23 2,559 2,621,684
------------
129,021,318
------------
STUDENT LOAN MARKETING ASSOCIATION -- 3.5%
6.00%.................. 06/30/98 20,000 20,035,398
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $302,054,109)................. 304,825,502
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.1%
California Infrastructure
SDG&E-1 Mtge.
5.97%.................. 12/25/00 10,000 10,004,687
Citicorp Mtge.
Securities, Inc. [VR]
7.584%................. 10/25/22 522 534,037
Collateralized Mtge.
Securities Corp. [VR]
7.985%................. 05/01/17 525 538,214
PAR
MATURITY (000) VALUE
-------- -------- ------------
Contimortgage Home Equity
Loan Trust Cl-A2
6.15%.................. 10/15/12 $20,000 $ 19,984,375
Countrywide Adjustable
Rate Mtge. [VR]
7.931%................. 03/25/24 562 575,771
8.359%................. 11/25/24 547 561,500
Guardian Adjustable Rate
Mtge. [VR]
6.889%................. 12/25/19 67 44,377
Mortgage Capital Trust VI
9.50%.................. 02/01/18 519 530,740
Prudential Home Mtge.
Securities
6.50%.................. 01/25/00 6,792 6,778,744
Prudential-Bache CMO
Trust
8.40%.................. 03/20/21 3,372 3,510,182
Resolution Trust Corp.
8.00%.................. 09/25/21 172 172,894
Rothschild (L.F.) Mtge.
Trust
9.95%.................. 08/01/17 2,108 2,300,495
Ryland Mtge. Securities
Corp. [VR]
8.042%................. 09/25/23 676 692,175
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $45,899,885).................. 46,228,191
------------
CORPORATE OBLIGATIONS -- 25.3%
AIRLINES -- 2.2%
American Airlines Notes
10.19%................. 05/26/15 250 328,497
United Air Lines, Inc.
Notes
10.36%................. 11/13/12 6,925 8,897,863
10.36%................. 11/27/12 500 637,200
10.02%................. 03/22/14 2,000 2,488,460
------------
12,352,020
------------
AUTOMOBILE MANUFACTURERS -- 1.7%
Ford Motor Credit Corp.
Notes [VR]
6.042%................. 09/03/01 10,000 9,999,730
------------
ENTERTAINMENT & LEISURE -- 2.5%
Time Warner, Inc. Notes
7.45%.................. 02/01/98 13,000 13,016,250
7.975%................. 08/15/04 262 280,995
8.11%.................. 08/15/06 525 571,594
8.18%.................. 08/15/07 525 576,844
------------
14,445,683
------------
FINANCIAL-BANK & TRUST -- 2.4%
First of America Bank
Notes
6.00%.................. 10/01/99 13,750 13,732,812
------------
|
PAR
MATURITY (000) VALUE
-------- -------- ------------
FINANCIAL SERVICES -- 6.5%
Goldman Sachs Notes [VR]
144A
6.085%................. 11/24/00 $20,000 $20,000,000
Salomon, Inc. Notes [VR]
5.83%.................. 08/04/98 15,000 15,011,998
6.08%.................. 02/15/99 2,000 2,009,520
------------
37,021,518
------------
FOOD -- 1.2%
RJR Nabisco, Inc. Notes
8.625%................. 12/01/02 6,500 6,890,000
------------
INDUSTRIAL PRODUCTS -- 1.7%
Imperial Chemical, Inc.
Notes [VR]
6.00%.................. 12/05/98 10,000 10,009,620
------------
REAL ESTATE -- 0.9%
Spieker Properties Notes
6.95%.................. 12/15/02 5,000 5,062,500
------------
TELECOMMUNICATIONS -- 1.8%
TCI Communications, Inc.
Sr. Notes [VR]
6.355%................. 09/11/00 10,000 10,017,900
------------
UTILITIES -- 4.4%
Cleveland Electric
Illumination Corp.
Notes
8.75%.................. 11/15/05 100 100,805
CMS Energy Corp. Sr.
Notes
8.125%................. 05/15/02 5,000 5,137,500
Long Island Lighting
Corp. Notes
7.85%.................. 05/15/99 7,000 7,113,750
8.90%.................. 07/15/19 6,000 6,384,540
Louisiana Power & Light
Corp. Notes
7.74%.................. 07/01/02 6,000 6,210,000
------------
24,946,595
------------
TOTAL CORPORATE OBLIGATIONS
(COST $142,214,548)................. 144,478,378
------------
U.S. TREASURY OBLIGATIONS -- 2.4%
U.S. TREASURY BILLS -- 0.5%
5.02%#................. 02/05/98 60 59,711
5.16%#................. 02/05/98 485 482,660
5.17%#................. 02/05/98 35 34,831
5.14%#................. 03/12/98 115 113,863
PAR
MATURITY (000) VALUE
-------- -------- ------------
5.19%#................. 03/12/98 $ 685 $ 678,225
5.19%#................. 03/12/98 1,120 1,108,923
5.18%#................. 04/16/98 590 581,120
5.31%#................. 04/16/98 165 162,517
------------
3,221,850
------------
U.S. TREASURY BONDS -- 1.9%
6.50%.................. 11/15/26 10,000 10,681,099
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $13,087,194).................. 13,902,949
------------
SOVEREIGN ISSUES -- 3.2%
ARGENTINA -- 1.7%
Republic of Argentina
[BRB,FRB]
6.688%................. 03/31/05 10,560 9,452,520
------------
MEXICO -- 0.7%
United Mexican States
Ser-W-B [BRB] (with
Value Recover Rights
Attached)
6.25%.................. 12/31/19 5,000 4,193,366
------------
PHILIPPINES -- 0.8%
Bangko Sentral
Philippinas
8.60%.................. 06/15/27 6,000 4,865,700
------------
TOTAL SOVEREIGN ISSUES
(COST $18,185,098).................. 18,511,586
------------
|
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
FOREIGN BONDS -- 8.7%
CANADA -- 0.7%
Canadian Government
4.25%................... 12/01/26 5,158 3,675,036
-------------
NEW ZEALAND -- 1.1%
New Zealand Government
10.00%.................. 03/15/02 10,000 6,359,076
-------------
UNITED KINGDOM -- 6.9%
United Kingdom Treasury
7.25%................... 12/07/07 22,500 39,601,759
-------------
TOTAL FOREIGN BONDS
(COST $50,663,909).................... 49,635,871
-------------
|
PAR
MATURITY (000) VALUE
--------- --------- -------------
CERTIFICATES OF DEPOSIT -- 9.6%
Bankers Trust
5.90%................... 07/07/98 $ 20,000 $ 19,997,748
Landesbank Hessen
Thueringer
5.93%................... 06/30/98 25,000 25,005,275
Sanwa Bank New York Ltd.
6.53%................... 06/22/98 10,000 9,994,324
-------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $54,986,321).................... 54,997,347
-------------
COMMERCIAL PAPER -- 20.6%
Abbott Laboratories
6.00%................... 01/13/98 3,200 3,193,600
AT&T Corp.
5.78%................... 01/16/98 14,200 14,165,802
5.76%................... 02/12/98 400 397,312
Canadian Wheat Board
5.73%................... 02/11/98 3,600 3,576,507
Dupont, (E.I.) De Nemours
& Co.
5.83%................... 01/28/98 4,000 3,982,510
Ford Motor Credit Corp.
5.58%................... 01/14/98 19,000 18,962,328
General Electric Capital
Corp.
5.60%................... 01/14/98 3,100 3,093,886
5.72%................... 01/16/98 900 897,950
5.60%................... 01/20/98 13,600 13,559,302
General Motors Acceptance
Corp.
5.53%................... 01/15/98 11,300 11,275,688
5.78%................... 01/28/98 400 398,266
KFW International
Financial Corp.
5.58%................... 01/05/98 1,000 999,380
5.79%................... 01/28/98 10,000 9,956,575
5.73%................... 02/06/98 1,300 1,292,791
National Rural Utility
Corp.
5.58%................... 01/08/98 4,700 4,695,068
New Center Asset Trust
5.56%................... 01/21/98 8,700 8,673,461
5.52%................... 01/28/98 10,300 10,257,435
Procter & Gamble Co.
5.64%................... 02/10/98 1,100 1,093,107
Province of Alberta
5.58%................... 01/09/98 4,000 3,994,800
Western Australian
Treasury
5.66%................... 02/17/98 3,500 3,473,817
-------------
TOTAL COMMERCIAL PAPER
(COST $117,938,976)................... 117,939,585
-------------
|
SHARES VALUE
----------- -------------
SHORT-TERM INVESTMENTS -- 1.0%
Temporary Investment Cash
Fund.......................... 2,912,640 $ 2,912,640
Temporary Investment Fund....... 2,912,639 2,912,639
------------
(COST $5,825,279)............... 5,825,279
------------
TOTAL INVESTMENTS -- 132.2%
(COST $750,855,319)............... 756,344,688
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (32.2%)................. (184,244,820)
------------
NET ASSETS -- 100.0%................ $ 572,099,868
============
|
Foreign currency exchange contacts outstanding at December 31, 1997:
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
-------------------------------------------------------------------------
01/98 Sell CAD 48,000 $ 79,517 $ 78,967 $ 550
03/98 Sell GBP 5,236,000 3,909,797 3,665,974 243,823
---------- ---------- ------
$3,989,314 $3,744,941 $244,373
========== ========== ===============
|
# Securities with an aggregate market value of $3,221,850 have been segregated with the custodian to cover margin requirements for the following open futures contracts at December 31, 1997:
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
--------------------------------------------------------------------------
U.S. Treasury 5 Year Note.............. 03/98 5,000 $ 1,562
U.S. Treasury 10 Year Note............. 03/98 53,500 47,188
U.S. Treasury 30 Year Note............. 03/98 104,800 893,594
Eurodollar............................. 03/98 30,000 25,500
------
$967,844
===============
|
Interest rate swap agreements outstanding at December 31, 1997:
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
----------------------------------------------------------
Receive variable rate
payments on the three month
LIBOR-BBA floating rate and
pay fixed rate payments on
the then current U.S.
Treasury 10 Year Note with
a spread of: 36.25......... 04/02 5,000 $ 22,203
37.00...................... 04/02 3,000 12,370
36.50...................... 04/02 7,500 32,512
37.00...................... 05/02 10,000 41,234
36.50...................... 06/02 12,000 52,019
35.75...................... 06/02 6,000 27,912
------------
$188,250
===========
|
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 72.6%
AEROSPACE -- 3.8%
AlliedSignal, Inc. ................ 200,000 $ 7,787,500
General Motors Corp. Cl-H ......... 20,000 738,750
Lockheed Martin Corp. ............. 20,000 1,970,000
Northrop Grumman Corp. ............ 100,000 11,500,000
Raytheon Co. Cl-A ................. 15,074 743,346
----------
22,739,596
----------
AUTOMOBILE MANUFACTURERS -- 1.1%
Chrysler Corp. .................... 30,000 1,055,625
Ford Motor Co. .................... 40,000 1,947,500
General Motors Corp. .............. 60,000 3,637,500
----------
6,640,625
----------
AUTOMOTIVE PARTS -- 0.4%
Borg Warner Automotive, Inc. ...... 50,000 2,600,000
----------
BEVERAGES -- 1.7%
Anheuser-Busch Companies, Inc. .... 140,000 6,160,000
Coors, (Adolph) Co. Cl-B .......... 130,000 4,322,500
----------
10,482,500
----------
CHEMICALS -- 1.5%
Agrium, Inc. ...................... 250,000 3,046,875
General Chemical Group, Inc. ...... 50,000 1,337,500
Lawter International, Inc. ........ 100,000 1,087,500
Olin Corp. ........................ 80,000 3,750,000
----------
9,221,875
----------
COMPUTER HARDWARE -- 2.2%
Hewlett-Packard Co. ............... 50,000 3,125,000
International Business
Machines Corp. .................. 94,000 9,828,875
----------
12,953,875
----------
CONGLOMERATES -- 0.3%
Tenneco, Inc. ..................... 50,000 1,975,000
----------
CONSUMER PRODUCTS & SERVICES -- 0.5%
Colgate-Palmolive Co. ............. 20,000 1,470,000
Procter & Gamble Co. .............. 20,000 1,596,250
----------
3,066,250
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.2%
Emerson Electric Co. .............. 100,000 5,643,750
General Electric Co. .............. 150,000 11,006,250
Honeywell, Inc. ................... 40,000 2,740,000
Sundstrand Corp. .................. 100,000 5,037,500
Tandy Corp. ....................... 260,000 10,026,250
Texas Instruments, Inc. ........... 60,000 2,700,000
----------
37,153,750
----------
ENVIRONMENTAL SERVICES -- 0.6%
Allied Waste Industries, Inc.* .... 152,000 3,543,500
----------
FINANCIAL-BANK & TRUST -- 4.3%
Bank of New York Co., Inc. ........ 100,000 5,781,250
Charter One Financial, Inc. ....... 100,000 6,312,500
Fleet Financial Group, Inc. ....... 100,000 7,493,750
Mellon Bank Corp. ................. 100,000 6,062,500
----------
25,650,000
----------
SHARES VALUE
------- ------------
FINANCIAL SERVICES -- 3.2%
Ahmanson, (H.F.) & Co. ............ 120,000 $ 8,032,500
Associates First Capital Corp. .... 80,000 5,690,000
Morgan Stanley, Dean Witter,
Discover & Co. .................. 95,000 5,616,875
----------
19,339,375
----------
FOOD -- 4.8%
General Mills, Inc. ............... 70,000 5,013,750
Heinz, (H.J.) Co. ................. 93,000 4,725,562
Kellogg Co. ....................... 140,000 6,947,500
Quaker Oats Co. ................... 100,000 5,275,000
Ralston Purina Group .............. 75,000 6,970,312
----------
28,932,124
----------
HEALTHCARE SERVICES -- 0.7%
Tenet Healthcare Corp.* ........... 120,000 3,975,000
----------
HOTELS & MOTELS -- 2.3%
Hilton Hotels Corp. ............... 300,000 8,925,000
Patriot American Hospitality,
Inc. ............................ 160,002 4,610,058
----------
13,535,058
----------
INDUSTRIAL PRODUCTS -- 0.4%
Albany International Corp. Cl-A ... 100,000 2,300,000
----------
INSURANCE -- 5.3%
Allmerica Financial Corp. ......... 131,363 6,559,940
Chubb Corp. ....................... 100,000 7,562,500
Lincoln National Corp. ............ 80,000 6,250,000
Ohio Casualty Corp. ............... 100,000 4,462,500
Travelers Property Casualty
Corp. Cl-A ...................... 167,500 7,370,000
----------
32,204,940
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.5%
Becton Dickinson & Co. ............ 60,000 3,000,000
----------
METALS & MINING -- 0.5%
Newmont Mining Corp. .............. 100,994 2,966,699
----------
OIL & GAS -- 8.7%
Apache Corp. ...................... 100,000 3,506,250
Atlantic Richfield Co. ............ 60,000 4,807,500
Baker Hughes, Inc. ................ 100,000 4,362,500
Chevron Corp. ..................... 70,000 5,390,000
EEX Corp.* ........................ 380,500 3,448,281
Enron Oil & Gas Co. ............... 100,000 2,118,750
Exxon Corp. ....................... 100,000 6,118,750
Mobil Corp. ....................... 24,000 1,732,500
Phillips Petroleum Co. ............ 100,000 4,862,500
Royal Dutch Petroleum Co. ......... 60,000 3,251,250
Schlumberger Ltd. ................. 42,000 3,381,000
Sonat, Inc. ....................... 85,000 3,888,750
Union Pacific Resources Group,
Inc. ............................ 121,173 2,938,445
USX-Marathon Group ................ 80,000 2,700,000
----------
52,506,476
----------
|
SHARES VALUE
------- ------------
PAPER & FOREST PRODUCTS -- 0.6%
Fort James Corp. .................. 100,000 $ 3,825,000
----------
PERSONAL SERVICES -- 0.9%
Galileo International, Inc. ....... 99,000 2,734,875
Service Corp. International ....... 72,000 2,659,500
----------
5,394,375
----------
PHARMACEUTICALS -- 5.1%
Abbott Laboratories ............... 100,000 6,556,250
American Home Products Corp. ...... 60,000 4,590,000
Merck & Co., Inc. ................. 80,000 8,500,000
Novo Nordisk AS [ADR] ............. 20,000 1,447,500
Pfizer, Inc. ...................... 30,000 2,236,875
Smithkline Beecham PLC [ADR] ...... 70,000 3,600,625
Warner-Lambert Co. ................ 30,000 3,720,000
----------
30,651,250
----------
RAILROADS -- 2.6%
Kansas City Southern Industries,
Inc. ............................ 350,000 11,112,500
Norfolk Southern Corp. ............ 150,000 4,621,875
----------
15,734,375
----------
REAL ESTATE -- 0.2%
Kilroy Realty Corp. [REIT] ........ 50,000 1,437,500
----------
RETAIL & MERCHANDISING -- 3.1%
Dayton-Hudson Corp. ............... 80,000 5,400,000
Dollar General Corp. .............. 31,250 1,132,812
Federated Department Stores,
Inc.* ........................... 100,000 4,306,250
May Department Stores Co. ......... 70,000 3,688,125
Penney, (J.C.) Co., Inc. .......... 70,000 4,221,875
----------
18,749,062
----------
SEMI-CONDUCTORS -- 2.1%
Analog Devices, Inc.* ............. 300,000 8,306,250
Motorola, Inc. .................... 75,000 4,279,688
----------
12,585,938
----------
TELECOMMUNICATIONS -- 7.7%
Ameritech Corp. ................... 50,000 4,025,000
AT&T Corp. ........................ 60,000 3,675,000
Bell Atlantic Corp. ............... 108,400 9,864,400
BellSouth Corp. ................... 80,000 4,505,000
GTE Corp. ......................... 100,000 5,225,000
SBC Communications, Inc. .......... 90,000 6,592,500
Sprint Corp. ...................... 12,700 744,538
Teleport Communications Group, Inc.
Cl-A* ........................... 99,600 5,465,550
U.S. West Communications Group .... 140,000 6,317,500
----------
46,414,488
----------
UTILITIES -- 1.3%
Endesa SA [ADR] ................... 300,000 5,456,250
IES Industries, Inc. .............. 60,000 2,208,750
----------
7,665,000
----------
TOTAL COMMON STOCK
(COST $345,121,687).................. 437,243,631
----------
PREFERRED STOCK -- 0.1%
METALS & MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575) ................... 20,000 720,000
----------
|
PAR
MATURITY (000)
------- -----
CORPORATE OBLIGATIONS -- 18.9%
BROADCASTING -- 0.8%
Allbritton Communica-
tions Co. Sr. Sub.
Debs.
9.75%................ 11/30/07 $ 1,500 1,537,500
Chancellor Media Corp.
Sr. Sub. Notes 144A
8.125%............... 12/15/07 2,000 1,965,000
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%............... 05/15/06 1,000 1,097,500
------------
4,600,000
------------
BUILDING MATERIALS -- 0.3%
USG Corp. Sr. Notes
8.50%................ 08/01/05 1,500 1,616,250
------------
COMPUTER HARDWARE -- 0.5%
International Business
Machine Corp. Debs.
6.22%................ 08/01/27 2,950 2,994,250
------------
COMPUTER SERVICES & SOFTWARE -- 0.2%
Unisys Corp. Sr. Notes
12.00%............... 04/15/03 1,000 1,132,500
------------
CONTAINERS & PACKAGING -- 0.3%
Gaylord Container Corp.
Sr. Sub. Debs.
12.75%............... 05/15/05 2,000 2,145,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Wyman-Gordon Co. Sr.
Notes
8.00%................ 12/15/07 2,000 2,027,500
------------
ENTERTAINMENT & LEISURE -- 0.9%
Fox Kids Worldwide,
Inc. Sr. Notes 144A
9.25%................ 11/01/07 1,000 970,000
GCI, Inc. Sr. Notes
9.75%................ 08/01/07 1,000 1,040,000
Horseshoe Gaming L.L.C.
Sr. Notes
12.75%............... 09/30/00 1,350 1,491,750
Time Warner
Entertainment Co.
L.P. Debs.
8.375%............... 03/15/23 1,000 1,136,250
Time Warner, Inc. Notes
6.85%................ 01/15/03 1,000 1,033,750
------------
5,671,750
------------
|
PAR
MATURITY (000) VALUE
------- ----- ----
FINANCIAL-BANK & TRUST -- 0.3%
Dime Bancorp, Inc. Sr.
Notes
10.50%............... 11/15/05 $ 2,000 $ 2,157,500
------------
FINANCIAL SERVICES -- 1.8%
CEI Citicorp Holdings
S.A. 144A
9.75%................ 02/14/07 2,000 1,915,000
Donaldson Lufkin &
Jenrette, Inc. Notes
5.625%............... 02/15/16 1,000 986,250
DQU II Funding Corp.
Debs.
8.70%................ 06/01/16 2,000 2,270,000
General Motors
Acceptance Corp. Notes
6.70%................ 04/25/01 1,000 1,015,000
Lehman Brothers
Holdings, Inc. Sr. Notes
8.80%................ 03/01/15 1,850 2,183,000
Spieker Properties,
Inc. Notes
7.35%................ 12/01/17 2,500 2,521,875
------------
10,891,125
------------
HEALTHCARE SERVICES -- 0.2%
FHP International Corp.
Sr. Notes
7.00%................ 09/15/03 1,000 1,010,000
------------
INSURANCE -- 0.8%
Equitable Companies,
Inc. Sr. Notes
9.00%................ 12/15/04 4,035 4,599,900
------------
MACHINERY & EQUIPMENT -- 0.2%
Agco Corp. Sr. Sub.
Notes
8.50%................ 03/15/06 1,000 1,027,500
------------
METALS & MINING -- 0.7%
Centaur Mining &
Exploration Ltd. 144A
11.00%............... 12/01/07 2,000 2,035,000
Glencore Nickel Ltd.
144A
9.00%................ 12/01/14 2,000 1,995,000
------------
4,030,000
------------
PAR
MATURITY (000) VALUE
------- ----- ----
OIL & GAS -- 1.7%
Belco Oil & Gas Corp.
Sr. Sub. Notes
8.875%............... 09/15/07 $ 1,500 $ 1,515,000
Cliffs Drilling Co.
Cl-B
10.25%............... 05/15/03 1,000 1,093,750
Navigator Gas Transport
Notes 144A
10.50%............... 06/30/07 1,000 1,065,000
Noram Energy Corp.
Sub. Deb. [CVT]
6.00%................ 03/15/12 339 319,508
Pacific Gas & Electric
First Mtge.
7.25%................ 08/01/26 1,500 1,515,000
Sun Co., Inc. Debs.
9.375%............... 06/01/16 2,000 2,347,500
VERITAS Holdings Sr.
Notes
9.625%............... 12/15/03 2,000 2,145,000
------------
10,000,758
------------
PAPER & FOREST PRODUCTS -- 0.4%
Quno Corp. Sr. Notes
9.125%............... 05/15/05 2,150 2,375,750
------------
PHARMACEUTICALS -- 0.4%
McKesson Corp. Sub.
Debs.
4.50%................ 03/01/04 2,875 2,601,875
------------
PRINTING &
PUBLISHING -- 0.3%
Affiliated Newspaper
Investments, Inc.
Sr. Disc. Notes [STEP]
10.882%.............. 07/01/06 2,000 1,900,000
------------
REAL ESTATE -- 0.2%
Saul, (B.F.)
Sr. Notes [REIT]
11.625%.............. 04/01/02 1,000 1,070,000
------------
TELECOMMUNICATIONS -- 2.9%
CF Cable TV, Inc. Sr.
Notes
11.625%.............. 02/15/05 2,000 2,302,500
Commnet Cellular, Inc.
Sub. Notes
11.25%............... 07/01/05 1,000 1,152,500
Frontier Corp.
Notes
7.25%................ 05/15/04 2,000 2,090,000
|
PAR
MATURITY (000) VALUE
------- ----- ----
Intermedia Communication
Sr. Notes 144A
8.50%................ 01/15/08 $ 2,000 $ 2,005,000
Nextel Communications,
Inc. Sr. Disc. Notes
144A
10.153%.............. 10/31/07 4,000 2,440,000
Nextlink Communications, Inc.
Sr. Notes
9.625%............... 10/01/07 2,000 2,060,000
NTL, Inc. Sr. Notes
10.00%............... 02/15/07 1,000 1,062,500
PriCellular Wireless
Corp.
Sr. Disc. Notes
14.00%............... 11/15/01 1,345 1,501,356
9.559%............... 10/01/03 2,000 2,060,000
U.S. West Capital
Funding Notes
7.30%................ 01/15/07 1,000 1,032,500
------------
17,706,356
------------
UTILITIES -- 5.7%
Boston Edison Co. Debs.
7.80%................ 05/15/10 1,000 1,084,806
7.80%................ 03/15/23 1,640 1,701,500
Carolina Power & Light
First Mtge.
8.625%............... 09/15/21 1,000 1,230,160
6.875%............... 08/15/23 1,000 988,750
Cleveland Electric
Illumination Co.
First Mtge. Cl-B
9.50%................ 05/15/05 3,000 3,348,750
Detroit Edison
Medium-Term Notes
8.30%................ 08/01/22 1,000 1,098,750
Jersey Central Power &
Light Co. First Mtge.
7.50%................ 05/01/23 1,500 1,539,375
6.75%................ 11/01/25 1,000 961,250
Long Island Lighting
Co. Debs.
8.20%................ 03/15/23 3,500 3,788,750
9.00%................ 11/01/22 1,000 1,113,750
Metropolitan Edison Co.
Notes
8.15%................ 01/30/23 2,975 3,252,127
PAR
MATURITY (000) VALUE
------- ----- ----
New York State Electric
& Gas Notes
8.30%................ 12/15/22 $ 1,400 $ 1,505,000
Pacific Gas & Electric
First Mtge.
8.25%................ 11/01/22 2,740 3,024,275
PECO Energy First Mtge.
7.25%................ 11/01/24 2,000 2,007,500
Penn Power and Light
First Mtge.
7.875%............... 02/01/23 1,000 1,073,750
Potomac Electric Power
First Mtge.
6.25%................ 10/15/04 1,900 1,919,000
PSI Energy, Inc. Debs.
6.35%................ 11/15/00 1,500 1,503,750
South Carolina Electric
& Gas Co. Mtge.
8.875%............... 08/15/21 2,000 2,215,000
Utilicorp United, Inc.
Sr. Notes
9.00%................ 11/15/21 1,000 1,097,500
------------
34,453,743
------------
TOTAL CORPORATE OBLIGATIONS
(COST $111,540,457)...... 114,011,757
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 3.1%
Federal Home Loan Mtge.
Corp.
6.50%................ 09/01/11 13,800 13,834,769
6.50%................ 01/01/12 4,691 4,703,535
------------
(COST $18,094,307).............. 18,538,304
------------
COMMERCIAL PAPER -- 5.0%
American Express Credit
Corp.
5.76%................ 01/08/98 10,000 10,000,000
CIGNA Corp.
6.06%................ 01/06/98 10,000 10,000,000
Ford Motor Credit Corp.
6.11%................ 01/02/98 10,000 10,000,000
------------
TOTAL COMMERCIAL PAPER
(COST $30,000,000)....... 30,000,000
------------
|
SHARES VALUE
------------ ------------
SHORT-TERM INVESTMENTS -- 2.0%
Temporary Investment Cash
Fund.......................... 6,086,602 $ 6,086,602
Temporary Investment Fund....... 6,086,601 6,086,601
-----------
(COST $12,173,203)..... 12,173,203
-----------
TOTAL INVESTMENTS -- 101.7%
(COST $517,926,229)...... 612,686,895
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (1.7%).................. (10,582,061)
------------
NET ASSETS -- 100.0%................ $602,104,834
============
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 2.4% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 87.1%
AEROSPACE -- 0.9%
REMEC, Inc.* ...................... 114,825 $ 2,583,562
----------
AUTOMOTIVE PARTS -- 0.8%
OEA, Inc. ......................... 46,400 1,342,700
United Rentals, Inc.* ............. 51,900 1,002,319
----------
2,345,019
----------
BUILDING MATERIALS -- 0.5%
NS Group, Inc.* ................... 76,600 1,311,775
----------
BUSINESS SERVICES -- 2.0%
Concord EFS, Inc.* ................ 94,550 2,351,931
Paraxel International Corp.* ...... 90,250 3,339,250
----------
5,691,181
----------
CHEMICALS -- 1.2%
Crompton & Knowles Corp. .......... 60,925 1,614,512
O.M. Group, Inc. .................. 48,575 1,779,059
----------
3,393,571
----------
CLOTHING & APPAREL -- 1.5%
The Men's Wearhouse, Inc.* ........ 65,775 2,285,681
Warnaco Group, Inc. Cl-A .......... 61,200 1,920,150
----------
4,205,831
----------
COMPUTER HARDWARE -- 1.4%
Insight Enterprises, Inc.* ........ 105,337 3,871,135
----------
COMPUTER SERVICES & SOFTWARE -- 15.6%
Aspen Technologies, Inc. .......... 79,925 2,737,431
Avant! Corp.* ..................... 38,400 643,200
CDW Computers Centers, Inc.* ...... 78,275 4,080,084
Checkfree Corp.* .................. 84,325 2,276,775
Documentum, Inc.* ................. 108,075 4,552,659
Electronic Arts, Inc.* ............ 33,875 1,280,898
Geoworks Corp.* ................... 238,900 2,299,412
Harbinger Corp.* .................. 89,850 2,527,031
HNC Software, Inc.* ............... 109,300 4,699,900
Keane, Inc.* ...................... 59,000 2,396,875
Mastech Corp.* .................... 103,100 3,273,425
MMC Networks, Inc.* ............... 36,775 625,175
Radisys Corp.* .................... 60,250 2,244,312
SanDisk Corp.* .................... 82,225 1,670,195
Security Dynamics Technologies,
Inc.* ........................... 37,550 1,342,412
SIPEX Corp.* ...................... 52,975 1,602,494
Sterling Commerce, Inc.* .......... 34,525 1,327,055
Summit Design, Inc.* .............. 126,150 1,308,806
Transaction Systems Architects,
Inc.* ........................... 64,925 2,467,150
----------
43,355,289
----------
CONSUMER PRODUCTS & SERVICES -- 8.4%
800-JR CIGAR, Inc.* ............... 51,625 1,290,625
Action Performance Companies,
Inc.* ........................... 33,425 1,265,972
Helen of Troy Ltd.* ............... 284,225 4,583,128
Pre-Paid Legal Services, Inc.* .... 109,250 3,734,984
Rexall Sundown, Inc.* ............. 102,900 3,106,294
Samsonite Corp.* .................. 69,300 2,191,612
Vestcom International, Inc.* ...... 76,450 1,710,569
SHARES VALUE
------- ------------
Windmere -- Durable Holdings,
Inc. ............................ 25,000 $ 564,062
Wolverine World Wide, Inc. ........ 220,630 4,991,754
----------
23,439,000
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.1%
Berg Electronics Corp.* ........... 143,800 3,271,450
Brooks Automation, Inc.* .......... 72,825 1,338,159
Powerwave Technologies, Inc.* ..... 35,425 595,601
PRI Automation, Inc.* ............. 74,250 2,143,969
Sanmina Corp.* .................... 47,800 3,238,450
Sawtek, Inc.* ..................... 54,500 1,437,437
Zebra Technologies Corp. Cl-A* .... 72,500 2,156,875
----------
14,181,941
----------
ENERGY SERVICES -- 0.2%
Metzler Group, Inc.* .............. 15,325 614,916
----------
ENTERTAINMENT & LEISURE -- 3.2%
Midway Games, Inc.* ............... 68,900 1,253,119
Signature Resorts, Inc.* .......... 124,075 2,714,141
Silverleaf Resorts, Inc.* ......... 132,025 3,234,612
Vistana, Inc.* .................... 70,400 1,619,200
----------
8,821,072
----------
ENVIRONMENTAL SERVICES -- 0.8%
USA Waste Services, Inc.* ......... 58,739 2,305,506
----------
EQUIPMENT SERVICES -- 0.8%
Rental Service Corp.* ............. 93,950 2,307,647
----------
FINANCIAL-BANK & TRUST -- 0.5%
Banco Latinoamericano de
Exportaciones SA Cl-E ........... 34,000 1,406,750
----------
FINANCIAL SERVICES -- 0.5%
Affiliated Managers Group,
Inc.* ........................... 46,975 1,362,275
----------
FOOD -- 2.0%
JP Foodservice, Inc.* ............. 149,425 5,519,386
----------
HEALTHCARE SERVICES -- 7.9%
Access Health, Inc.* .............. 45,400 1,333,625
Advance Paradigm, Inc.* ........... 49,525 1,572,419
Capital Senior Living Corp.* ...... 202,550 2,114,116
Coram Healthcare Corp.* ........... 2,152 7,263
Envoy Corp.* ...................... 9,150 266,494
FPA Medical Management, Inc.* ..... 125,475 2,336,972
Heartport, Inc.* .................. 63,850 3,264,331
Medical Manager Corp.* ............ 130,975 2,357,550
National Data Corp. ............... 30,000 1,083,750
NCS Healthcare, Inc. Cl-A* ........ 53,000 1,397,875
Orthodontic Centers of America,
Inc.* ........................... 145,150 2,413,119
Simione Central Holdings, Inc. .... 123,075 1,107,675
Sunrise Assisted Living, Inc.* .... 65,125 2,808,516
----------
22,063,705
----------
HOTELS & MOTELS -- 1.5%
Capstar Hotel Co.* ................ 81,900 2,810,194
Promus Hotel Corp.* ............... 35,500 1,491,000
----------
4,301,194
----------
INDUSTRIAL PRODUCTS -- 0.8%
Harsco Corp. ...................... 52,500 2,264,062
----------
|
SHARES VALUE
------- ------------
INSURANCE -- 2.4%
Executive Risk, Inc. .............. 42,150 $ 2,942,597
Reliastar Financial Corp. ......... 90,000 3,706,875
----------
6,649,472
----------
MEDICAL SUPPLIES & EQUIPMENT -- 5.5%
Covance, Inc.* .................... 85,075 1,690,866
ESC Medical Systems Ltd.* ......... 81,600 3,162,000
HBO & Co. ......................... 102,645 4,926,960
Ocular Sciences, Inc.* ............ 59,775 1,569,094
Schein, (Henry), Inc.* ............ 70,525 2,468,375
Transition Systems, Inc.* ......... 68,750 1,521,094
----------
15,338,389
----------
METALS & MINING -- 0.3%
IMCO Recycling, Inc. .............. 55,350 889,059
----------
OFFICE EQUIPMENT -- 1.6%
U.S. Office Products Co.* ......... 229,500 4,503,937
----------
OIL & GAS -- 2.4%
Offshore Logistics, Inc.* ......... 209,000 4,467,375
Patterson Energy, Inc.* ........... 6,375 246,633
UTI Energy Corp.* ................. 79,250 2,050,594
----------
6,764,602
----------
PERSONAL SERVICES -- 0.9%
Sylvan Learning Systems, Inc.* .... 67,500 2,632,500
----------
PHARMACEUTICALS -- 2.5%
Scherer, (R.P.) Corp.* ............ 21,050 1,284,050
Watson Pharmaceuticals, Inc.* ..... 174,425 5,657,911
----------
6,941,961
----------
PRINTING & PUBLISHING -- 0.9%
Mail-Well, Inc.* .................. 62,950 2,549,475
----------
REAL ESTATE -- 2.2%
Fairfield Communities, Inc.* ...... 138,887 6,128,389
----------
RESTAURANTS -- 1.5%
CKE Restaurants, Inc. ............. 98,500 4,149,312
----------
RETAIL & MERCHANDISING -- 3.0%
Meyer, (Fred), Inc.* .............. 60,000 2,182,500
Proffitt's, Inc.* ................. 117,100 3,330,031
Stage Stores, Inc.* ............... 73,125 2,733,047
----------
8,245,578
----------
SEMICONDUCTORS -- 0.7%
Speedfam International, Inc.* ..... 36,925 978,513
Vitesse Semiconductor, Inc.* ...... 23,562 889,466
----------
1,867,979
----------
TELECOMMUNICATIONS -- 7.3%
Cellular Communications
International, Inc.* ............ 45,900 2,145,825
Digital Microwave Corp.* .......... 98,500 1,428,250
Echostar Communications Corp.* .... 53,450 895,288
Genesys Telecommuncations
Laboratories, Inc.* ............. 40,025 1,275,797
SHARES VALUE
------- ------------
Intelect Communications, Inc.* .... 119,450 $ 612,181
Nextlink Communications, Inc.
C1-A* ........................... 52,675 1,122,636
P-Com, Inc.* ...................... 89,600 1,545,600
Pacific Gateway Exchange, Inc.* ... 32,500 1,748,906
Periphonics Corp.* ................ 100,575 880,031
Premiere Technologies, Inc.* ...... 147,475 4,073,997
Smartalk Teleservices, Inc.* ...... 98,250 2,235,188
Westell Technologies, Inc.
Cl-A* ........................... 181,300 2,311,575
----------
20,275,274
----------
TOTAL COMMON STOCK
(COST $202,679,911).................. 242,280,744
----------
FOREIGN STOCK -- 2.7%
BROADCASTING -- 0.5%
Flextech PLC -- (GBP)* ............ 167,000 1,448,112
----------
BUILDING MATERIALS -- 0.6%
Hunter Douglas NV -- (NLG) ........ 42,037 1,472,269
----------
RESTAURANTS -- 0.9%
Wetherspoon, (J.D.)
PLC -- (GBP) .................... 447,665 2,467,590
----------
TRANSPORTATION -- 0.8%
IHC Caland NV -- (NLG) ............ 40,000 2,075,739
----------
TOTAL FOREIGN STOCK
(COST $4,779,865).................... 7,463,710
----------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund .... 58 58
Temporary Investment Fund ......... 57 57
----------
(COST $115)........................ 115
----------
|
PAR
MATURITY (000)
--------- -------
COMMERCIAL PAPER -- 10.5%
American Express Credit
Corp.
6.00%................ 01/06/98 $10,973 10,963,856
Associates Corp. of
North America
6.00%................ 01/02/98 10,509 10,507,249
Ciesco L.P.
5.90%................ 01/05/98 7,693 7,687,957
-----------
TOTAL COMMERCIAL PAPER
(COST $29,159,062).................. 29,159,062
-----------
TOTAL INVESTMENTS -- 100.2%
(COST $236,618,952)................. 278,903,631
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.2%).................... (645,477)
------------
NET ASSETS -- 100.0%.................. $278,258,154
============
|
SHARES VALUE
---------- ------------
FOREIGN STOCK -- 94.5%
ARGENTINA -- 1.1%
Banco de Galicia y Buenos Aires
SA de C.V. [ADR] .............. 14,268 $ 367,401
Banco Frances del Rio de la Plata
SA [ADR] ...................... 16,411 449,251
Perez Companc SA ................ 138,525 989,247
Telefonica de Argentina SA Cl-B
[ADR] ......................... 29,080 1,083,230
YPF SA [ADR] .................... 58,307 1,993,371
----------
4,882,500
----------
AUSTRALIA -- 2.2%
Australia & New Zealand Banking
Group Ltd. .................... 54,000 356,772
Australian Gas Light Co. Ltd. ... 125,945 878,060
Brambles Industries Ltd. ........ 13,000 257,923
Broken Hill Proprietary Co.
Ltd. .......................... 93,549 868,587
Commonwealth Bank of
Australia ..................... 94,461 1,083,240
Fosters Brewing Group Ltd. ...... 242,000 460,424
FXF Trust* ...................... 116,300 19,702
John Fairfax Holdings Ltd. ...... 201,000 419,088
Lend Lease Corp. Ltd. ........... 32,854 642,198
National Australia Bank Ltd. .... 36,185 505,255
News Corp. Ltd. ................. 158,593 875,240
News Corp. Ltd. Pfd. ............ 56,839 281,240
Publishing & Broadcasting
Ltd. .......................... 116,300 515,286
Sydney Harbour Casino Holdings
Ltd.* ......................... 339,000 321,382
Tabcorp Holdings Ltd. ........... 99,000 464,437
Telstra Corp. Ltd.* ............. 298,000 629,102
Westpac Banking Corp. Ltd. ...... 97,000 620,391
WMC Ltd. ........................ 80,377 280,185
Woodside Petroleum Ltd. ......... 86,000 606,297
----------
10,084,809
----------
BELGIUM -- 1.3%
Credit Communal Holding Dexia
SA ............................ 3,940 529,057
Generale de Banque SA ........... 3,274 1,424,923
Generale de Banque SA -
Strip* ........................ 214 58
Kredietbank NV .................. 8,790 3,689,200
UCB SA .......................... 101 333,396
----------
5,976,634
----------
BRAZIL -- 3.2%
Banco Bradesco SA ............... 73,235,000 721,837
Banco Bradesco SA Rights* ....... 3,131,162 11,223
Banco Itau SA ................... 710,000 381,714
Brasmotor SA Pfd. ............... 906,000 89,299
Centrais Electrobras SA [ADR] ... 3,628 90,210
Centrais Eletricas Brasileiras
SA- Electrobras ............... 16,860,000 838,453
Cesp-Cia Energetica de Sao Paolo
[ADR]* ........................ 5,020 90,410
Companhia Cervejaria Brahma ..... 834,000 560,474
Companhia Cimento Portland
Itau .......................... 865,000 166,641
Companhia de Tecidos Norte de
Minas ......................... 619,000 221,860
SHARES VALUE
---------- ------------
Companhia Energetica de Minas
Gerais ........................ 11,846,000 $ 514,697
Companhia Energetica de Minas
Geras [ADR] ................... 19,868 863,245
Lojas Americanas SA* ............ 7,826,000 36,465
Companhia Brasileira de
Distribuicoa Grupo Pao de
Acucar [GDR] .................. 5,160 99,975
Companhia Brasileira de
Distribuicoa Grupo Pao de
Acucar [ADR] .................. 16,260 315,038
Petroleo Brasileiro
SA-Petrobras .................. 4,889,508 1,143,493
White Martins SA ................ 84,000 122,686
Telebras SA [ADR] ............... 52,707 6,137,071
Telecomunicacoes de Minas Gerais-
Telemig Cl-B .................. 1,935,000 244,471
Telecomunicacoes de Sao Paulo
SA ............................ 4,292,000 1,142,167
Telecomunicacoes do Rio de
Janeiro SA .................... 2,013,000 209,233
Usinas Siderurgicas de Minas
Gerais SA ..................... 58,000 343,005
Usinas Siderurgicas de Minas
Gerais SA [ADR] ............... 61,345 362,794
----------
14,706,461
----------
CANADA -- 0.3%
Alcan Aluminium Ltd. ............ 30,470 843,183
Royal Bank of Canada ............ 10,980 580,067
----------
1,423,250
----------
CHILE -- 0.4%
Chilectra Metropolitana SA [ADR]
144A .......................... 14,905 380,704
Chilgener SA [ADR] .............. 8,472 207,564
Compania Cervecerias Unidas SA
[ADR] ......................... 7,712 226,540
Empresa Nacional de Electridad SA
[ADR] ......................... 18,526 327,679
Enersis SA [ADR] ................ 12,553 364,037
Genesis Chile Fund ** ........... 9,350 359,975
Santa Isabel SA [ADR] ........... 8,017 140,298
----------
2,006,797
----------
CHINA -- 0.3%
Huaneng Power International, Inc.
[ADR]* ........................ 51,000 1,182,563
----------
CZECH REPUBLIC -- 0.0%
SPT Telecom AS* ................. 1,360 145,130
----------
DENMARK -- 0.3%
Den Danske Bank ................. 6,380 850,703
Tele Danmark AS Cl-B ............ 2,030 126,000
Unidanmark AS Cl-A .............. 6,110 448,844
----------
1,425,547
----------
FINLAND -- 0.3%
Nokia AB Cl-A ................... 17,254 1,226,209
----------
FRANCE -- 8.3%
Accor SA ........................ 2,920 543,144
Alcatel Alsthom ................. 12,992 1,652,113
|
SHARES VALUE
---------- ------------
Assurances Generales de
France ........................ 7,533 $ 399,323
AXA SA .......................... 16,162 1,251,133
Canal Plus ...................... 3,880 721,712
Carrefour Supermarche SA ........ 1,669 871,141
Compagnie de Saint-Gobain ....... 11,740 1,668,540
Compagnie Generale des Eaux ..... 47,970 6,698,095
Credit Commercial de France ..... 10,560 724,086
Credit Local de France .......... 3,095 358,588
Dexia France .................... 7,128 825,853
Groupe Danone ................... 5,700 1,018,558
GTM Entrepose SA ................ 4,510 303,622
Guilbert SA ..................... 5,003 713,543
Havas SA ........................ 2,940 211,611
L'Oreal ......................... 1,607 629,085
Lapeyre SA ...................... 10,315 568,401
Legrand SA ...................... 3,823 761,949
Louis Vuitton Moet Hennessy ..... 1,873 311,032
Pathe SA ........................ 2,331 452,572
Pinault-Printemps Redoute SA .... 7,441 3,971,677
Sanofi SA ....................... 19,997 2,227,111
Schneider SA .................... 35,098 1,906,631
Societe Generale ................ 7,336 999,943
Societe Nationale Elf Aquitaine
SA ............................ 14,280 1,661,608
Societe Television Francaise .... 11,080 1,132,706
Sodexho Alliance SA (New)* ...... 282 147,425
Sodexho SA ...................... 2,543 1,362,414
Total SA Cl-B ................... 39,864 4,340,347
----------
38,433,963
----------
GERMANY -- 5.5%
Allianz AG ...................... 9,480 2,446,397
Bayer AG ........................ 43,195 1,603,561
Bayerische Hypotheken-und
Wechsel-Bank AG ............... 29,712 1,441,777
Bayerische Vereinsbank AG ....... 25,045 1,615,771
Bilfinger & Berger Bau AG ....... 10,700 338,013
Buderus AG ...................... 807 362,199
Commerzbank AG .................. 15,850 617,061
Deutsche Bank AG ................ 37,964 2,656,154
Deutsche Telekom AG ............. 46,401 859,354
Dresdner Bank AG ................ 12,380 563,216
Dresdner Bank AG Warrants* ...... 27,736 493,622
Fielmann AG Pfd. ................ 5,723 132,887
Fresenius AG Pfd. ............... 2,660 483,760
Gehe AG ......................... 44,961 2,275,506
Hoechst AG ...................... 12,980 449,742
Hornbach Baumarkt AG ............ 1,300 37,235
Hornbach Holdings AG Pfd. ....... 5,870 406,451
Krones AG Hermann Kronseder
Maschinenfabrik Pfd. .......... 456 142,021
Mannesmann AG ................... 1,880 944,161
Rhoen-Klinikum AG ............... 8,250 807,546
SAP AG .......................... 5,980 1,814,248
SAP AG Pfd. ..................... 1,738 564,692
Siemens AG ...................... 15,410 929,893
Veba AG ......................... 41,654 2,837,876
Volkswagen AG ................... 1,019 569,562
----------
25,392,705
----------
SHARES VALUE
---------- ------------
HONG KONG -- 2.4%
Cheung Kong Holdings Ltd. ....... 65,000 $ 425,740
China Light & Power Co. Ltd. .... 100,000 554,963
Dao Heng Bank Group Ltd. ........ 243,000 606,852
First Pacific Co. Ltd. .......... 926,954 448,626
Hong Kong Land Holdings Ltd. .... 620,582 1,191,517
HSBC Holdings PLC ............... 18,800 463,432
Hutchison Whampoa Ltd. .......... 405,000 2,540,309
New World Development Co.
Ltd. .......................... 592,205 2,048,340
Sun Hung Kai Properties Ltd. .... 64,000 446,035
Swire Pacific Ltd. Cl-A ......... 241,000 1,321,908
Wharf Holdings Ltd. ............. 516,000 1,132,124
----------
11,179,846
----------
INDIA -- 0.1%
Mahanagar Telephone Nigam Ltd.
[GDR]* ........................ 44,000 682,440
----------
ITALY -- 3.6%
Assicurazioni Generali .......... 60,000 1,474,551
Banca Commerciale Italia NA ..... 104,000 361,765
Credito Italiano SPA ............ 636,996 1,965,396
Ente Nazionale Idrocarburi
SPA ........................... 479,100 2,717,977
Industrie Natuzzi SPA [ADR] ..... 15,260 314,738
Istituto Mobiliare Italiano
SPA ........................... 68,710 816,127
Italgas SPA ..................... 112,936 466,309
La Rinascente SPA ............... 22,800 170,227
Mediolanum SPA .................. 58,344 1,098,902
Telecom Italia Mobile RNC SPA ... 113,043 321,611
Telecom Italia Mobile SPA ....... 821,805 3,795,278
Telecom Italia SPA .............. 533,518 3,409,935
----------
16,912,816
----------
JAPAN -- 18.2%
Advantest Corp. ................. 7,000 398,397
Alps Electric Co. Ltd. .......... 72,000 681,120
Amada Co. Ltd. .................. 109,000 406,588
Canon, Inc. ..................... 217,000 5,073,638
Citizen Watch Co. Ltd. .......... 68,000 457,618
Dai Nippon Screen Manufacturing
Co. Ltd. ...................... 122,000 562,986
Daifuku Co. Ltd. ................ 18,000 87,909
Daiichi Pharmaceutical Co.
Ltd. .......................... 129,000 1,458,456
Daiwa House Industry Co. Ltd. ... 163,000 865,014
DDI Corp. ....................... 267 708,462
Denso Corp. ..................... 188,000 3,397,910
East Japan Railway Co. Ltd. ..... 358 1,621,752
Fanuc Co. ....................... 34,000 1,291,790
Hitachi Ltd. .................... 228,000 1,630,812
Hitachi Zosen Corp. ............. 181,000 290,945
Honda Motor Co. ................. 15,000 552,603
Inax ............................ 46,000 134,086
Ishihara Sangyo Kaisha Ltd.* .... 56,000 62,451
Ito-Yokado Co. Ltd. ............. 53,000 2,710,714
Kao Corp. ....................... 90,000 1,301,327
|
SHARES VALUE
---------- ------------
Kokuyo .......................... 58,000 $ 1,003,683
Komatsu Ltd. .................... 173,000 871,512
Komori Corp. .................... 49,000 731,112
Kumagai Gumi Co. Ltd. ........... 88,000 48,054
Kuraray Co. Ltd. ................ 126,000 1,046,599
Kyocera Corp. ................... 68,000 3,096,113
Makita Corp. .................... 84,000 807,561
Matsushita Electric Industrial
Co. ........................... 207,000 3,040,814
Mauri Co. Ltd. .................. 137,000 2,138,961
Mitsubishi Corp. ................ 132,000 1,045,677
Mitsubishi Heavy Industries
Ltd. .......................... 641,000 2,681,903
Mitsubishi Paper Mills Ltd. ..... 64,000 90,078
Mitsui Fudosan Co. Ltd. ......... 306,000 2,965,365
Mitsui Petrochemical
Industries .................... 43,000 79,372
Murata Manufacturing Co. Ltd. ... 65,000 1,639,734
National House Industrial ....... 26,000 178,971
NEC Corp. ....................... 386,000 4,126,561
Nippon Hodo ..................... 22,000 71,065
Nippon Steel Co. ................ 819,000 1,215,703
Nippon Telegraph & Telephone
Corp. ......................... 183 1,576,360
Nomura Securities Co. Ltd. ...... 194,000 2,596,194
Pioneer Electronic Corp. ........ 68,000 1,051,214
Sangetsu Co. Ltd. ............... 11,000 113,366
Sankyo Co. Ltd. ................. 140,000 3,176,408
Sega Enterprises Ltd. ........... 19,400 352,127
Sekisui Chemical Co. Ltd. ....... 207,000 1,055,529
Sekisui House Ltd. .............. 107,000 690,450
Seven-Eleven Japan Co. Ltd. ..... 16,000 1,137,046
Sharp Corp. ..................... 193,000 1,332,968
Shin-Etsu Chemical Co. .......... 112,000 2,144,883
Shiseido Co. Ltd. ............... 51,000 698,194
Sony Corp. ...................... 49,100 4,380,520
Sumitomo Corp. .................. 218,000 1,223,955
Sumitomo Electric Industries .... 290,000 3,970,125
Sumitomo Forestry Co. ........... 73,000 356,519
TDK Corp. ....................... 48,000 3,632,641
Teijin Ltd. ..................... 303,000 636,197
Tokio Marine & Fire Insurance
Co. ........................... 60,000 682,966
Tokyo Electron Ltd. ............. 18,000 578,675
Tokyo Steel Manufacturing Co.
Ltd. .......................... 56,500 191,634
Toppan Printing Co. Ltd. ........ 111,000 1,451,303
UNY Co. Ltd. .................... 66,000 908,622
Yurtec Corp. .................... 22,000 135,532
----------
84,646,844
----------
KOREA -- 0.1%
Samsung Electronics Co. ......... 12,038 272,728
----------
MALAYSIA -- 0.3%
Berjaya Sports Toto BHD ......... 222,000 567,495
Tanjong PLC ..................... 371,000 614,780
Time Engineering BHD ............ 190,000 48,813
----------
1,231,088
----------
MEXICO -- 2.2%
Cementos de Mexico SA de CV
[ADS]* ........................ 65,090 559,774
Cemex SA [ADS] 144A* ............ 50,068 430,585
SHARES VALUE
---------- ------------
Cemex SA Cl-B* .................. 67,925 $ 360,613
Cifra SA [ADR]* ................. 6,445 158,708
Fomento Economico Mexicano SA
Cl-B .......................... 96,409 770,142
Gruma SA [ADS] 144A* ............ 24,309 364,635
Gruma SA Cl-B* .................. 112,850 447,939
Grupo Financiero Banamex SA Cl-
B* ............................ 146,200 437,051
Grupo Financiero Banamex SA Cl-
L* ............................ 4,184 10,795
Grupo Financiero Bancomer SA Cl-B
[GDR]* ........................ 2,330 29,125
Grupo Financiero Bancomer SA
Cl-L* ......................... 1,725 706
Grupo Industrial Maseca SA de CV
Cl-B .......................... 306,095 306,786
Grupo Modelo SA Cl-C ............ 67,506 568,564
Grupo Televisia SA [GDR]* ....... 14,034 542,378
Kimberly-Clark de Mexico SA
Cl-A .......................... 166,630 789,558
Panamerican Beverages, Inc.
Cl-A .......................... 34,540 1,126,868
Telefonos de Mexico SA Cl-L
[ADR] ......................... 46,014 2,579,660
TV Azteca, SA de CV [ADR]* ...... 31,200 703,950
----------
10,187,837
----------
NETHERLANDS -- 10.4%
ABN Amro Holding NV ............. 126,196 2,458,893
AKZO Nobel NV ................... 3,582 617,723
Baan Co. NV* .................... 16,454 538,935
Baan Co. NV [ADR]* .............. 18,040 595,320
CSM NV .......................... 36,451 1,618,262
Elsevier NV ..................... 330,172 5,342,088
Fortis Amev NV .................. 38,702 1,687,651
Gucci Group NV .................. 15,717 658,149
ING Groep NV .................... 128,092 5,396,061
ING Groep NV Warrants* .......... 39,906 418,109
Koninklijke Ahold NV ............ 27,463 716,639
Koninklijke Nutricia Verenigde
Bedrijven NV .................. 30,650 929,828
Otra NV ......................... 6,490 92,841
Polygram NV ..................... 60,217 2,881,296
Royal Dutch Petroleum Co. ....... 202,374 11,110,839
Royal PTT Nederland NV .......... 11,749 490,307
Unilever NV ..................... 70,080 4,321,167
Wolters Kluwer NV ............... 65,110 8,411,630
----------
48,285,738
----------
NEW ZEALAND -- 0.3%
Air New Zealand Ltd. ............ 140,445 281,347
Fletcher Challenge Building
Ltd. .......................... 129,552 264,791
Fletcher Challenge Energy
Ltd. .......................... 100,267 351,068
Telecom Corp. of New Zealand
Ltd. .......................... 136,000 659,389
----------
1,556,595
----------
NORWAY -- 1.8%
Bergesen D.Y. AS Cl-A ........... 9,560 225,637
Norsk Hydro AS .................. 79,880 3,895,296
|
SHARES VALUE
---------- ------------
Orkla AS Cl-A ................... 48,710 $ 4,195,612
Saga Petroleum ASA Cl-B ......... 15,160 230,314
----------
8,546,859
----------
PANAMA -- 0.0%
Banco Latinoamericano de
Exportaciones SA Cl-E ......... 4,035 166,948
----------
PERU -- 0.1%
Credicorp Ltd. [ADR] ............ 10,620 191,160
Telefonica del Peru SA Cl-B ..... 26,690 59,627
Telefonica del Peru SA Cl-B
[ADR] ......................... 11,383 265,366
----------
516,153
----------
PORTUGAL -- 0.6%
Jeronimo Martins, SGPS, SA ...... 33,099 1,051,423
Jeronimo Martins, SGPS, SA
(New)* ........................ 33,099 1,539,146
----------
2,590,569
----------
RUSSIA -- 0.1%
Gazprom [ADR] ................... 5,750 138,719
Lukoil Holding [ADR] ............ 3,620 332,407
----------
471,126
----------
SINGAPORE -- 0.6%
City Developments Ltd. .......... 53,000 245,350
Overseas-Chinese Banking Corp.
Ltd. .......................... 37,200 216,364
Overseas Union Bank Ltd. ........ 110,400 422,614
Singapore Land Ltd. ............. 104,000 228,376
Singapore Press Holdings Ltd. ... 90,000 1,127,043
United Overseas Bank Ltd. ....... 101,400 562,685
----------
2,802,432
----------
SPAIN -- 2.3%
Banco Bilbao Vizcaya SA ......... 21,420 692,847
Banco Popular Espanol SA ........ 22,680 1,584,761
Banco Santander SA .............. 57,788 1,929,864
Centros Comerciales Pryca SA .... 14,319 213,260
Corporacion Bancaria de Espana
SA ............................ 12,814 779,356
Empresa Nacional de
Electricidad SA ............... 64,292 1,141,026
Gas Natural SDG SA .............. 14,051 728,292
Iberdrola SA .................... 86,553 1,138,591
Repsol SA ....................... 20,855 889,395
Telefonica de Espana SA ......... 57,547 1,642,416
----------
10,739,808
----------
SWEDEN -- 3.2%
ABB AB Cl-A ..................... 82,210 973,959
Astra AB Cl-B ................... 231,146 3,889,158
Atlas Copco AB Cl-B ............. 40,130 1,196,158
Electrolux AB Cl-B .............. 28,770 1,997,927
Esselte AB ...................... 14,410 292,400
Granges AB* ..................... 14,385 225,719
Hennes & Mauritz AB Cl-B ........ 59,900 2,642,305
SHARES VALUE
---------- ------------
Nordbanken Holding AB* .......... 366,188 $ 2,072,233
Sandvik AB Cl-A ................. 6,140 174,890
Sandvik AB Cl-B ................. 43,420 1,242,235
Scribona AB Cl-B ................ 5,500 61,347
----------
14,768,331
----------
SWITZERLAND -- 6.4%
ABB AG .......................... 1,569 1,973,957
Adecco SA ....................... 7,460 2,166,062
Credit Suisse Group ............. 7,130 1,104,782
Nestle SA ....................... 3,898 5,850,140
Novartis AG ..................... 5,939 9,650,290
Roche Holding AG ................ 565 5,618,817
Swiss Bank Corp. ................ 6,700 2,085,496
Union Bank of Switzerland ....... 1,000 1,448,013
----------
29,897,557
----------
UNITED KINGDOM -- 18.5%
Abbey National PLC .............. 176,000 3,159,457
Argos PLC ....................... 182,749 1,656,844
ASDA Group PLC .................. 501,450 1,464,539
BG PLC-B ........................ 169,597 764,617
British Petroleum Co. PLC ....... 153,840 2,025,043
Cable & Wireless PLC ............ 352,000 3,098,643
Cadbury Schweppes PLC ........... 241,456 2,437,404
Caradon PLC ..................... 334,530 988,040
Centrica PLC .................... 126,210 185,863
Compass Group PLC ............... 159,000 1,946,458
Diageo PLC ...................... 760,940 7,005,281
Electrocomponents PLC ........... 126,000 937,096
GKN PLC ......................... 17,000 348,811
Glaxo Wellcome PLC .............. 254,000 6,018,264
Heywood Williams Group PLC ...... 32,010 109,290
Hillsdown Holdings PLC .......... 95,160 232,518
Kingfisher PLC .................. 378,950 5,287,529
Ladbroke Group PLC .............. 218,000 946,968
Laing, (John) PLC Cl-A .......... 70,000 372,028
National Westminster Bank PLC ... 648,670 10,801,383
Rank Group PLC .................. 207,120 1,155,305
Reed International PLC .......... 659,740 6,621,825
Rolls-Royce PLC ................. 78,140 302,146
Rio Tinto PLC ................... 165,600 2,040,879
Safeway PLC ..................... 289,660 1,634,774
Shell Transport & Trading Co.
PLC ........................... 893,000 6,465,158
Smith, (David S.) Holdings
PLC ........................... 197,900 647,998
Smithkline Beecham PLC .......... 821,240 8,418,470
T&N PLC ......................... 181,680 759,304
Tesco PLC ....................... 238,000 1,938,462
Tomkins PLC ..................... 631,220 3,022,378
United News & Media PLC ......... 280,470 3,198,119
----------
85,990,894
----------
|
SHARES VALUE
---------- ------------
VENEZUELA -- 0.1%
Cia Anonima Nacional Tele
Venezuela [ADS] ............... 13,427 $ 558,899
----------
TOTAL INVESTMENTS -- 94.5%
(COST $395,941,263)................ 438,892,076
OTHER ASSETS LESS
LIABILITIES -- 5.5%................ 25,563,844
----------
NET ASSETS -- 100.0%................. $464,455,920
==========
|
* Non-income producing securities.
** Closed-end funds.
144A -- Security was purchased pursuant to rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 0.3% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- ----------- -------------
FOREIGN BONDS -- 89.7%
AUSTRALIA -- 4.0%
Australian Government
12.00%................ 11/15/01 1,200 $ 953,684
10.00%................ 10/15/07 1,600 1,343,626
7.50%................. 09/15/09 2,350 1,719,336
Federal National Mtge.
Assoc. Global Bond
6.50%................. 07/10/02 1,850 1,234,782
-------------
5,251,428
-------------
CANADA -- 2.8%
Canadian Government
8.00%................. 06/01/23 3,185 2,823,282
Province of Alberta
8.00%................. 03/01/00 710 521,671
Province of Ontario
8.25%................. 12/01/05 200 161,043
Province of Quebec
7.75%................. 03/30/06 200 155,903
-------------
3,661,899
-------------
CZECH REPUBLIC -- 0.2%
European Investment Bank
11.00%................ 10/10/01 8,000 208,287
-------------
DENMARK -- 1.5%
Nykredit
7.00%................. 10/01/16 202 29,923
6.00%................. 10/01/26 13,820 1,966,873
7.00%................. 10/01/29 10 1,444
-------------
1,998,240
-------------
EUROPEAN CURRENCY UNIT -- 3.7%
European Bank
Reconstruction &
Development Global
Bond
6.00%................. 05/06/99 970 1,086,132
French O.A.T.
9.50%................. 04/25/00 1,550 1,884,246
United Kingdom Treasury
4.00%................. 01/28/00 1,760 1,915,528
-------------
4,885,906
-------------
FRANCE -- 9.5%
French O.A.T.
5.50%................. 04/25/04 7,000 1,195,939
6.50%................. 10/25/06 6,500 1,173,722
5.50%................. 10/25/07 20,000 3,365,770
6.00%................. 10/25/25 4,000 674,351
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- ----------- -------------
French O.A.T. Principal
Strip [ZCB]
5.471%................ 10/25/08 13,700 $ 1,270,058
French Treasury Bill
7.75%................. 04/12/00 16,000 2,853,657
4.50%................. 07/12/02 11,000 1,809,849
-------------
12,343,346
-------------
GERMANY -- 20.1%
Bank Nederlandse
Gemeenten
6.25%................. 08/10/00 1,000 576,739
5.25%................. 10/01/01 4,300 2,439,323
Federal National Mtge.
Assoc. Global Bond
5.00%................. 02/16/01 3,500 1,963,402
Federal Republic of
Germany
7.25%................. 10/21/02 1,960 1,202,245
7.50%................. 11/11/04 5,750 3,619,321
6.875%................ 05/12/05 9,400 5,766,913
6.50%................. 07/04/27 2,800 1,686,814
Federal Republic of
Germany Principal
Strip [ZCB]
11.13%................ 07/04/07 6,500 2,197,949
18.72%................ 07/04/27 8,400 794,198
Inter-America
Development Bank
7.00%................. 06/08/05 4,500 2,740,484
KFW International
Finance, Inc.
6.75%................. 06/20/05 4,500 2,721,714
Minnesota Mining &
Manufacturing Co.
5.00%................. 10/15/01 900 504,322
-------------
26,213,424
-------------
HUNGARY -- 0.4%
Hungarian Government
24.00%................ 03/21/98 45,000 221,855
23.50%................ 05/17/98 50,000 247,738
-------------
469,593
-------------
ITALY -- 8.6%
Italian Government
9.50%................. 02/01/01 6,150,000 3,915,067
8.25%................. 07/01/01 3,715,000 2,315,576
9.00%................. 10/01/03 1,880,000 1,254,222
9.50%................. 01/01/05 2,510,000 1,741,955
8.75%................. 07/01/06 1,895,000 1,297,242
7.25%................. 11/01/26 1,100,000 724,210
-------------
11,248,272
-------------
|
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- ----------- -------------
JAPAN -- 8.1%
Asian Development Bank
3.125%................ 06/29/05 200,000 $ 1,678,574
Export-Import Bank of
Japan
4.375%................ 10/01/03 360,000 3,207,359
International Bank
Reconstruction &
Development Global
Bond
4.75%................. 12/20/04 260,000 2,412,229
Republic of Austria
5.00%................. 01/22/01 110,000 949,834
4.50%................. 09/28/05 180,000 1,658,673
Republic of Italy
3.75%................. 06/08/05 70,000 608,363
-------------
10,515,032
-------------
NETHERLANDS -- 1.8%
Netherlands Government
7.50%................. 11/15/99 1,950 1,016,732
9.00%................. 01/15/01 2,500 1,381,812
-------------
2,398,544
-------------
NEW ZEALAND -- 2.7%
International Bank
Reconstruction &
Development
7.00%................. 09/18/00 1,300 739,751
New Zealand Government
10.00%................ 03/15/02 4,310 2,740,762
-------------
3,480,513
-------------
PHILIPPINES -- 0.1%
Philippines Government
12.50%................ 04/25/01 8,000 168,856
-------------
PORTUGAL -- 2.5%
Republic of Portugal
5.375%................ 03/23/00 200,000 1,101,720
5.75%................. 03/23/02 380,000 2,117,347
-------------
3,219,067
-------------
RUSSIA -- 1.3%
GKO Pass-Through Notes
10.80%................ 01/15/98 3,128,000 519,219
25.817%............... 04/15/98 3,815,500 588,295
25.991%............... 07/01/98 4,060,538 588,094
-------------
1,695,608
-------------
SOUTH AFRICA -- 1.9%
Republic of South Africa
12.00%................ 02/28/05 13,000 2,466,807
-------------
SPAIN -- 4.4%
Spanish Government
10.90%................ 08/30/03 341,000 $ 2,845,854
8.00%................. 05/30/04 160,000 1,200,509
10.00%................ 02/28/05 208,000 1,729,473
-------------
5,775,836
-------------
SWEDEN -- 1.1%
Swedish Government
5.50%................. 04/12/02 11,000 1,383,200
-------------
UNITED KINGDOM -- 15.0%
Alliance & Leicester BLD
8.75%................. 12/07/06 1,500 2,705,677
Annington Finance
7.75%................. 10/02/11 500 900,350
Bank of Scotland
8.375%................ 10/29/49 450 781,623
Federal National Mtge.
Assoc. Global Bond
6.875%................ 06/07/02 990 1,630,461
Guaranteed Export
Finance Corp.
6.102%................ 09/29/00 900 1,229,124
10.625%............... 09/15/01 1,550 2,837,310
Halifax Building Society
8.75%................. 07/10/06 600 1,089,675
9.375%................ 05/15/21 710 1,447,892
National Power Co. PLC
8.375%................ 08/02/06 600 1,056,355
Republic of Austria
9.00%................. 07/22/04 360 660,469
Swiss Bank Corp. Jersey
8.75%................. 12/18/25 520 1,016,578
United Kingdom Treasury
9.00%................. 08/06/12 360 740,991
8.75%................. 08/25/17 1,640 3,438,030
-------------
19,534,535
-------------
TOTAL FOREIGN BONDS
(COST $119,967,824)................. 116,918,393
-------------
|
PAR
(000)
-------
SOVEREIGN ISSUES -- 7.5%
ARGENTINA -- 0.6%
Republic of Argentina
Debs. [FRB, BRB]
6.6875%.............. 03/31/05 $ 504 451,458
Republic of Argentina
Unsub. Debs. [FRB,
BRB]
11.375%.............. 01/30/17 250 274,219
-------------
725,677
-------------
|
PAR
MATURITY (000) VALUE
--------- ------- -------------
BRAZIL -- 1.1%
Federal Republic of
Brazil Debs., EI Bond
[FRB, BRB]
6.6875%.............. 04/15/06 $ 49 $ 41,956
Federal Republic of
Brazil Debs., IDU
Bond [FRB, BRB]
6.8125%.............. 01/01/01 608 579,582
Republic of Brazil
Capitalization Bond
[FRB, BRB]
4.50%................ 04/15/14 456 357,757
Republic of Brazil Debt
Conversion Bond
Series L [FRN, BRB]
6.9375%.............. 04/15/12 200 151,000
Republic of Brazil
Global Bond
10.125%.............. 05/15/27 250 235,312
Republic of Brazil New
Money Bond [FRB, BRB]
6.75%................ 04/15/09 155 125,124
-------------
1,490,731
-------------
BULGARIA -- 1.1%
National Republic of
Bulgaria Debs. [FRN,
BRB]
6.6875%.............. 07/28/11 575 421,906
2.25%................ 07/28/12 1,620 988,200
-------------
1,410,106
-------------
DOMINICAN REPUBLIC -- 0.2%
Dominican Republic
Disc. [FRN, BRB]
6.875%............... 08/30/24 250 201,250
-------------
MEXICO -- 1.0%
Banco Nacional de
Comercio Exterier
Debs.
7.25%................ 02/02/04 120 111,375
United Mexican States
Global Bond
9.875%............... 01/15/07 100 104,312
11.375%.............. 09/15/16 625 717,578
United Mexican States
[BRB]
6.25%................ 12/31/19 500 418,694
-------------
1,351,959
-------------
POLAND -- 0.6%
Government of Poland
PDI [STEP, BRB]
4.00%................ 10/27/14 $ 375 $ 324,609
Government of Poland
REG -- PAR [BRB,
STEP]
3.00%................ 10/27/24 250 154,219
Poland Communications,
Inc. Sr. Notes 144A
9.875%............... 11/01/03 300 295,200
-------------
774,028
-------------
RUSSIA -- 1.7%
City of Moscow Unsub.
Deb.
9.50%................ 05/31/00 100 95,187
Republic of Kazakhstan
9.25%................ 12/20/99 100 98,250
Russia Interest Note --
US [FRN]
6.71875%............. 12/15/15 1,177 824,866
Russia Ministry of
Finance Unsub.
10.00%............... 06/26/07 650 602,062
Russia Principal Loans
[FRN]
2.6875%.............. 12/15/20 1,050 650,344
-------------
2,270,709
-------------
SOUTH AFRICA -- 0.2%
Ivory Coast [FLIRB, WI]
1.246%............... 12/29/49 750 256,875
-------------
VENEZUELA -- 1.0%
Republic of Venezuela
Debs. [FRN, BRB]
6.75%................ 12/18/07 1,190 1,066,964
Republic of Venezuela
[BRB]
6.75%................ 03/31/20 300 259,875
-------------
1,326,839
-------------
TOTAL SOVEREIGN ISSUES
(COST $9,300,891)........ 9,808,174
-------------
|
NOTIONAL
AMOUNT
(000)
--------
OPTIONS -- 0.0%
Call Option on United Kingdom
Pound Put Option on German
Deutsche Marks Strike Price
GBP 2.8759, Expires 1/5/98
(COST $61,070)............... 1,500 0
-------------
TOTAL INVESTMENTS -- 97.2%
(COST $129,329,785).............. 126,726,567
OTHER ASSETS LESS
LIABILITIES -- 2.8%.............. 3,680,964
-------------
NET ASSETS -- 100.0%............... $ 130,407,531
===========
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
---------------------------------------------------------------------------------------------
01/98 Buy CAD 1,987,907 $1,405,874 $1,390,261 $(15,613)
01/98 Buy JPY 176,407,200 1,350,000 1,362,143 12,143
---------- ---------- --------
$2,755,874 $2,752,404 $ (3,470)
========== ========== ========
|
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
------------------------------------------------------------------------------------------------
01/98 Sell CAD 1,988,372 $ 1,396,027 $ 1,390,587 $ 5,440
========== ========== ===============
|
UNREALIZED
SETTLEMENT CONTRACTS TO IN EXCHANGE APPRECIATION
MONTH TYPE RECEIVE FOR (DEPRECIATION)
-------------------------------------------------------------------------------------
01/98 Buy CAD 1,972,308 AUD 2,060,928 $ 35,680
01/98 Buy DEM 2,526,175 GBP 853,438 4,808
01/98 Buy DEM 1,025,183 ITL 1,006,473,185 (787)
01/98 Buy DEM 3,206,448 ZAR 8,939,104 (48,711)
01/98 Buy FRF 4,153,360 DEM 1,241,439 330
01/98 Buy JPY 233,467,453 GBP 1,130,277 (52,601)
01/98 Buy JPY 627,713,692 NZD 8,073,488 151,904
01/98 Buy NZD 1,760,000 JPY 135,247,200 (20,897)
01/98 Buy ZAR 2,989,104 DEM 1,104,017 571
-------
$ 70,297
=======
|
144A -- Security was purchased pursuant to rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 0.2% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
--------- ------------
COMMON STOCK -- 96.4%
AUTOMOTIVE PARTS -- 1.0%
Lear Corp.* ...................... 40,000 $ 1,900,000
----------
BEVERAGES -- 1.7%
PepsiCo, Inc. .................... 87,800 3,199,212
----------
BUILDING MATERIALS -- 0.9%
Lowe's Companies, Inc. ........... 36,000 1,716,750
----------
CLOTHING & APPAREL -- 5.3%
Claiborne, (Liz), Inc. ........... 79,600 3,328,275
Hilfiger, (Tommy) Corp.* ......... 100,800 3,540,600
Jones Apparel Group, Inc.* ....... 67,000 2,881,000
----------
9,749,875
----------
COMPUTER HARDWARE -- 2.5%
Bay Networks, Inc.* .............. 104,200 2,663,612
Compaq Computer Corp. ............ 34,100 1,924,519
----------
4,588,131
----------
COMPUTER SERVICES & SOFTWARE -- 12.9%
BMC Software, Inc.* .............. 27,800 1,824,375
Cadence Design Systems, Inc.* .... 223,200 5,468,400
CHS Electronics, Inc. ............ 113,950 1,951,394
Cisco Systems, Inc.* ............. 39,225 2,186,794
Computer Sciences Corp.* ......... 48,300 4,033,050
Parametric Technology Corp.* ..... 141,500 6,703,562
Sun Microsystems, Inc.* .......... 40,000 1,595,000
----------
23,762,575
----------
CONGLOMERATES -- 1.1%
Philip Morris Companies, Inc. .... 44,000 1,993,750
----------
CONSUMER PRODUCTS & SERVICES -- 3.4%
Cendant Corp. .................... 62,481 2,147,771
Republic Industries, Inc.* ....... 173,500 4,044,719
----------
6,192,490
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 11.3%
Altera Corp.* .................... 25,000 828,125
Applied Materials, Inc.* ......... 106,200 3,199,275
Honeywell, Inc. .................. 80,500 5,514,250
KLA-Tencor Corp.* ................ 19,400 749,325
LAM Research Corp.*............... 112,300 3,284,775
Linear Technology Corp. .......... 32,000 1,844,000
Maxim Integrated Products,
Inc.* .......................... 70,000 2,415,000
Philips Electronics NV [ADR] ..... 25,000 1,512,500
Tandy Corp. ...................... 42,000 1,619,625
----------
20,966,875
----------
ENTERTAINMENT & LEISURE -- 2.0%
Mirage Resorts, Inc.* ............ 57,800 1,314,950
Royal Caribbean Cruises Ltd. ..... 45,000 2,399,062
----------
3,714,012
----------
ENVIRONMENTAL SERVICES -- 5.7%
Allied Waste Industries, Inc.* ... 71,000 1,655,187
U.S. Filter Corp.* ............... 117,900 3,529,631
USA Waste Services, Inc.*......... 138,400 5,432,200
----------
10,617,018
----------
FINANCIAL-BANK & TRUST -- 1.5%
Chase Manhattan Corp. ............ 26,000 $ 2,847,000
----------
FINANCIAL SERVICES -- 6.6%
CIT Group, Inc. Cl-A* ............ 100,000 3,225,000
Green Tree Financial Corp. ....... 138,000 3,613,875
Household International, Inc. .... 17,000 2,168,562
The Money Store, Inc. ............ 154,700 3,248,700
----------
12,256,137
----------
FOOD -- 2.5%
International Home Foods,
Inc.* .......................... 100,000 2,800,000
Safeway, Inc.* ................... 27,500 1,739,375
----------
4,539,375
----------
HEALTHCARE SERVICES -- 4.5%
Medpartners, Inc.* ............... 94,000 2,103,250
Omnicare, Inc. ................... 88,400 2,740,400
Phycor, Inc.* .................... 65,800 1,776,600
Tenet Healthcare Corp.* .......... 50,000 1,656,250
----------
8,276,500
----------
HOTELS & MOTELS -- 2.3%
Hilton Hotels Corp. .............. 75,600 2,249,100
Promus Hotel Corp. * ............. 46,177 1,939,434
----------
4,188,534
----------
INSURANCE -- 2.4%
Conseco, Inc. .................... 50,000 2,271,875
Hartford Financial Services
Group, Inc. .................... 23,000 2,151,938
----------
4,423,813
----------
MACHINERY & EQUIPMENT -- 0.9%
Caterpillar, Inc. ................ 34,400 1,670,550
----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.2%
Johnson & Johnson Co. ............ 33,000 2,173,875
----------
OFFICE EQUIPMENT -- 3.6%
Office Depot, Inc.* .............. 100,000 2,393,750
Officemax, Inc.* ................. 145,000 2,066,250
Xerox Corp. ...................... 30,000 2,214,375
----------
6,674,375
----------
OIL & GAS -- 4.9%
Baker Hughes, Inc. ............... 75,000 3,271,875
Halliburton Co. .................. 50,000 2,596,875
Noble Drilling Corp.* ............ 50,000 1,531,250
Texaco, Inc. ..................... 30,000 1,631,250
----------
9,031,250
----------
PAPER & FOREST PRODUCTS -- 0.9%
Kimberly-Clark Corp. ............. 34,600 1,706,213
----------
PHARMACEUTICALS -- 0.9%
Cardinal Health, Inc. ............ 22,500 1,690,313
----------
RESTAURANTS -- 1.0%
McDonald's Corp. ................. 40,000 1,910,000
----------
|
SHARES VALUE
--------- ------------
RETAIL & MERCHANDISING -- 4.3%
Federated Department Stores,
Inc.* .......................... 65,000 $ 2,799,063
Nordstrom, Inc. .................. 49,400 2,982,525
TJX Companies, Inc. .............. 65,000 2,234,375
----------
8,015,963
----------
SEMICONDUCTORS -- 5.0%
Motorola, Inc. ................... 35,000 1,997,188
National Semiconductor Corp.* .... 132,000 3,423,750
Xilinx, Inc.* .................... 110,500 3,874,406
----------
9,295,344
----------
TELECOMMUNICATIONS -- 6.1%
China Telecom Hong Kong Ltd.* .... 25,000 839,063
Nokia Corp. Cl-A [ADR]............ 52,000 3,640,000
Teleport Communications Group,
Inc. Cl-A* ..................... 20,000 1,097,500
Tellabs, Inc.* ................... 43,600 2,305,350
Telstra Corp. Ltd. [ADR]* ........ 81,000 3,381,750
----------
11,263,663
----------
TOTAL COMMON STOCK
(COST $174,483,265)................. 178,363,593
----------
|
PAR
MATURITY (000) VALUE
--------- ------ ------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 2.7%
Federal Home Loan
Mortgage Corp.
4.90%
(COST $4,999,319)....... 01/02/98 $5,000 $ 4,999,319
------------
|
SHARES
---------
SHORT-TERM INVESTMENTS -- 1.5%
Temporary Investment Cash Fund ... 1,406,059 1,406,059
Temporary Investment Fund ........ 1,406,060 1,406,060
----------
(COST $2,812,119)................. 2,812,119
----------
TOTAL INVESTMENTS -- 100.6%
(COST $182,294,703)................. 186,175,031
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.6%).................... (1,125,219)
------------
NET ASSETS -- 100.0%.................. $185,049,812
===========
|
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
--------- -----------
FOREIGN STOCK -- 76.4%
AUSTRALIA -- 0.9%
Village Roadshow Ltd. ........... 396,000 $ 1,003,701
------------
CANADA -- 1.7%
Cinar Films, Inc. Cl-B*.......... 52,500 2,040,937
------------
CHILE -- 1.6%
Banco de A. Edwards [ADR]........ 44,800 761,600
Compania Cervecerias Unidas SA
[ADR].......................... 38,575 1,133,141
------------
1,894,741
------------
DENMARK -- 2.2%
Kobenhavns Lufthavne AS.......... 21,575 2,599,508
------------
FINLAND -- 3.9%
KCI Konecranes International*.... 41,250 1,363,516
Raision Tehtaat Oy............... 27,450 3,261,448
------------
4,624,964
------------
FRANCE -- 6.1%
Altran Technologies SA........... 6,975 2,133,361
Coflexip SA [ADR]................ 33,475 1,857,862
Dassault Systemes SA............. 57,850 1,764,581
Guilbert SA...................... 10,050 1,433,361
------------
7,189,165
------------
GERMANY -- 10.0%
Douglas Holding AG............... 16,350 495,581
Marschollek, Lautenschlaeger Ung
Partner AG..................... 10,450 2,673,467
Plettac AG....................... 2,150 296,545
Porsche AG Pfd. ................. 1,700 2,855,331
Schmalbach Lubeca AG............. 12,810 2,137,327
Schwarz Pharma AG................ 29,825 2,015,382
Sixt AG.......................... 3,800 300,105
Turbon International AG.......... 48,775 1,055,231
------------
11,828,969
------------
HONG KONG -- 2.5%
Asia Satellite Telecommunications
Holdings Ltd. [ADR]*........... 25,000 420,312
VTech Holdings Ltd. ............. 876,000 2,583,364
------------
3,003,676
------------
INDONESIA -- 0.9%
Gulf Indonesia Resources Ltd.*... 33,325 733,150
London Sumatra*.................. 637,600 362,613
------------
1,095,763
------------
IRELAND -- 0.7%
Ryanair Holdings PLC [ADR]*...... 33,000 829,125
------------
ITALY -- 2.6%
Bulgari SPA...................... 270,000 1,374,437
Editoriale L'Expresso SPA........ 75,000 360,578
Industrie Natuzzi SPA [ADR]...... 65,775 1,356,609
------------
3,091,624
------------
JAPAN -- 3.1%
Doutor Coffee Co. Ltd. .......... 39,000 1,004,837
Fuji Soft ABC, Inc. ............. 24,500 842,286
Nippon System Development........ 36,000 742,033
Noritsu Koki Co. Ltd. ........... 41,000 1,015,374
------------
3,604,530
------------
MALAYSIA -- 0.0%
Kentucky Fried Chicken Holdings
Warrants*...................... 21,333 $ 2,192
------------
MEXICO -- 2.8%
Grupo Iusacell SA [ADR]*......... 98,600 2,138,388
Grupo Posadas SA................. 1,675,000 1,142,733
------------
3,281,121
------------
NETHERLANDS -- 3.3%
Beter Bed Holding NV............. 14,875 286,900
Brunel International NV*......... 19,050 364,606
Hunter Douglas NV................ 46,950 1,644,337
IHC Caland NV.................... 26,025 1,350,528
Toolex Alpha NV.................. 29,000 293,257
------------
3,939,628
------------
NEW ZEALAND -- 0.3%
Sky Network Television Ltd. ..... 226,000 339,879
------------
NORWAY -- 2.8%
Kverneland ASA................... 37,325 607,554
Narvesen ASA..................... 15,050 332,757
Petroleum Geo-Services [ADR]*.... 19,125 1,238,344
Tomra Systems ASA................ 49,175 1,100,606
------------
3,279,261
------------
PANAMA -- 1.1%
Banco Latinoamericano de
Exportaciones SA Cl-E.......... 33,000 1,365,375
------------
PHILIPPINES -- 0.1%
International Container Terminal
Services, Inc.*................ 481,775 60,375
------------
SPAIN -- 2.6%
Tele Pizza SA*................... 37,600 3,034,339
------------
SWEDEN -- 1.3%
NetCom Systems AB Cl-B........... 62,000 1,332,307
Pricer AB Cl-B*.................. 8,000 148,216
------------
1,480,523
------------
UNITED KINGDOM -- 25.9%
British-Borneo Petroleum
Syndicate PLC.................. 382,473 2,662,050
BTG PLC.......................... 72,350 809,510
Cairn Energy PLC................. 188,525 1,538,600
Capital Radio PLC................ 184,950 1,512,466
DFS Furniture Co. PLC............ 151,350 1,285,012
Eidos PLC [ADR].................. 23,000 281,750
Flextech PLC*.................... 226,475 1,963,839
JBA Holdings PLC................. 200,300 3,389,692
Misys PLC........................ 99,892 3,007,855
Parity PLC....................... 213,800 2,237,381
PizzaExpress PLC................. 270,750 3,341,218
Psion PLC........................ 341,400 2,541,892
Regent Inns PLC.................. 186,125 1,009,102
Select Appointments Holdings
PLC............................ 90,400 831,487
|
SHARES VALUE
--------- -----------
Virgin Express Holdings PLC
[ADR].......................... 32,150 $ 667,113
Wetherspoon, (J.D.) PLC.......... 630,000 3,472,645
------------
30,551,612
------------
TOTAL FOREIGN STOCK
(COST $79,935,175)................. 90,141,008
------------
COMMON STOCK -- 3.4%
EQUIPMENT SERVICES -- 1.2%
Rofin-Sinar Technologies,
Inc.*.......................... 119,900 1,453,788
------------
TELECOMMUNICATIONS -- 2.1%
Cellular Communications
International, Inc.*........... 53,850 2,517,488
------------
TOTAL COMMON STOCK
(COST $3,533,348).................. 3,971,276
------------
|
PAR
MATURITY (000)
--------- -------
COMMERCIAL PAPER -- 20.2%
Associates Corp. of North
America
6.12%.................... 01/02/98 $ 1,255 1,254,787
5.55%.................... 01/05/98 4,411 4,408,280
Bell Atlantic Financial
Services, Inc.
6.15%.................... 01/06/98 5,196 5,191,562
PAR
MATURITY (000) VALUE
--------- ------- ------------
General Electric Capital
Corp.
5.75%.................... 01/07/98 $ 5,716 $ 5,710,522
Household Finance Corp.
6.08%.................... 01/02/98 1,916 1,915,676
Merrill Lynch & Co., Inc.
6.05%.................... 01/07/98 1,679 1,677,307
Progress Capital Holdings
6.02%.................... 01/02/98 3,700 3,699,381
TOTAL COMMERCIAL PAPER
(COST $23,857,515)..................... 23,857,515
TOTAL INVESTMENTS -- 100.0%
(COST $106,746,038).................... 117,969,799
LIABILITIES IN EXCESS OF OTHER
ASSETS -- 0.0%......................... (32,070)
NET ASSETS -- 100.0%..................... $117,937,729
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION
-----------------------------------------------------------------------------------------
01/98 Buy DEM 408,405 $230,100 $227,173 $ (2,927)
01/98 Buy NLG 12,664 6,299 6,248 (51)
----- --------- -----------
$236,399 $233,421 $ (2,978)
===== ========= ===========
|
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
--------- ------------
COMMON STOCK -- 80.3%
CHEMICALS -- 6.6%
Applied Extrusion Technologies,
Inc.* .......................... 5,600 $ 37,800
Dupont, (E.I.) de Nemours &
Co. ............................ 6,400 384,400
FMC Corp.* ....................... 18,000 1,211,625
Great Lakes Chemical Corp. ....... 28,300 1,269,962
IMC Global, Inc. ................. 11,500 376,625
Lyondell Petrochemical Co. ....... 58,300 1,544,950
Millennium Chemicals, Inc. ....... 75,000 1,767,187
Olin Corp. ....................... 11,000 515,625
Witco Corp. ...................... 8,000 326,500
----------
7,434,674
----------
DIVERSIFIED METALS -- 5.1%
Freeport-McMoran Copper & Gold,
Inc. Cl-A ...................... 31,900 488,469
Freeport-McMoran Copper & Gold,
Inc. Cl-B ...................... 13,000 204,750
Inco, Ltd. ....................... 86,800 1,475,600
Nucor Corp. ...................... 28,500 1,376,906
Reynolds Metals Co.* ............. 35,300 2,118,000
----------
5,663,725
----------
DIVERSIFIED RESOURCES -- 1.0%
Penn Virginia Corp. .............. 25,700 758,150
Western Water Co.* ............... 28,000 304,500
----------
1,062,650
----------
ENERGY SERVICES -- 14.0%
Ashland, Inc. .................... 23,500 1,261,656
Camco International, Inc. ........ 10,800 687,825
Carbo Ceramics, Inc. ............. 43,750 1,400,000
Coflexip SA [ADR] ................ 42,600 2,364,300
Cooper Cameron Corp.* ............ 38,300 2,336,300
Energy Group PLC [ADR] ........... 7,875 351,422
Halliburton Co. .................. 19,600 1,017,975
McDermott International, Inc. .... 59,300 2,171,862
Niagara Mohawk Power Corp. ....... 95,000 997,500
Western Atlas, Inc.* ............. 20,000 1,480,000
Wheelabrator Technologies,
Inc. ........................... 103,000 1,654,437
----------
15,723,277
----------
HOTELS & MOTELS -- 0.5%
Patriot American Hospitality,
Inc. ........................... 17,400 501,337
----------
INTEGRATED PETROLEUM -- 15.0%
Amerada Hess Corp. ............... 25,500 1,399,312
Atlantic Richfield Co. ........... 13,000 1,041,625
British Petroleum Co. PLC
[ADR] .......................... 25,600 2,040,000
Ente Nazionale Idrocarbure SPA
[ADR] .......................... 13,000 741,812
Mobil Corp. ...................... 49,200 3,551,625
Phillips Petroleum Co. ........... 33,000 1,604,625
Repsol SA [ADR] .................. 18,600 791,662
Texaco, Inc. ..................... 52,000 2,827,500
Total SA [ADR] ................... 45,000 2,497,500
Ultramar Diamond Shamrock
Corp. .......................... 10,800 344,250
----------
16,839,911
----------
OIL & GAS -- 6.8%
Exxon Corp. ...................... 9,000 $ 550,688
Hanover Compressor Co.* .......... 41,400 846,113
Ocean Energy, Inc.* .............. 3,500 172,594
Petroleo Brasileiro SA [ADR]
144A* .......................... 58,600 1,370,478
Royal Dutch Petroleum Co. ........ 28,000 1,517,250
Santa Fe International Corp. ..... 12,000 488,250
USX-Marathon Group ............... 80,500 2,716,875
----------
7,662,248
----------
PAPER & FOREST PRODUCTS -- 7.0%
Fort James Corp. ................. 22,800 872,100
Georgia Pacific Corp. ............ 13,300 807,975
Georgia Pacific Timber Group* .... 13,300 301,744
International Paper Co. .......... 31,000 1,336,875
Jefferson Smurfit Corp.* ......... 104,600 1,477,475
Kimberly-Clark Corp. ............. 15,200 749,550
Louisiana-Pacific Corp. .......... 78,000 1,482,000
Willamette Industries, Inc. ...... 24,800 798,250
----------
7,825,969
----------
PETROLEUM EXPLORATION &
PRODUCTION -- 7.9%
Barrett Resources Corp.* ......... 15,100 456,775
Bouygues Offshore SA [ADR]........ 40,000 870,000
Enserch Corp.* ................... 202,000 1,830,625
Houston Exploration Co.* ......... 50,500 927,938
Noble Affiliates, Inc. ........... 9,900 348,975
Rutherford-Moran Oil Corp.* ...... 35,300 630,988
Societe Nationale Elf Aquitaine SA
[ADR] .......................... 7,000 410,375
Union Texas Petroleum Holdings,
Inc. ........................... 91,700 1,908,506
United Meridian Corp.* ........... 51,300 1,442,813
----------
8,826,995
----------
PRECIOUS METALS -- 10.6%
Ashanti Goldfields Co. Ltd.
[GDR] .......................... 32,900 246,750
Battle Mountain Gold Co. ......... 272,000 1,598,000
Cambior, Inc. .................... 140,400 824,850
Canyon Resources Corp.* .......... 368,400 437,475
Dayton Mining Corp.* ............. 60,000 116,250
Driefontein Consolidated Ltd.
[ADR] .......................... 100,000 662,500
Gold Fields of South Africa Ltd.
[ADR] .......................... 40,000 620,000
Homestake Mining Co. ............. 173,700 1,541,588
Kloof Gold Mining Co. Ltd.
[ADR] .......................... 130,000 430,625
Newmont Mining Corp. ............. 89,224 2,620,955
Placer Dome, Inc. ................ 147,300 1,868,869
TVX Gold, Inc.* .................. 260,900 880,538
----------
11,848,400
----------
RAILROADS -- 1.1%
Burlington Northern Santa Fe
Corp. .......................... 13,700 1,273,244
----------
|
SHARES VALUE
--------- ------------
REAL ESTATE -- 4.7%
AMB Property Corp. [REIT] ........ 14,893 $ 374,187
Apartment Investment & Management
Co. Cl-A [REIT] ................ 23,700 870,975
Boston Properties, Inc. [REIT] ... 8,600 284,338
Camden Property Trust [REIT] ..... 13,100 406,100
Catellus Development Corp.* ...... 26,500 530,000
Equity Office Properties Trust
[REIT] ......................... 25,735 812,261
Security Capital Group, Inc.
Warrants* ...................... 1,804 9,471
Security Capital Pacific Trust
[REIT] ......................... 34,285 831,411
The Rouse Co. [REIT] ............. 13,200 432,300
United Dominion Realty Trust
[REIT] ......................... 50,000 696,875
----------
5,247,918
----------
TOTAL COMMON STOCK
(COST $83,111,614).................. 89,910,348
----------
PREFERRED STOCK -- 0.3%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT]
(COST $225,345)................. 9,890 369,639
----------
FOREIGN STOCK -- 13.6%
DIVERSIFIED METALS -- 2.7%
English China Clays
PLC -- (GBP) ................... 181,000 801,135
Lonrho PLC -- (GBP) .............. 1,464,035 2,240,317
----------
3,041,452
----------
HOTELS & MOTELS -- 0.4%
Sun International
Ltd. -- (ZAR) .................. 1,150,000 472,633
----------
METALS & MINING -- 2.4%
Anglo American Platinum Corp.
Ltd. -- (ZAR) .................. 50,139 669,708
AVMIN Ltd. -- (ZAR) .............. 240,000 288,512
Oryx Gold Holdings
Ltd. -- (ZAR)* ................. 1,450,000 953,487
Rio Tinto PLC -- (GBP) ........... 63,000 776,421
----------
2,688,128
----------
NON-FERROUS METALS -- 0.2%
Bougainville Copper
Ltd. -- (AUD)* ................. 882,542 270,267
----------
PAPER & FOREST PRODUCTS -- 0.7%
Macmillan Bloedel
Ltd. -- (CAD) .................. 72,000 747,159
----------
PETROLEUM EXPLORATION &
PRODUCTION -- 0.7%
Berkley Petroleum
Corp. -- (CAD)* ................ 20,100 210,689
Northstar Energy
Corp. -- (CAD)* ................ 78,000 547,791
----------
758,480
----------
PRECIOUS METALS -- 5.7%
Banro Resources
Corp. -- (CAD)* ................ 70,000 $ 256,810
Banro Resources Corp. Special --
(CAD)* ......................... 91,630 384,846
Banro Resources Corp. Special
Warrants -- (CAD)* ............. 45,815 0
Delta Gold NL -- (AUD) ........... 850,000 894,993
Gold Fields of South Africa
Ltd. -- (ZAR) .................. 3,800 58,175
Goldfields Ltd. -- (AUD) ......... 665,000 511,285
Impala Platinum Holdings Ltd. --
(ZAR) .......................... 94,900 906,809
Normandy Mining Ltd. -- (AUD) .... 458,658 445,282
Prime Resources Group, Inc. --
(CAD) .......................... 358,000 2,376,626
Samax 144A -- (CAD)* ............. 193,500 574,678
War Eagle Mining Co., Inc.
Warrants -- (CAD)* ............. 59,000 0
----------
6,409,504
----------
REAL ESTATE -- 0.8%
Security Capital U.S. Realty
[REIT] -- (NLG)* ............... 60,000 852,000
----------
TOTAL FOREIGN STOCK
(COST $19,480,116).................. 15,239,623
----------
PAR
MATURITY (000)
--------- ------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.4%
Federal Home Loan
Mortgage Corp.
4.75%
(COST $1,499,802)...... 01/02/98 $1,500 1,499,802
------------
COMMERCIAL PAPER -- 3.1%
Procter & Gamble Co.
5.90%
(COST $3,491,396)........ 01/16/98 3,500 3,491,396
------------
SHARES
---------
SHORT-TERM INVESTMENTS -- 1.0%
Temporary Investment Cash Fund
(COST $1,082,331)................. 1,082,331 1,082,331
----------
TOTAL INVESTMENTS -- 99.7% (COST
$108,890,604)................................. 111,593,139
OTHER ASSETS LESS LIABILITIES -- 0.3%........... 360,920
----------
NET ASSETS -- 100.0%............................ $111,954,059
==========
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 1.7% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
PAR
MATURITY (000) VALUE
--------- -------- -------------
CORPORATE OBLIGATIONS -- 18.8%
FINANCIAL SERVICES -- 1.6%
Salomon, Inc Sr. Notes
7.00%.................. 01/20/98 $ 2,650 $ 2,650,954
9.375%................. 04/15/98 2,000 2,018,400
4,669,354
FOOD -- 4.7%
RJR Nabisco Inc. Notes
7.625%................. 09/15/03 5,000 5,110,600
8.625%................. 12/01/02 8,000 8,516,720
13,627,320
INDUSTRIAL PRODUCTS -- 4.7%
Chesapeake Energy Corp.
Sr. Notes
12.00%................. 03/01/01 8,000 8,460,000
Imperial Chemical, Inc.
Notes
6.00% [VR]............. 03/05/98 5,000 5,004,810
13,464,810
TELECOMMUNICATIONS -- 1.7%
TCI Communications, Inc.
Sr. Notes
6.355% [FRN]........... 09/11/00 5,000 5,008,950
UTILITIES -- 6.1%
Connecticut Light & Power
7.25%.................. 07/01/99 6,000 6,001,260
Long Island Lighting Co.
8.50%.................. 05/15/06 5,000 5,371,800
9.75%.................. 05/01/21 1,000 1,015,850
9.625%................. 07/01/24 5,000 5,156,250
17,545,160
TOTAL CORPORATE OBLIGATIONS
(COST $53,802,909)......... 54,315,594
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 78.2%
FEDERAL HOME LOAN MORTGAGE
CORP. -- 12.0%
5.95%.................. 06/19/98 10,000 10,013,899
8.50%.................. 01/01/25 19,690 20,551,363
8.75%.................. 10/01/01 2,158 2,215,475
6.50% [TBA]............ 01/14/28 1,500 1,482,660
6.50% [TBA]............ 02/12/28 500 493,905
34,757,302
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 32.3%
5.84%................. 06/19/98 5,000 5,003,965
6.334% [VR]........... 03/01/17 2,379 2,383,901
6.907%................ 05/01/25 1,460 1,491,467
7.50%...........01/25/22-05/01/24 67,749 69,679,011
7.694% [VR]........... 01/01/25 475 487,045
8.00%................. 11/25/23 4,189 4,353,870
6.50% [TBA]........... 01/14/28 10,000 9,875,000
-----------
93,274,259
-----------
PAR
MATURITY (000) VALUE
-------- ------- -----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 30.4%
6.00%................. 11/20/26 $25,225 $25,824,347
6.50%................. 01/20/26 8,590 8,772,820
7.00%.......... 01/15/24-08/15/25 2,634 2,657,162
7.00% [VR]............ 07/20/17 286 292,830
7.00% [VR]............ 08/20/17 373 381,999
7.00% [VR]............ 09/20/17 313 321,775
7.00% [VR]............ 03/20/24 5,991 6,124,922
7.00% [VR]............ 07/20/24 368 376,947
7.375% [VR]........... 05/20/24 2,957 3,038,597
8.00%.......... 01/15/25-11/15/25 8,799 9,128,899
7.50% [TBA]........... 01/22/28 20,000 20,487,600
8.00% [TBA]........... 01/22/28 10,000 10,365,600
-----------
87,773,498
-----------
STUDENT LOAN MARKETING
ASSOCIATION -- 3.5%
6.00%.................. 06/30/98 10,000 10,017,699
-------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $224,126,411)........ 225,822,758
-------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 3.9%
Merrill Lynch Mtge.
Investors, Inc. Cl-B
7.332% [VR]............ 06/15/21 1,096 1,125,023
Resolution Trust Corp.
7.50% [VR]............. 07/25/28 10,000 10,194,176
-------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $11,261,427)......... 11,319,199
-------------
U.S. TREASURY OBLIGATIONS --
3.5%
U.S. TREASURY
BILLS -- 0.0%
5.02% #................ 02/05/98 10 9,952
5.14% #................ 03/12/98 15 14,852
-------------
24,804
-------------
U.S. TREASURY
NOTES -- 3.5%
5.625%................. 12/31/02 10,000 9,963,399
-------------
TOTAL U.S. TREASURY
OBLIGATIONS
(COST $9,999,014).......... 9,988,203
-------------
SOVEREIGN ISSUES -- 2.1%
Republic of Argentina
[FRB, BRB]
6.688%................. 03/31/05 4,800 4,296,600
Republic of Argentina
Bote 10 [FRN, PIK]
5.719%................. 04/01/00 1,994 1,888,014
-------------
TOTAL SOVEREIGN ISSUES
(COST $5,808,881).......... 6,184,614
-------------
|
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- -------- -------------
FOREIGN BONDS -- 2.0%
New Zealand Government
10.00%
(COST $6,187,247)...... 03/15/02 8,900 $ 5,659,577
-------------
PAR
(000)
--------
CERTIFICATES OF
DEPOSIT -- 3.5%
Landesbank Hessen
Thueringer
5.93%
(COST $9,995,127)...... 06/30/98 $10,000 10,002,110
-------------
COMMERCIAL PAPER -- 6.4%
International Business
Machines Corp.
5.82%.................. 01/16/98 1,100 1,097,332
Ford Motor Credit Corp.
5.68%.................. 01/06/98 1,500 1,498,817
General Electric Capital
Corp.
5.60%.................. 01/14/98 1,600 1,596,844
KFW International
Financial Corp.
5.89%.................. 01/09/98 3,500 3,495,419
National Rural Utility
Corp.
5.54%.................. 01/05/98 1,000 999,380
5.54%.................. 01/12/98 1,000 998,267
New Center Asset Trust
5.56%.................. 01/14/98 1,400 1,397,224
5.56%.................. 01/21/98 5,200 5,184,138
Procter & Gamble Co.
5.83%.................. 01/16/98 1,300 1,296,842
6.04%.................. 01/26/98 900 896,225
-------------
TOTAL COMMERCIAL PAPER
(COST $18,460,217)......... 18,460,488
-------------
|
SHARES VALUE
-------- ------------
SHORT-TERM INVESTMENTS -- 0.2%
Temporary Investment Cash Fund... 245,384 $ 245,384
Temporary Investment Fund........ 245,383 245,383
----------
(COST $490,767).................. 490,767
----------
TOTAL INVESTMENTS -- 118.6%
(COST $340,132,000)................ 342,243,310
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (18.6%).................. (53,600,863)
----------
NET ASSETS -- 100.0%................. $288,642,447
==========
|
# Securities with an aggregate market value of $24,804 have been segregated with the custodian to cover margin requirements for the following open futures contracts at December 31, 1997:
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
----------------------------------------------------------
U.S. Treasury 10 Year
Note 03/98 2,000 $ 5,000
======== =============
|
Interest rate swap agreement outstanding at December 31, 1997:
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
----------------------------------------------------------
Receive variable rate
payments on the
three-month LIBOR-BBA
floating rate and pay
fixed rate payments on
the then current U.S.
Treasury 10 Year Note
with a spread of: 36.50 06/02 7,000 $ 30,344
======== =============
|
See Notes to Financial Statements.
SHARES VALUE
--------- ------------
COMMON STOCK -- 96.3%
BUSINESS SERVICES -- 0.5%
Robert Half International,
Inc.* .......................... 30,200 $ 1,208,000
----------
COMPUTER HARDWARE -- 11.3%
Adaptec, Inc.* ................... 121,100 4,495,838
Bay Networks, Inc.* .............. 160,700 4,107,894
Compaq Computer Corp.* ........... 137,320 7,749,997
Dell Computer Corp.* ............. 89,600 7,526,400
EMC Corp.* ....................... 101,700 2,790,394
----------
26,670,523
----------
COMPUTER SERVICES & SOFTWARE -- 7.6%
BMC Software, Inc.* .............. 75,200 4,935,000
Cadence Design Systems, Inc.* .... 193,900 4,750,550
CompUSA, Inc.* ................... 266,752 8,269,312
----------
17,954,862
----------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 14.5%
Applied Materials, Inc.* ......... 203,700 6,136,462
Inacom Corp.* .................... 146,100 4,099,931
KLA-Tencor Corp.* ................ 121,100 4,677,487
Novellus System, Inc.* ........... 121,100 3,913,044
Sony Corp. [ADR] ................. 40,300 3,657,225
Tech Data Corp.* ................. 105,400 4,097,425
Teradyne, Inc.* .................. 169,700 5,430,400
VLSI Technology, Inc.* ........... 91,300 2,156,962
----------
34,168,936
----------
FINANCIAL-BANK & TRUST -- 6.0%
Chase Manhattan Corp. ............ 44,300 4,850,850
Citicorp ......................... 44,300 5,601,181
Northern Trust Corp. ............. 52,300 3,647,925
----------
14,099,956
----------
FINANCIAL SERVICES -- 12.5%
Ahmanson, (H.F.) & Co. ........... 95,200 6,372,450
Franklin Resources, Inc. ......... 40,800 3,547,050
Household International, Inc. .... 39,500 5,038,719
Merrill Lynch & Co., Inc. ........ 97,076 7,080,481
Schwab, (Charles) Corp. .......... 88,700 3,719,856
SunAmerica, Inc. ................. 88,750 3,794,062
----------
29,552,618
----------
FOOD -- 1.6%
Safeway, Inc.* ................... 59,500 3,763,375
----------
HEALTHCARE SERVICES -- 4.9%
Concentra Managed Care, Inc.* .... 81,800 2,760,750
Healthcare Compare Corp.* ........ 88,100 4,504,112
United Healthcare Corp. .......... 86,600 4,302,937
----------
11,567,799
----------
INSURANCE -- 2.9%
The Equitable Companies, Inc. .... 45,500 2,263,625
Travelers Group, Inc. ............ 86,050 4,635,944
----------
6,899,569
----------
MEDICAL SUPPLIES & EQUIPMENT -- 3.1%
HBO & Co. ........................ 150,400 7,219,200
----------
SHARES VALUE
--------- ------------
OFFICE EQUIPMENT -- 1.1%
Staples, Inc.* ................... 89,500 $ 2,483,625
----------
PHARMACEUTICALS -- 9.2%
Bristol-Meyers Squibb Co. ........ 29,100 2,753,587
Cardinal Health, Inc. ............ 59,100 4,439,887
Lilly, (Eli) & Co. ............... 46,500 3,237,563
McKesson Corp. ................... 63,600 6,880,725
Pfizer, Inc. ..................... 59,100 4,406,644
----------
21,718,406
----------
RETAIL & MERCHANDISING -- 13.4%
Costco Companies, Inc.* .......... 91,000 4,060,875
CVS Corp. ........................ 77,200 4,945,625
Dayton-Hudson Corp. .............. 69,700 4,704,750
Gap, Inc. ........................ 113,650 4,027,472
General Nutrition Companies,
Inc.* .......................... 60,400 2,053,600
Nordstrom, Inc. .................. 86,000 5,192,250
Starbucks Corp. .................. 88,800 3,407,700
Walgreen Co. ..................... 103,900 3,259,863
----------
31,652,135
----------
SEMICONDUCTORS -- 0.8%
National Semiconductor Corp.* .... 74,500 1,932,344
----------
TELECOMMUNICATIONS -- 2.7%
Lucent Technologies, Inc. ........ 45,500 3,634,313
Northern Telecom Ltd. ............ 30,600 2,723,400
----------
6,357,713
----------
TRANSPORTATION -- 4.2%
CNF Transportation, Inc. ......... 98,000 3,760,750
Federal Express Corp.* ........... 38,400 2,344,800
Swift Transportation Co., Inc. ... 23,100 747,863
USFreightways Corp. .............. 50,000 1,625,000
Werner Enterprises, Inc. ......... 30,100 617,050
Yellow Corp. ..................... 30,100 756,263
----------
9,851,726
----------
TOTAL COMMON STOCK
(COST $218,581,896)................. 227,100,787
----------
|
SHARES VALUE
--------- ------------
SHORT-TERM INVESTMENTS -- 2.9%
Temporary Investment Cash Fund ... 3,376,869 $ 3,376,869
Temporary Investment Fund ........ 3,376,869 3,376,869
----------
(COST $6,753,738)................. 6,753,738
----------
TOTAL INVESTMENTS -- 99.2%
(COST $225,335,634)................. 233,854,525
OTHER ASSETS LESS
LIABILITIES -- 0.8%................. 1,793,174
----------
NET ASSETS -- 100.0%.................. $235,647,699
==========
|
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
---------- ------------
FOREIGN STOCK -- 87.9%
ARGENTINA -- 1.0%
Banco Rio de La Plata SA* ....... 9,650 $ 135,100
Nortel Inversora [ADR]* ......... 38,625 984,938
Telecom Argentina Stet SA
Cl-B [ADR] .................... 11,550 412,912
Telefonica de Argentina SA
Cl-B [ADR] .................... 6,400 238,400
YPF SA [ADR] .................... 23,000 786,313
----------
2,557,663
----------
AUSTRIA -- 0.6%
Erste Bank Der Oesterreichischen
Sparkassen AG 144A* ........... 30,133 1,499,404
----------
BRAZIL -- 0.9%
Companhia Energetica de Minas
Geras [ADR] ................... 3,125 135,778
Companhia Paranaense de Energia-
Copel ......................... 69,900 956,756
Ericsson Telecomunicacoes SA .... 20,540,000 658,888
Petroleo Brasileiro SA .......... 580,000 135,643
Unibanco Holdings SA Sponsored
[GDR]* ........................ 9,275 298,539
----------
2,185,604
----------
CHILE -- 0.1%
Quinenco SA [ADR]* .............. 23,800 273,700
----------
DENMARK -- 1.3%
BG Bank AS ...................... 5,686 382,820
BG Bank AS 144A* ................ 12,772 859,897
SAS Danmark AS .................. 24,525 358,175
Sophus Berendsen AS ............. 7,601 1,254,399
Unidanmark AS Cl-A .............. 5,663 416,007
----------
3,271,298
----------
FINLAND -- 4.1%
Amer Group Ltd.* ................ 14,866 285,282
Merita Ltd. Cl-A................. 251,062 1,373,919
Metra Oy Cl-B ................... 4,193 98,560
Nokia AB Cl-A ................... 32,112 2,282,139
Nokia Corp. Cl-A [ADR] .......... 11,950 836,500
Pohjola Insurance Co. ........... 61,232 2,271,400
Raision Tehtaat Oy .............. 11,179 1,328,223
Sampo Insurance Co. Ltd. ........ 63,296 2,057,375
----------
10,533,398
----------
FRANCE -- 10.8%
Alcatel Alsthom ................. 2,414 306,974
Assurances Generales de
France ........................ 6,299 333,909
Axime* .......................... 4,952 638,770
Banque Nationale de Paris ....... 13,700 728,513
Cap Gemini SA ................... 15,331 1,257,650
Compagnie Francaise d'Etudes et
de Construction Technip ....... 5,405 570,521
Credit Commercial de France ..... 10,904 747,674
Credit Local de France .......... 10,155 1,176,562
Dassault Systemes SA [ADR] ...... 1,750 54,031
GrandVision 144A* ............... 23,024 947,619
GrandVision* .................... 12,492 514,144
SHARES VALUE
---------- ------------
Groupe Danone ................... 4,480 $ 800,551
Groupe Danone [ADR].............. 125,775 4,496,456
Lagardere S.C.A. ................ 8,365 276,708
Michelin C.G.D.E. Cl-B .......... 28,403 1,430,570
Renault SA* ..................... 67,657 1,904,022
Rhone-Poulenc ................... 26,034 1,166,710
Societe Generale ................ 2,013 274,385
Societe Nationale Elf Aquitaine
SA ............................ 37,009 4,306,334
Suez Lyonnaise des Eaux ......... 16,102 1,782,610
Total SA Cl-B ................... 35,552 3,870,861
Union des Assurances
Federales ..................... 340 44,649
----------
27,630,223
----------
GERMANY -- 5.9%
Adidas AG ....................... 4,214 557,792
Allianz AG ...................... 2,478 639,470
AMB Aachener & Muenchener
Beteiligungs AG ............... 11,785 1,297,763
Bankgesellschaft Berlin AG ...... 25,780 566,344
Bayerische Vereinsbank AG ....... 44,412 2,865,227
Deutsche Bank AG ................ 39,815 2,785,659
Deutsche Lufthansa AG ........... 33,533 630,362
Deutsche Lufthansa AG 144A ...... 48,330 908,519
Deutsche Pfandbrief &
Hypothekenbank AG ............. 26,600 1,575,549
Fresenius Medical Care AG
[ADR]* ........................ 4,175 90,806
Muenchener Rueckversicherung
AG ............................ 1,354 515,081
Pfeiffer Vacuum Technology AG
[ADR]* ........................ 80,525 2,259,733
Siemens AG ...................... 4,533 273,537
----------
14,965,842
----------
HONG KONG -- 0.6%
China Telecom Ltd. 144A ......... 164,000 281,508
Citic Pacific Ltd. .............. 67,000 266,330
First Pacific Co. Ltd. .......... 1,184,860 573,447
Hutchison Whampoa Ltd. .......... 26,000 163,082
Swire Pacific Ltd. Cl-A ......... 57,000 312,650
----------
1,597,017
----------
IRELAND -- 0.6%
Ryanair Holdings PLC [ADR]* ..... 59,675 1,499,334
----------
ITALY -- 3.4%
Aeroporti di Roma SPA 144A* ..... 197,886 2,053,855
Assicurazioni Generali .......... 104,638 2,571,567
Banca Commerciale Italia NA ..... 830,689 2,889,563
Credito Italiano SPA ............ 163,293 503,826
Telecom Italia SPA .............. 103,609 662,208
----------
8,681,019
----------
JAPAN -- 8.2%
Bridgestone Corp. ............... 33,130 721,098
Fujitsu Ltd. .................... 32,000 344,559
Hitachi Ltd. .................... 65,000 464,925
Kita Kyushu Coca-Cola
Bottling ...................... 33,550 639,927
Matsushita Electric Works
Ltd. .......................... 26,000 225,963
Mitsubishi Estate Co. Ltd. ...... 93,000 1,015,681
|
SHARES VALUE
---------- ------------
Mitsui Fudosan Co. Ltd. ......... 13,000 $ 125,980
Nippon Denso Corp. .............. 16,000 289,184
Nippon Telegraph & Telephone
Corp. ......................... 674 5,805,827
NTT Data Corp. .................. 38 2,054,590
Rohm Co. ........................ 12,000 1,227,493
Ryohin Keikaku Co. Ltd. ......... 2,000 132,286
Sony Corp. ...................... 64,000 5,709,843
Takeda Chemical Industries ...... 61,000 1,745,255
Tokyo Electron Ltd. ............. 17,000 546,527
----------
21,049,138
----------
MEXICO -- 0.9%
Cifra V* ........................ 68,818 169,019
Fomento Economico Mexicano SA
Cl-B .......................... 65,000 519,238
Grupo Carso SA de CV ............ 21,100 140,548
Grupo Casa Autrey SA de CV
[ADR] ......................... 14,075 287,658
Grupo Televisa SA [GDR]* ........ 17,250 667,359
Kimberly-Clark de Mexico SA
Cl-A .......................... 82,800 392,339
----------
2,176,161
----------
NETHERLANDS -- 10.9%
AKZO Nobel NV ................... 27,105 4,674,313
ASM Lithography Holding NV* ..... 4,900 330,750
Elsevier NV ..................... 165,899 2,684,198
Getronics NV .................... 79,541 2,534,665
KLM Royal Dutch Airlines NV ..... 41,745 1,544,410
Koninklijke Ahrend Groep NV ..... 40,990 1,287,995
Koninklijke Nutricia Verenigde
Bedrijven NV .................. 8,595 260,746
Philips Electronics NV .......... 62,915 3,773,851
Philips Electronics NV [ADR] .... 70,179 4,245,830
Simac Techniek NV ............... 3,252 378,582
Vedior NV 144A .................. 6,516 117,320
Wolters Kluwer NV ............... 45,872 5,926,252
----------
27,758,912
----------
NORWAY -- 1.0%
Ekornes ASA ..................... 19,206 157,614
Merkantildata ASA ............... 13,549 466,815
Petroleum Geo-Services [ADR]* ... 19,975 1,293,381
SAS Norge ASA Cl-B .............. 26,266 366,973
Tomra Systems ASA ............... 17,824 398,926
----------
2,683,709
----------
PERU -- 0.2%
Millicom International Cellular
SA* ........................... 3,225 121,341
Telefonica del Peru SA
Cl-B [ADR] .................... 17,000 396,313
----------
517,654
----------
PORTUGAL -- 1.1%
Brisa-Auto Estradas de Portugal
SA* ........................... 79,700 2,858,189
----------
RUSSIA -- 0.2%
Lukoil Holding [ADR] ............ 4,450 408,621
Mosenergo [ADR] 144A* ........... 1,650 62,700
Unified Energy Systems [GDR]* ... 4,680 140,400
----------
611,721
----------
SHARES VALUE
---------- ------------
SOUTH AFRICA -- 0.3%
Dimension Data Holdings Ltd.
144A* ......................... 203,297 $ 877,298
----------
SPAIN -- 0.3%
Tele Pizza SA* .................. 9,277 748,659
----------
SWEDEN -- 8.0%
Assa Abloy AB Cl-B .............. 69,858 1,848,943
Electrolux AB Cl-B .............. 89,117 6,188,712
Ericsson, (L.M.) Telephone Co.
[ADR] ......................... 17,088 637,596
Ericsson, (L.M.) Telephone Co.
Cl-B .......................... 45,022 1,693,781
Investor AB ..................... 18,763 915,169
Medical Invest Svenska AB* ...... 10,572 353,095
Munters AB 144A* ................ 61,603 531,839
Prosolvia AB Cl-B 144A* ......... 9,200 367,566
SAS Sverige AB .................. 29,019 420,599
Securitas AB .................... 213,323 6,452,634
Skandinaviska Enskilda Banken ... 78,461 993,821
----------
20,403,755
----------
SWITZERLAND -- 7.5%
Ares-Serono Group ............... 743 1,227,678
Baloise Holding Ltd. ............ 144 266,862
Clariant AG ..................... 129 107,902
Credit Suisse Group ............. 7,618 1,180,397
Kuoni Reisen AG ................. 508 1,906,894
Novartis AG ..................... 1,036 1,683,398
Roche Holding AG ................ 249 2,476,257
Sair Group* ..................... 24 32,909
Schweizerische
Lebensversicherungs-Und
Rentenanstalt ................. 8,256 6,492,497
Union Bank of Switzerland........ 1,533 2,219,805
Zurich
Versicherungs-Gesellschaft .... 3,427 1,635,317
----------
19,229,916
----------
UNITED KINGDOM -- 20.0%
Amvescap PLC .................... 29,237 251,599
Barclays PLC .................... 23,891 636,045
British Petroleum Co. PLC ....... 67,365 886,746
Capita Group PLC ................ 254,217 1,543,498
Compass Group PLC ............... 67,929 831,578
Compass Group PLC 144A .......... 9,626 118,632
Electrocomponents PLC ........... 318,758 2,370,689
Energis PLC ..................... 169,380 707,898
Freepages Group PLC* ............ 202,634 109,194
Hays PLC ........................ 79,014 1,055,687
Imperial Chemical Industries
PLC ........................... 69,994 1,095,258
JBA Holdings PLC ................ 77,893 1,318,189
Lloyds TSB Group PLC ............ 380,572 4,928,180
Logica PLC ...................... 114,457 2,179,909
Misys PLC ....................... 16,581 499,272
|
SHARES VALUE
---------- ------------
National Westminster Bank PLC ... 27,398 $ 456,220
Newsquest PLC 144A* ............. 566,132 2,482,504
Pilkington PLC .................. 295,677 622,734
Powerscreen International PLC ... 637,517 6,372,548
Premier Farnell PLC ............. 110,312 799,546
Rentokil Initial PLC ............ 1,395,324 6,084,095
Royal & Sun Alliance Insurance
Group PLC ..................... 139,446 1,406,506
Select Appointments Holdings
PLC ........................... 142,950 2,608,838
SEMA Group PLC .................. 56,654 1,381,975
Siebe PLC ....................... 330,589 6,500,269
Smithkline Beecham PLC [ADR] .... 1,000 51,438
Stagecoach Holdings PLC ......... 35,434 489,167
TI Group PLC .................... 7,571 58,052
Tomkins PLC ..................... 144,103 689,987
Victrex PLC ..................... 27,849 105,851
Virgin Express Holdings PLC
[ADR]* ........................ 31,100 629,775
Wetherspoon, (J.D.) PLC ......... 2,490 13,725
Williams PLC .................... 323,330 1,798,199
----------
51,083,803
----------
TOTAL FOREIGN STOCK
(COST $210,319,143)................ 224,693,417
----------
COMMON STOCK -- 3.6%
CHEMICALS -- 0.1%
Monsanto Co. .................... 3,250 136,500
Solutia, Inc. ................... 650 17,347
----------
153,847
----------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 0.9%
Texas Instruments, Inc. ......... 53,700 2,416,500
----------
FINANCIAL SERVICES -- 0.1%
Romanian Investment Fund** ...... 163 150,775
----------
OIL & GAS -- 1.7%
Schlumberger Ltd. ............... 52,125 4,196,063
Transocean Offshore, Inc. ....... 7,200 346,950
----------
4,543,013
----------
SHARES VALUE
---------- ------------
PHARMACEUTICALS -- 0.1%
Bristol-Meyers Squibb Co. ....... 2,600 $ 246,025
----------
TELECOMMUNICATIONS -- 0.7%
Northern Telecom Ltd. ........... 19,250 1,713,250
----------
TOTAL COMMON STOCK
(COST $9,602,095).................. 9,223,410
----------
|
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000)
-------- ---------
FOREIGN BONDS -- 0.2%
JAPAN
STB Cayman Capital Ltd.
144A
0.50%
(COST $650,421)........ 10/01/07 75,000 428,430
-------------
|
PAR
(000)
---------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 3.9%
Federal Mortgage Corp.
Disc. Notes
5.70%
(COST $9,998,417)...... 9,998,417
01/02/98 $ 10,000 -------------
COMMERCIAL PAPER -- 4.3%
General Electric Capital
Services, Inc.
6.70%
(COST $11,097,936)..... 11,097,936
01/02/98 11,100 -------------
TOTAL INVESTMENTS -- 99.9%
(COST $241,668,012).................. 255,441,610
OTHER ASSETS LESS
LIABILITIES -- 0.1%.................. 263,514
-------------
NET ASSETS -- 100.0%................... $ 255,705,124
===========
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
-----------------------------------------------------------------------------------------------
2/98 Buy CHF 4,000,000 $ 2,889,088 $ 2,759,725 $ (129,363)
2/98 Buy DEM 6,575,000 3,824,600 3,665,234 (159,366)
1/98 Buy FRF 14,257,261 2,484,753 2,372,025 (112,728)
2/98 Buy FRF 10,000,000 1,746,533 1,667,303 (79,230)
4/98 Buy FRF 6,000,000 1,051,814 1,004,386 (47,428)
2/98 Buy GBP 4,500,000 7,486,830 7,381,163 (105,667)
1/98 Buy JPY 125,861,393 967,554 968,717 1,163
3/98 Buy JPY 320,000,000 2,683,524 2,488,942 (194,582)
1/98 Buy NLG 625,000 322,639 308,436 (14,203)
2/98 Buy NLG 7,950,000 4,056,605 3,930,596 (126,009)
4/98 Buy NLG 3,250,000 1,666,667 1,611,935 (54,732)
1/98 Buy SEK 2,022,304 259,117 254,897 (4,220)
----------- ----------- ------------
$29,439,724 $28,413,359 $ (1,026,365)
=========== =========== ============
|
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
-----------------------------------------------------------------------------------------------
1/98 Sell CHF 1,009,714 $ 695,498 $ 692,918 $ 2,580
2/98 Sell CHF 6,990,000 4,884,062 4,822,949 61,113
1/98 Sell DEM 1,333,698 751,167 741,903 9,264
2/98 Sell DEM 7,392,500 4,098,846 4,121,185 (22,339)
3/98 Sell DEM 1,675,000 976,107 934,559 41,548
1/98 Sell FRF 16,100,059 2,678,522 2,679,209 (687)
2/98 Sell FRF 18,750,000 3,151,715 3,127,374 24,341
3/98 Sell FRF 1,500,000 257,909 250,698 7,211
4/98 Sell FRF 11,000,000 1,880,760 1,841,374 39,386
1/98 Sell GBP 9,284 15,474 15,274 200
2/98 Sell GBP 10,935,000 17,657,003 17,933,164 (276,161)
1/98 Sell JPY 20,000,000 176,991 154,024 22,967
2/98 Sell JPY 255,000,000 2,149,643 1,975,673 173,970
3/98 Sell JPY 726,200,000 6,269,486 5,648,343 621,143
4/98 Sell JPY 653,000,000 5,130,981 5,106,563 24,418
1/98 Sell NLG 625,000 313,362 308,436 4,926
2/98 Sell NLG 9,975,000 4,939,231 4,932,040 7,191
4/98 Sell NLG 6,500,000 3,311,427 3,223,871 87,556
1/98 Sell SEK 2,213,557 283,689 279,004 4,685
2/98 Sell SEK 13,000,000 1,723,224 1,639,865 83,359
10/98 Sell ZAR 1,750,000 346,741 359,612 (12,871)
----------- ----------- ----------
$61,691,838 $60,788,038 $ 903,800
=========== =========== ==========
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Closed-end funds.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 4.5% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 93.2%
AEROSPACE -- 2.8%
Boeing Co. ........................ 26,825 $ 1,312,748
General Motors Corp. Cl-H ......... 15,420 569,577
Northrop Grumman Corp. ............ 8,170 939,550
Raytheon Co. Cl-A ................. 9,050 446,294
----------
3,268,169
----------
AIRLINES -- 0.9%
Delta Air Lines, Inc. ............. 8,673 1,032,087
----------
AUTOMOBILE MANUFACTURERS -- 0.5%
Chrysler Corp. .................... 16,070 565,463
----------
AUTOMOTIVE PARTS -- 4.0%
Dana Corp. ........................ 27,836 1,322,210
Eaton Corp. ....................... 9,343 833,863
Goodyear Tire & Rubber Co. ........ 23,845 1,517,138
TRW, Inc. ......................... 18,483 986,530
----------
4,659,741
----------
BEVERAGES -- 0.9%
PepsiCo, Inc. ..................... 30,245 1,102,052
----------
BUILDING MATERIALS -- 1.5%
Lowe's Companies, Inc. ............ 23,594 1,125,139
Masco Corp. ....................... 13,524 688,033
----------
1,813,172
----------
CHEMICALS -- 2.5%
Dupont, (E.I.) de Nemours & Co. ... 17,143 1,029,651
Eastman Chemical Co. .............. 16,638 991,001
Witco Corp. ....................... 21,810 890,121
----------
2,910,773
----------
COMPUTER HARDWARE -- 3.7%
Hewlett-Packard Co. ............... 30,856 1,928,500
International Business Machines
Corp. ........................... 18,665 1,951,659
Seagate Technology, Inc.* ......... 25,445 489,816
----------
4,369,975
----------
COMPUTER SERVICES & SOFTWARE -- 2.0%
Computer Associates International,
Inc. ............................ 31,710 1,676,666
NCR Corp.* ........................ 24,130 671,116
----------
2,347,782
----------
CONGLOMERATES -- 3.3%
Minnesota Mining & Manufacturing
Co. ............................. 12,503 1,026,027
Philip Morris Companies, Inc. ..... 33,954 1,538,541
Tenneco, Inc. ..................... 33,680 1,330,360
----------
3,894,928
----------
CONSUMER PRODUCTS & SERVICES -- 3.4%
Clorox Co. ........................ 9,090 718,678
Colgate-Palmolive Co. ............. 1,500 110,250
Eastman Kodak Co. ................. 22,635 1,376,491
RJR Nabisco Holdings Corp. ........ 23,480 880,500
Whitman Corp. ..................... 33,450 871,791
----------
3,957,710
----------
CONTAINERS & PACKAGING -- 1.7%
Owens-Illinois, Inc.* ............. 44,105 1,673,233
Temple-Inland, Inc. ............... 6,678 349,343
----------
2,022,576
----------
SHARES VALUE
------- ------------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 3.2%
Emerson Electric Co. .............. 19,810 $ 1,118,027
Polaroid Corp. .................... 24,924 1,213,487
Texas Instruments, Inc. ........... 31,620 1,422,900
----------
3,754,414
----------
ENVIRONMENTAL SERVICES -- 0.9%
Browning-Ferris Industries,
Inc. ............................ 29,195 1,080,215
----------
FINANCIAL-BANK & TRUST -- 10.5%
Banc One Corp. .................... 19,021 1,033,078
BankBoston Corp. .................. 6,550 615,291
Bankers Trust New York Corp. ...... 10,280 1,155,858
Crestar Financial Corp. ........... 700 39,900
First Chicago NBD Corp. ........... 11,685 975,698
First Tennessee National Corp. .... 5,451 363,854
Mercantile Bancorporation, Inc. ... 9,777 601,286
Morgan, (J.P.) & Co., Inc. ........ 10,238 1,155,614
National City Corp. ............... 8,670 570,053
PNC Bank Corp. .................... 44,725 2,552,120
Regions Financial Corp. ........... 11,836 499,331
Summit Bancorp .................... 11,100 591,075
Suntrust Banks, Inc. .............. 6,740 481,068
Union Planters Corp. .............. 10,521 714,770
Wells Fargo & Co. ................. 2,860 970,791
----------
12,319,787
----------
FINANCIAL SERVICES -- 1.3%
Ahmanson, (H.F.) & Co. ............ 4,383 293,387
Beneficial Corp. .................. 7,979 663,254
Washington Mutual, Inc. ........... 8,260 527,091
----------
1,483,732
----------
FOOD -- 4.9%
General Mills, Inc. ............... 21,731 1,556,483
Heinz, (H.J.) Co. ................. 22,705 1,153,698
Quaker Oats Co. ................... 23,905 1,260,989
Ralston Purina Group .............. 7,850 729,559
Sara Lee Corp. .................... 18,768 1,056,873
----------
5,757,602
----------
HOTELS & MOTELS -- 0.7%
ITT Corp.* ........................ 10,700 886,763
----------
INSURANCE -- 3.2%
American General Corp. ............ 23,360 1,262,900
AON Corp. ......................... 20,519 1,202,926
CIGNA Corp. ....................... 5,962 1,031,799
USF&G Corp. ....................... 11,859 261,639
----------
3,759,264
----------
MACHINERY & EQUIPMENT -- 2.3%
Caterpillar, Inc. ................. 18,875 916,617
Cooper Industries, Inc. ........... 20,190 989,310
Deere & Co. ....................... 13,380 780,221
----------
2,686,148
----------
|
SHARES VALUE
------- ------------
MEDICAL SUPPLIES & EQUIPMENT -- 2.5%
Baxter International, Inc. ........ 30,957 $ 1,561,394
Johnson & Johnson Co. ............. 20,725 1,365,259
----------
2,926,653
----------
OFFICE EQUIPMENT -- 3.1%
Pitney Bowes, Inc. ................ 12,975 1,166,939
Xerox Corp. ....................... 34,082 2,515,678
----------
3,682,617
----------
OIL & GAS -- 10.1%
Amoco Corp. ....................... 14,863 1,265,213
Atlantic Richfield Co. ............ 14,721 1,179,520
British Petroleum Co. PLC [ADR] ... 12,971 1,033,627
Coastal Corp. ..................... 14,816 917,666
Enron Corp. ....................... 8,900 369,906
Exxon Corp. ....................... 17,691 1,082,468
Kerr-McGee Corp. .................. 9,595 607,483
Mobil Corp. ....................... 15,424 1,113,420
Occidental Petroleum Corp. ........ 32,273 946,002
Societe Nationale Elf Aquitaine SA
[ADR] ........................... 28,175 1,651,759
Tosco Corp. ....................... 31,125 1,176,914
YPF Sociedad Anonima [ADR] ........ 15,600 533,325
----------
11,877,303
----------
PAPER & FOREST PRODUCTS -- 2.8%
Boise Cascade Corp. ............... 28,885 873,771
Kimberly-Clark Corp. .............. 35,282 1,739,844
Willamette Industries, Inc. ....... 22,385 720,517
----------
3,334,132
----------
PHARMACEUTICALS -- 7.0%
American Home Products Corp. ...... 20,839 1,594,184
Bristol-Meyers Squibb Co. ......... 18,320 1,733,530
Glaxo Wellcome PLC [ADR] .......... 12,360 591,735
Merck & Co., Inc. ................. 19,045 2,023,531
Pharmacia & Upjohn, Inc. .......... 63,157 2,313,125
----------
8,256,105
----------
PRINTING & PUBLISHING -- 1.1%
McGraw-Hill Co., Inc. ............. 12,415 918,710
Times Mirror Co. Cl-A ............. 6,200 381,300
----------
1,300,010
----------
RAILROADS -- 1.7%
Canadian National Railway Co. ..... 12,408 586,278
Norfolk Southern Corp. ............ 332 10,230
Union Pacific Corp. ............... 22,015 1,374,562
----------
1,971,070
----------
RETAIL & MERCHANDISING -- 2.0%
Kmart Corp.* ...................... 86,000 994,375
Penney, (J.C.) Co., Inc. .......... 600 36,188
Toys 'R' Us, Inc.* ................ 41,375 1,300,727
----------
2,331,290
----------
SEMICONDUCTORS -- 1.5%
Intel Corp. ....................... 24,398 $ 1,713,197
----------
TELECOMMUNICATIONS -- 7.0%
AT&T Corp. ........................ 17,989 1,101,826
Bell Atlantic Corp. ............... 14,185 1,290,835
BellSouth Corp. ................... 24,534 1,381,571
SBC Communications, Inc. .......... 18,937 1,387,135
Sprint Corp. ...................... 31,246 1,831,797
U.S. West Communications Group .... 26,186 1,181,643
----------
8,174,807
----------
TRANSPORTATION -- 0.2%
Ryder Systems, Inc. ............... 5,606 183,597
----------
TOTAL COMMON STOCK
(COST $103,780,576).................. 109,423,134
----------
|
PAR
MATURITY (000)
--------- ------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 2.5%
Federal Home Loan Mtge. Corp.
5.72%..................... 01/14/98 $2,000 1,995,869
5.71%..................... 01/20/98 1,000 996,986
------------
(COST $2,992,855)......... 2,992,855
------------
REPURCHASE AGREEMENTS -- 3.5%
UBS Securities Funding,
Inc. 6.45%, dated
12/31/97,
repurchase price
$4,081,462
(Collateralized by U.S.
Treasury Notes, par
value $3,052,000,
market value
$4,168,364 due
02/15/19)
(COST $4,080,000)......... 01/02/98 4,080 4,080,000
------------
|
SHARES
------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund ..... 173 173
Temporary Investment Fund .......... 172 172
------------
(COST $345)......................... 345
------------
TOTAL INVESTMENTS -- 99.2%
(COST $110,853,776)................... 116,496,334
OTHER ASSETS LESS LIABILITIES -- 0.8%... 941,982
------------
NET ASSETS -- 100.0%.................... $117,438,316
===========
|
SHARES VALUE
------ -----------
COMMON STOCK -- 56.2%
ADVERTISING -- 2.5%
Outdoor Systems, Inc.* .............. 18,800 $ 721,450
----------
AIRLINES -- 1.2%
Alaska Air Group, Inc.* ............. 3,900 151,125
AMR Corp.* .......................... 1,500 192,750
----------
343,875
----------
BEVERAGES -- 1.8%
Coca-Cola Co. ....................... 7,800 519,675
----------
BROADCASTING -- 2.4%
Clear Channel Communications,
Inc.* ............................. 8,700 691,106
----------
COMPUTER HARDWARE -- 1.6%
Hewlett-Packard Co. ................. 900 56,250
International Business Machines
Corp. ............................. 3,800 397,337
----------
453,587
----------
COMPUTER SERVICES & SOFTWARE -- 4.5%
America Online, Inc.* ............... 2,700 240,806
BMC Software, Inc.* ................. 3,600 236,250
Cisco Systems, Inc.* ................ 6,700 373,525
Compuware Corp.* .................... 10,200 326,400
Sun Microsystems, Inc.* ............. 3,200 127,600
----------
1,304,581
----------
CONGLOMERATES -- 3.3%
Tyco International Ltd. ............. 21,200 955,325
----------
CONSUMER PRODUCTS & SERVICES -- 5.7%
Gillette Co. ........................ 4,800 482,100
Procter & Gamble Co. ................ 9,600 766,200
Sunbeam Oster Corp. ................. 6,600 278,025
U.S. Industries, Inc. ............... 3,850 115,981
----------
1,642,306
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.6%
General Electric Co. ................ 13,600 997,900
SCI Systems, Inc.* .................. 1,400 60,987
----------
1,058,887
----------
ENTERTAINMENT & LEISURE -- 0.6%
Viacom, Inc. Cl-B* .................. 4,300 178,181
----------
ENVIRONMENTAL SERVICES -- 0.5%
USA Waste Services, Inc.* ........... 3,400 133,450
----------
FINANCIAL-BANK & TRUST -- 2.3%
BankAmerica Corp. ................... 4,300 313,900
Charter One Financial, Inc. ......... 3,120 196,950
Citicorp ............................ 1,200 151,725
----------
662,575
----------
FINANCIAL SERVICES -- 4.5%
American Express Co. ................ 2,300 205,275
CIT Group, Inc. Cl-A* ............... 7,300 235,425
Fannie Mae .......................... 2,600 148,362
Morgan Stanley, Dean Witter, Discover
& Co. ............................. 2,400 141,900
SunAmerica, Inc. .................... 13,300 568,575
----------
1,299,537
----------
INSURANCE -- 2.6%
American International Group,
Inc. .............................. 1,600 174,000
Conseco, Inc. ....................... 4,800 218,100
Travelers Group, Inc. ............... 6,900 371,737
----------
763,837
----------
SHARES VALUE
------ -----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.3%
Guidant Corp. ....................... 3,200 $ 199,200
Medtronic, Inc. ..................... 3,300 172,631
----------
371,831
----------
OIL & GAS -- 2.6%
Diamond Offshore Drilling, Inc. ..... 1,500 72,188
Falcon Drilling Co., Inc.* .......... 4,200 147,263
Input-Output, Inc.* ................. 17,600 522,500
----------
741,951
----------
PHARMACEUTICALS -- 9.2%
Bristol-Meyers Squibb Co. ........... 6,300 596,138
Cardinal Health, Inc. ............... 2,600 195,325
Lilly, (Eli) & Co. .................. 10,900 758,913
Merck & Co., Inc. ................... 1,000 106,250
Pfizer, Inc. ........................ 7,200 536,850
Warner-Lambert Co. .................. 3,800 471,200
----------
2,664,676
----------
PRINTING & PUBLISHING -- 1.8%
McGraw-Hill Co., Inc. ............... 7,200 532,800
----------
RETAIL & MERCHANDISING -- 0.5%
Pier 1 Imports, Inc. ................ 6,400 144,800
----------
TELECOMMUNICATIONS -- 3.7%
Ameritech Corp. ..................... 600 48,300
Bell Atlantic Corp. ................. 2,300 209,300
Jacor Communications, Inc.* ......... 3,200 170,000
Tele-Communications, Inc., Cl-A* .... 7,757 216,711
WorldCom, Inc.* ..................... 14,500 438,625
----------
1,082,936
----------
TOTAL COMMON STOCK
(COST $14,634,581)..................... 16,267,366
----------
|
PAR
MATURITY (000)
--------- ------
CORPORATE OBLIGATIONS -- 4.1%
AEROSPACE -- 0.7%
Lockheed Martin Corp.
Notes
7.25%.................. 05/15/06 $ 200 211,750
-----------
FINANCIAL-BANK & TRUST -- 1.0%
BankAmerica Mfg. Housing
Contract Cl-A5
6.39%.................. 12/10/12 100 100,626
CIT RV Trust Cl-A
6.35%.................. 04/15/11 100 100,588
First Bank System Sub.
Notes
7.625%................. 05/01/05 100 106,750
-----------
307,964
-----------
|
PAR
MATURITY (000) VALUE
--------- ------ -----------
FINANCIAL SERVICES -- 0.4%
General Motors Acceptance
Corp. Notes
7.125%................. 05/01/03 $ 100 $ 103,875
-----------
METALS & MINING -- 0.4%
Barrick Gold Corp. Notes
7.50%.................. 05/01/07 100 105,875
-----------
OIL & GAS -- 0.5%
Enron Corp. Notes
6.625%................. 11/15/05 150 151,688
-----------
RETAIL & MERCHANDISING -- 0.7%
Sears Roebuck Co. Notes
6.25%.................. 01/15/04 200 199,750
-----------
TELECOMMUNICATIONS -- 0.4%
Worldcom, Inc. Notes
7.55%.................. 04/01/04 100 104,875
-----------
TOTAL CORPORATE OBLIGATIONS
(COST $1,155,057).................... 1,185,777
-----------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 15.0%
FEDERAL HOME LOAN BANK DISC. NOTES -- 9.4%
4.75%................... 01/02/98 2,708 2,707,643
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 2.9%
7.00%................... 02/20/07 150 153,732
7.50%.......... 03/01/27- 07/01/27 675 690,897
----------
844,629
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 2.7%
7.00%................... 12/15/27 300 302,250
8.00%................... 03/15/27 185 191,569
8.75%.......... 01/15/27- 04/15/27 281 298,206
----------
792,025
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $4,316,450).............................. 4,344,297
----------
U.S. TREASURY OBLIGATIONS -- 22.6%
U.S. Treasury Notes
5.75%.................. 11/30/02 500 500,547
6.25%.................. 02/15/03 1,100 1,125,465
6.25%.................. 01/31/02 650 661,869
6.25%.................. 08/31/02 1,000 1,020,920
5.875%................. 09/30/02 1,000 1,005,840
6.625%................. 05/15/07 2,100 2,223,690
-----------
(COST $6,402,015)................ 6,538,331
-----------
|
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- -------- ----------
FOREIGN BONDS -- 6.6%
AUSTRALIA -- 0.5%
Queensland Treasury
Corp.
8.00%................. 08/14/01 200 $ 139,693
----------
CANADA -- 0.3%
Canadian Government
6.50%................. 06/01/04 100 73,555
----------
FRANCE -- 0.9%
French O.A.T.
6.75%................. 10/25/03 1,500 272,255
----------
GERMANY -- 1.6%
Deutscheland Republic
6.00%................. 09/15/03 800 468,866
----------
ITALY -- 0.7%
Italian Government
6.75%................. 02/01/07 350,000 214,308
----------
JAPAN -- 1.5%
Japanese Government
4.10%................. 12/22/03 50,000 441,890
----------
SPAIN -- 0.3%
Spanish Government
10.50%................ 10/30/03 10,000 82,370
----------
UNITED KINGDOM -- 0.8%
United Kingdom Treasury
8.00%................. 06/10/03 125 219,818
----------
TOTAL FOREIGN BONDS
(COST $1,909,249)......... 1,912,755
----------
|
SHARES
-------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund ..... 719 719
Temporary Investment Fund .......... 718 718
----------
(COST $1,437)....................... 1,437
----------
TOTAL INVESTMENTS -- 104.5%
(COST $28,418,789).................... 30,249,963
LIABILITIES IN EXCESS OF OTHER ASSETS --
(4.5%)................................ (1,302,849)
----------
NET ASSETS -- 100.0%.................... $28,947,114
==========
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
--------- -----------
FOREIGN STOCK -- 91.9%
ARGENTINA -- 0.2%
YPF Sociedad Anonima [ADR] ........ 2,300 $ 78,631
----------
AUSTRALIA -- 0.8%
Woodside Petroleum Ltd. ........... 36,400 256,619
----------
AUSTRIA -- 0.6%
VA Technologie AG ................. 1,360 206,190
----------
BRAZIL -- 1.6%
Centrais Eletricas Brasileiras SA-
Electrobras ..................... 2,372,000 117,960
Petroleo Brasileiro
SA-Petrobras .................... 478,900 111,999
Telebras SA [ADR] ................. 2,500 291,094
----------
521,053
----------
CANADA -- 4.2%
Geac Computer Corp. Ltd. .......... 11,400 375,215
Investors Group, Inc. ............. 9,100 287,431
Newbridge Networks Corp. .......... 3,800 132,525
Newcourt Credit Group, Inc.
144A ............................ 9,320 311,639
Newcourt Credit Group, Inc.
Rights* ......................... 2,150 71,065
Northern Telecom Ltd. ............. 1,100 97,738
QLT Phototherapeutics, Inc. ....... 3,900 43,605
Talisman Energy, Inc. ............. 2,200 67,260
----------
1,386,478
----------
DENMARK -- 2.1%
Novo Nordisk A/S Cl-B ............. 4,811 688,569
----------
FINLAND -- 2.0%
Merita Ltd. C1-A................... 40,900 223,822
Raision Tehtaat Oy ................ 1,000 118,814
Sampo Insurance Co. Ltd. .......... 10,200 331,541
----------
674,177
----------
FRANCE -- 10.3%
Accor SA .......................... 2,473 459,999
Alcatel Alsthom ................... 1,169 148,655
AXA SA ............................ 8,407 650,803
Cap Gemini SA ..................... 4,330 355,204
Compagnie Francaise d'Etudes et de
Construction Technip ............ 2,200 232,219
Dassault Systemes SA [ADR]* ....... 5,200 160,550
France Telecom SA [ADR] ........... 3,800 136,800
Groupe Danone ..................... 2,000 357,389
Pinault-Printemps Redoute SA ...... 600 320,253
Rhone-Poulenc ..................... 4,900 219,593
Societe Generale .................. 1,900 258,982
Societe Nationale Elf Aquitaine
SA .............................. 1,000 116,359
----------
3,416,806
----------
GERMANY -- 8.8%
Bayerische Hypotheken-und Wechsel-
Bank AG ......................... 5,300 257,183
Bayerische Vereinsbank AG ......... 3,800 245,156
Berliner Kraft-Und Licht (Bewag)-
Aktiengesellschaft .............. 2,000 59,287
Deutsche Bank AG .................. 4,100 286,857
Deutsche Pfandbrief &
Hypothekenbank AG ............... 6,200 367,233
SHARES VALUE
--------- -----------
Henkel KGAA ....................... 3,400 $ 189,095
Henkel KGAA Pfd. .................. 2,000 123,245
Mannesmann AG ..................... 950 477,103
SAP AG Pfd. ....................... 500 162,455
Veba AG ........................... 8,000 545,038
Wella Aktiengesellschaft AG
Pfd. ............................ 260 190,874
----------
2,903,526
----------
HONG KONG -- 0.3%
HSBC Holdings PLC ................. 3,000 73,952
Shanghai Industrial Holdings Ltd.
144A ............................ 12,000 44,603
----------
118,555
----------
HUNGARY -- 0.5%
Magyar Tavkozlesi Rt. [ADR]........ 6,000 156,000
----------
IRELAND -- 1.1%
Bank of Ireland ................... 10,000 153,517
CBT Group PLC [ADR] ............... 2,700 221,737
----------
375,254
----------
ISRAEL -- 0.4%
Check Point Software Technologies
Ltd. ............................ 3,400 138,550
----------
ITALY -- 4.3%
Banca Popolare di Bergamo Credito
Varesino SPA .................... 6,900 120,594
Banco Ambrosiano Veneto SPA ....... 32,800 125,598
Banco Ambrosiano Veneto SPA
Rights* ......................... 20,000 85,125
Banco Ambrosiano Veneto SPA
Rights* ......................... 20,000 12,670
Credito Italiano SPA .............. 180,200 555,992
Mondadori, (Arnoldo) Editore
SPA ............................. 22,800 179,254
Telecom Italia SPA ................ 55,000 351,528
----------
1,430,761
----------
JAPAN -- 7.4%
Canon, Inc. ....................... 9,000 210,427
Circle K Japan Co. Ltd. ........... 2,000 96,138
Keyence Corp. ..................... 2,200 326,562
Minebea Co. Ltd. .................. 28,000 301,490
Nintendo Co. Ltd. ................. 800 78,756
NTT Data Corp. .................... 3 162,204
Promise Co. Ltd. .................. 1,600 89,093
Rohm Co. .......................... 1,000 102,291
Shiseido Co. Ltd. ................. 22,000 301,182
Sony Corp. ........................ 5,300 472,846
Takeda Chemical Industries ........ 11,000 314,718
----------
2,455,707
----------
MEXICO -- 1.4%
Desc SA de C.V. [ADR] ............. 1,900 71,250
Grupo Financiero Banamex SA
Cl-B ............................ 35,100 104,928
Grupo Televisia SA [GDR]* ......... 3,000 116,063
Panamerican Beverages, Inc.
Cl-A ............................ 5,000 163,125
----------
455,366
----------
|
SHARES VALUE
--------- -----------
NETHERLANDS -- 9.5%
Assurantieconcern Stad Rotterdam
NV .............................. 5,100 $ 277,487
Getronics NV ...................... 6,300 200,757
ING Groep NV ...................... 16,500 695,086
KLM Royal Dutch Airlines NV ....... 5,200 192,381
Koninklijke Ahold NV .............. 17,948 468,348
Randstad Holdings NV .............. 5,750 216,416
Stork NV .......................... 1,700 58,701
Unilever NV PLC [ADR] ............. 7,000 437,063
Verenigde Nederlandse
Uitgeversbedrijven Verenigd
Bezit ........................... 20,800 586,889
----------
3,133,128
----------
NORWAY -- 0.8%
Petroleum Geo-Services ASA ........ 1,500 94,612
Storebrand ASA .................... 23,000 162,231
----------
256,843
----------
PORTUGAL -- 1.2%
Banco Espirito Santo e Comercial de
Lisboa SA ....................... 6,400 190,666
Portugal Telecom SA ............... 4,400 204,390
----------
395,056
----------
RUSSIA -- 0.3%
Unified Energy Systems [GDR] ...... 3,000 83,250
----------
SOUTH AFRICA -- 0.6%
ABSA Group Ltd. ................... 11,800 67,895
Liberty Life Association of Africa
Ltd. ............................ 4,605 118,287
----------
186,182
----------
SPAIN -- 1.5%
Banco Popular Espanol SA .......... 3,500 244,562
Telefonica de Espana SA ........... 9,000 256,864
----------
501,426
----------
SWEDEN -- 1.3%
Hennes & Mauritz AB Cl-B .......... 4,200 185,270
Skandinaviska Enskilda Banken ..... 18,900 239,395
----------
424,665
----------
SWITZERLAND -- 12.5%
ABB AG ............................ 100 125,810
Credit Suisse Group ............... 2,750 426,108
Julius Baer Holdings AG Cl-B ...... 300 557,403
Nestle SA ......................... 340 510,274
Novartis AG ....................... 700 1,137,431
Roche Holding AG .................. 80 795,585
Union Bank of Switzerland ......... 400 579,205
----------
4,131,816
----------
UNITED KINGDOM -- 18.2%
Amvescap PLC ...................... 33,500 288,285
British Aerospace PLC ............. 16,500 471,041
British-Borneo Petroleum Syndicate
PLC ............................. 23,263 161,913
Cable & Wireless PLC .............. 38,600 339,794
COLT Telecom Group PLC ............ 833 8,450
Compass Group PLC ................. 16,600 203,215
Flextech PLC 144A* ................ 3,600 31,217
SHARES VALUE
--------- -----------
General Electric Co. PLC .......... 58,600 $ 380,382
Glaxo Wellcome PLC [ADR] .......... 8,000 383,000
Hays PLC .......................... 22,300 297,945
Ladbroke Group PLC ................ 49,100 213,285
Lloyds TSB Group PLC .............. 39,700 514,091
Misys PLC ......................... 21,600 650,399
Next PLC .......................... 26,100 297,181
Pearson PLC ....................... 37,800 491,975
Railtrack Group PLC ............... 13,200 210,027
Siebe PLC ......................... 11,600 228,087
Standard Chartered Bank PLC ....... 22,200 237,433
Tesco PLC ......................... 19,000 154,751
Vodafone Group PLC ................ 14,000 101,128
Zeneca Group PLC .................. 10,000 351,625
----------
6,015,224
----------
TOTAL FOREIGN STOCK
(COST $29,016,171)................... 30,389,832
----------
COMMON STOCK -- 0.8%
OIL & GAS
Transocean Offshore, Inc.
(COST $273,021).................... 5,600 269,850
----------
|
PAR
MATURITY (000)
--------- ------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 10.3%
Federal Home Loan Bank
Disc. Notes 4.75%
(COST $3,412,550)........ 01/02/98 $3,413 3,412,550
-----------
TOTAL INVESTMENTS -- 103.0%
(COST $32,701,742)...................... 34,072,232
LIABILITIES IN EXCESS OF OTHER ASSETS --
(3.0%).................................. (947,710)
-----------
NET ASSETS -- 100.0%...................... $33,124,522
==========
|
Foreign currency exchange contracts outstanding at December 31, 1997:
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
----------------------------------------------------------
1/98 Buy CHF 383,552 $ 263,433 $ 263,189 $ (244)
1/98 Buy CAD 138,000 96,369 96,450 81
1/98 Buy DEM 589,689 329,351 328,145 (1,206)
1/98 Buy DKK 296,978 43,418 43,384 (34)
1/98 Buy ESP 26,927,573 177,388 176,758 (630)
1/98 Buy GBP 58,332 96,638 95,931 (707)
1/98 Buy ITL 692,628,525 393,550 391,835 (1,715)
1/98 Buy JPY 25,506,829 200,211 196,982 (3,229)
1/98 Buy NLG 468,675 232,133 231,257 (876)
1/98 Buy PTE 34,949,393 190,346 190,143 (203)
1/98 Buy SEK 543,090 69,850 68,483 (1,367)
---------- ---------- --------
$2,092,687 $2,082,557 $(10,130)
========== ========== ========
|
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
--------------------------------------------------------------------------------------------
1/98 Sell CHF 1,085,057 $ 768,142 $ 746,868 $ 21,274
1/98 Sell DEM 390,697 219,160 217,577 1,583
1/98 Sell FRF 4,011,880 683,853 668,633 15,220
1/98 Sell GBP 741,689 1,237,357 1,217,517 19,840
1/98 Sell JPY 115,860,726 913,024 894,760 18,264
1/98 Sell NLG 1,174,773 596,086 580,278 15,808
1/98 Sell SEK 1,263,622 165,446 159,341 6,105
---------- ---------- --------
$4,583,068 $4,484,974 $ 98,094
========== ========== ========
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. At the end of the year, these securities amounted to 1.2% of net assets.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------- ------------
COMMON STOCK -- 93.4%
AIRLINES -- 1.4%
Midwest Express Holdings, Inc.* ... 70,000 $ 2,716,875
----------
AUTOMOTIVE PARTS -- 1.6%
Myers Industries, Inc. ............ 80,000 1,365,000
TBC Corp.* ........................ 200,000 1,912,500
----------
3,277,500
----------
BUILDING MATERIALS -- 8.3%
Giant Cement Holding, Inc.* ....... 60,000 1,387,500
Gibraltar Steel Corp.* ............ 90,000 1,777,500
Holophane Corp.* .................. 90,000 2,227,500
Juno Lighting, Inc. ............... 100,000 1,750,000
Modine Manufacturing Co. .......... 90,000 3,071,250
Republic Group, Inc. .............. 90,000 1,473,750
Skyline Corp. ..................... 51,800 1,424,500
Synthetic Industries, Inc.* ....... 60,000 1,485,000
Thomas Industries, Inc. ........... 105,000 2,073,750
----------
16,670,750
----------
BUSINESS SERVICES -- 1.0%
Grey Advertising, Inc. ............ 6,000 1,968,000
----------
CHEMICALS -- 2.7%
Furon Co. ......................... 140,000 2,922,500
Schulman, (A.), Inc. .............. 100,000 2,512,500
----------
5,435,000
----------
CLOTHING & APPAREL -- 1.0%
Unitog Co. ........................ 90,000 2,002,500
----------
COMPUTER HARDWARE -- 1.4%
Analogic Corp. .................... 75,000 2,850,000
----------
COMPUTER SERVICES & SOFTWARE -- 1.2%
Analysts International Corp. ...... 67,500 2,328,750
----------
CONSUMER PRODUCTS & SERVICES -- 1.3%
American Safety Razor Co.* ........ 60,000 1,200,000
Culp, Inc. ........................ 70,000 1,400,000
----------
2,600,000
----------
CONTAINERS & PACKAGING -- 3.2%
Aptargroup, Inc. .................. 33,600 1,864,800
First Brands Corp. ................ 80,000 2,155,000
Shorewood Packaging* .............. 90,000 2,407,500
----------
6,427,300
----------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 7.9%
Electro Rental Corp.* ............. 120,000 4,290,000
Franklin Electric Co., Inc. ....... 30,000 1,927,500
Landauer, Inc. .................... 51,000 1,428,000
Littelfuse, Inc.* ................. 100,000 2,487,500
Nichols Research Corp.* ........... 120,000 3,000,000
Pioneer-Standard Electronics,
Inc. ............................ 90,000 1,372,500
Scotsman Industries, Inc. ......... 50,000 1,221,875
----------
15,727,375
----------
ENTERTAINMENT & LEISURE -- 0.5%
Carmike Cinemas, Inc.* ............ 35,000 1,004,062
----------
EQUIPMENT SERVICES -- 4.2%
Cort Business Services Corp.* ..... 48,900 1,946,831
Rival Co. ......................... 87,000 1,141,875
SHARES VALUE
------- ------------
Unifirst Corp. .................... 85,000 $ 2,385,312
VWR Scientific Products, Inc.* .... 100,000 2,825,000
----------
8,299,018
----------
FINANCIAL-BANK & TRUST -- 5.3%
Commercial Federal Savings & Loan
Corp. ........................... 30,000 1,066,875
Community First Bankshares,
Inc. ............................ 50,000 2,662,500
First Republic Bank* .............. 70,000 2,235,625
Silicon Valley Bancshares* ........ 50,000 2,812,500
Sirrom Capital Corp. .............. 35,000 1,824,375
----------
10,601,875
----------
FINANCIAL SERVICES -- 5.0%
Amresco, Inc.* .................... 80,000 2,420,000
First Financial Fund, Inc. ........ 100,000 1,850,000
McGrath Rentcorp .................. 100,000 2,450,000
Medallion Financial Corp. ......... 100,000 2,200,000
Quick & Reilly Group, Inc. ........ 26,000 1,118,000
----------
10,038,000
----------
FOOD -- 0.7%
Suiza Foods Corp.* ................ 25,000 1,489,063
----------
INSURANCE -- 6.2%
FBL Financial Group, Inc. Cl-A .... 59,100 2,371,388
Harleysville Group, Inc. .......... 46,000 1,104,000
Markel Corp. ...................... 10,000 1,561,250
PXRE Corp. Cl-A ................... 50,000 1,659,375
Poe & Brown, Inc. ................. 71,700 3,199,613
Presidential Life Corp. ........... 80,000 1,620,000
Selective Insurance Group ......... 30,000 810,000
----------
12,325,626
----------
LUMBER & WOOD PRODUCTS -- 0.8%
Deltic Timber Corp. ............... 60,000 1,642,500
----------
MACHINERY & EQUIPMENT -- 4.5%
Alamo Group, Inc. ................. 50,000 1,084,375
Carbo Ceramics, Inc. .............. 70,000 2,240,000
Smith, (A.O.) Corp. ............... 70,000 2,957,500
Woodward Governor Co. ............. 82,400 2,667,700
----------
8,949,575
----------
MEDICAL SUPPLIES & EQUIPMENT -- 2.1%
Lunar Corp.* ...................... 130,000 2,665,000
Owens & Minor, Inc. ............... 110,000 1,595,000
----------
4,260,000
----------
METALS & MINING -- 3.9%
Cambior, Inc. ..................... 80,000 470,000
Dayton Mining Corp.* .............. 140,000 271,250
Golden Star Resources Ltd.* ....... 100,000 356,250
Layne Christensen Co.* ............ 80,000 1,040,000
Material Sciences Corp.* .......... 110,000 1,340,625
Penn Virginia Corp. ............... 70,000 2,065,000
|
SHARES VALUE
------- ------------
Prime Resources Group, Inc. ....... 80,000 $ 545,000
TriMas Corp. ...................... 50,000 1,718,750
----------
7,806,875
----------
OFFICE EQUIPMENT -- 2.1%
Aaron Rents, Inc. Cl-A ............ 35,000 612,500
Aaron Rents, Inc. Cl-B ............ 60,000 1,162,500
IDEX Corp. ........................ 70,000 2,441,250
----------
4,216,250
----------
OIL & GAS -- 4.3%
Cross Timbers Oil Co. ............. 110,000 2,743,125
Devon Energy Corp. ................ 25,000 962,500
Lone Star Technologies, Inc.* ..... 90,000 2,553,750
Rutherford-Moran Oil Corp.* ....... 130,000 2,323,750
----------
8,583,125
----------
PAPER & FOREST PRODUCTS -- 2.0%
CSS Industries, Inc.* ............. 60,000 1,912,500
Wausau-Mosinee Paper Corp. ........ 100,000 2,012,500
----------
3,925,000
----------
PERSONAL SERVICES -- 1.1%
Matthews International Corp.
Cl-A ............................ 50,000 2,200,000
----------
REAL ESTATE -- 6.7%
Allied Capital Commercial Corp.
[REIT] .......................... 70,000 2,327,500
Apartment Investment & Management
Co. Cl-A [REIT] ................. 55,000 2,021,250
CCA Prison Realty Trust [REIT] .... 40,000 1,785,000
Glenborough Realty Trust, Inc.
[REIT] .......................... 30,000 888,750
Innkeepers USA Trust [REIT] ....... 100,000 1,550,000
National Health Investors, Inc.
[REIT] .......................... 40,000 1,675,000
Post Properties, Inc. [REIT] ...... 24,600 999,375
Sun Communities, Inc. [REIT] ...... 60,000 2,156,250
----------
13,403,125
----------
RESTAURANTS -- 3.3%
Consolidated Products, Inc.* ...... 137,500 2,251,563
Ruby Tuesday, Inc.* ............... 110,000 2,832,500
Sbarro, Inc. ...................... 60,000 1,578,750
----------
6,662,813
----------
RETAIL & MERCHANDISING -- 5.4%
Carson Pirie Scott & Co.* ......... 33,000 1,654,125
Casey's General Stores, Inc. ...... 90,000 2,283,750
Compucom Systems, Inc.* ........... 210,000 1,732,500
Fabri-Centers of America, Inc.
Cl-B* ........................... 110,000 2,275,625
Hancock Fabrics, Inc. ............. 100,000 1,450,000
Stein Mart, Inc.* ................. 50,000 1,337,500
----------
10,733,500
----------
SHARES VALUE
------- ------------
TELECOMMUNICATIONS -- 2.4%
Aliant Communications, Inc. ....... 100,000 $ 3,137,500
CommNet Cellular, Inc.* ........... 23,400 832,163
Mosaix, Inc.* ..................... 100,000 881,250
----------
4,850,913
----------
TRANSPORTATION -- 0.7%
Landstar Systems, Inc. ............ 50,000 1,318,750
----------
UTILITIES -- 1.2%
United Water Resources, Inc. ...... 120,000 2,347,500
----------
TOTAL COMMON STOCK
(COST $169,727,606).................. 186,661,620
----------
PREFERRED STOCK -- 0.2%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT]
(COST $453,022).................. 13,000 485,875
----------
FOREIGN STOCK -- 0.4%
METALS & MINING
Prime Resources Group,
Inc. -- (CAD)
(COST $956,274).................... 120,000 796,635
----------
|
PAR
MATURITY (000)
--------- ------
U.S. TREASURY OBLIGATIONS -- 5.1%
U.S. Treasury Bills
5.195%................... 01/22/98 $4,935 4,920,660
5.20%.................... 01/22/98 5,222 5,206,826
----------
(COST $10,126,205)....... 10,127,486
----------
COMMERCIAL PAPER -- 6.9%
Corporate Asset Funding,
Inc.
6.25%.................... 01/02/98 7,803 7,801,645
Hewlett-Packard Co., Inc.
5.95%.................... 01/21/98 1,453 1,448,197
Merck & Co., Inc.
6.10%.................... 01/05/98 4,625 4,621,865
----------
TOTAL COMMERCIAL PAPER
(COST $13,871,707)....... 13,871,707
----------
|
SHARES VALUE
------ ------------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund
(COST $474).......................... 474 $ 474
------------
TOTAL INVESTMENTS -- 106.0%
(COST $195,135,288).................... 211,943,797
LIABILITIES IN EXCESS OF OTHER ASSETS --
(6.0%)................................. (12,048,277)
------------
NET ASSETS -- 100.0%..................... $199,895,520
============
|
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
SHARES VALUE
------ ----------
COMMON STOCK -- 87.7%
AEROSPACE -- 3.0%
Boeing Co. ........................ 4,500 $ 220,219
----------
AIRLINES -- 3.3%
Southwest Airlines Co. ............ 3,850 94,806
UAL Corp.* ........................ 1,575 145,687
----------
240,493
----------
BEVERAGES -- 2.0%
Coca-Cola Enterprises, Inc. ....... 4,050 144,028
----------
CHEMICALS -- 8.0%
Cytec Industries, Inc.* ........... 4,725 221,780
Dow Chemical Co. .................. 1,425 144,637
Monsanto Co. ...................... 5,125 215,250
----------
581,667
----------
COMPUTER HARDWARE -- 2.9%
Dell Computer Corp.* .............. 2,525 212,100
----------
ELECTRONICS COMPONENTS &
EQUIPMENT -- 3.9%
General Electric Co. .............. 3,900 286,162
----------
ENTERTAINMENT & LEISURE -- 3.0%
Time Warner, Inc. ................. 3,500 217,000
----------
FARMING & AGRICULTURE -- 8.4%
Dekalb Genetics Corp. Cl-B ........ 5,575 218,819
Delta & Pine Land Co. ............. 5,825 177,662
Pioneer Hi-Bred International,
Inc. ............................ 2,000 214,500
----------
610,981
----------
FINANCIAL-BANK & TRUST -- 18.9%
Affiliated Managers Group,
Inc.* ........................... 425 12,325
AmSouth Bancorp ................... 2,625 142,570
Citicorp .......................... 1,700 214,944
Fannie Mae ........................ 2,550 145,509
Mercantile Bancorporation, Inc. ... 2,375 146,062
PFF Bancorp, Inc.* ................ 7,275 144,591
Star Banc Corp. ................... 2,425 139,134
Wells Fargo & Co. ................. 850 288,522
Zions Bancorp ..................... 3,200 145,200
----------
1,378,857
----------
FINANCIAL SERVICES -- 8.0%
Ahmanson, (H.F.) & Co. ............ 2,175 145,589
Friedman, Billings, Ramsey Group,
Inc. Cl-A* ...................... 4,200 75,337
Merrill Lynch & Co., Inc. ......... 1,975 144,052
SLM Holding Corp. ................. 1,575 219,122
----------
584,100
----------
MACHINERY & EQUIPMENT -- 2.0%
Caterpillar, Inc. ................. 3,000 145,688
----------
SHARES VALUE
------ ----------
METALS & MINING -- 1.0%
Phelps Dodge Corp. ................ 1,150 $ 71,588
----------
OIL & GAS -- 2.9%
British Petroleum Co. PLC [ADR] ... 2,700 215,156
----------
PHARMACEUTICALS -- 14.5%
Lilly, (Eli) & Co. ................ 4,125 287,203
Pfizer, Inc. ...................... 3,800 283,338
Schering-Plough Corp. ............. 2,275 141,334
Warner-Lambert Co. ................ 2,810 348,440
----------
1,060,315
----------
RETAIL & MERCHANDISING -- 2.0%
Wal-Mart Stores, Inc. ............. 3,650 143,947
----------
TELECOMMUNICATIONS -- 3.9%
Lucent Technologies, Inc. ......... 1,800 143,775
SBC Communications, Inc. .......... 1,950 142,838
----------
286,613
----------
TOTAL COMMON STOCK
(COST $6,376,699).................... 6,398,914
----------
|
PAR
MATURITY (000)
--------- ------
COMMERCIAL PAPER -- 14.0%
American Express Credit
Corp.
6.25%................ 01/02/98 $ 340 339,941
Ford Motor Credit Co.
5.75%................ 01/02/98 340 339,946
General Electric
Capital Services,
Inc.
5.65%................ 01/02/98 340 339,947
-----------
TOTAL COMMERCIAL PAPER
(COST $1,019,834).................. 1,019,834
-----------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 6.2%
Federal Mortgage Corp.
Disc. Note
5.75%
(COST $449,928)...... 01/02/98 450 449,928
-----------
U.S. TREASURY OBLIGATIONS -- 56.1%
U.S. Treasury Bills
4.35%
(COST $4,099,505).... 01/02/98 4,100 4,099,505
-----------
|
SHARES
------
SHORT-TERM INVESTMENTS -- 3.8%
Temporary Investment Cash Fund ... 139,662 139,662
Temporary Investment Fund ........ 139,661 139,661
----------
(COST $279,323)................... 279,323
----------
|
VALUE
-----------
TOTAL INVESTMENTS -- 167.8%
(COST $12,225,289).................. $12,247,504
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (67.8%)................... (4,948,200)
----------
NET ASSETS -- 100.0%.................. $ 7,299,304
==========
|
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of Investments.
See Notes to Financial Statements.
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
ATS-Austria/Austrian Schilling
AUD-Australia/Australian Dollar
BEF-Belgium/Belgian Franc
CAD-Canada/Canadian Dollar
CHF-Switzerland/Swiss Franc
DEM-Germany/German Deutschemark
DKK-Denmark/Danish Krone
ESP-Spain/Spanish Peseta
FIM-Finland/Finnish Markka
FRF-France/French Franc
GBP-United Kingdom/British Pound
HKD-Hong Kong/Hong Kong Dollar
IEP-Ireland/Irish Punt
ITL-Italy/Italian Lira
JPY-Japan/Japanese Yen
MXP-Mexico/Mexican Peso
MYR-Malaysia/Malaysian Ringgit
NLG-Netherlands/Netherland Guilder
NOK-Norway/Norwegian Krone
NZD-New Zealand/New Zealand Dollar
PHP-Philippines/Philippine Peso
PTE-Portugal/Portuguese Escudo
SEK-Sweden/Swedish Krona
SGD-Singapore/Singapore Dollar
ZAR-South Africa/South African Rand
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT AST FEDERATED AST
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY PUTNAM FEDERATED
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD
------------- ----------- ---------- -------- --------- -------- ----------
ASSETS
Investments in securities at
value (A)................... $ 410,801 $ 938,105 $1,524,174 $760,025 $200,825 $359,224 $429,823
Cash in bank, including
foreign currency holdings... 840 -- 410 -- -- 1,194 --
Receivable for:
Securities sold............. 2,935 828 1,344 -- 793 4,349 --
Forward foreign currency
exchange contracts
purchased................. -- -- -- -- -- -- --
Forward foreign currency
exchange contracts sold... -- -- 1,315 -- -- -- --
Dividends and interest...... 1,467 1,531 1,509 3,485 356 1,717 7,351
Fund shares sold............ 1,053 1,745 13,430 -- 348 -- --
Futures variation margin.... -- -- -- -- -- 1,070 --
Other assets.................. 43 9 16 6 1 4 314
Unrealized appreciation on
interest rate swap
agreements.................. -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- --------
TOTAL ASSETS.............. 417,139 942,218 1,542,198 763,516 202,323 367,558 437,488
-------- -------- -------- -------- -------- ------- --------
LIABILITIES
Cash overdraft................ -- -- -- 3 5 -- 1
Sale commitments, at value.... -- -- -- -- -- 207 --
Payable for:
Securities purchased........ 2,598 4,723 28,461 -- 1,066 7,395 --
Forward foreign currency
exchange contracts
purchased................. 844 -- 1,231 -- -- 53 --
Forward foreign currency
exchange contracts sold... 1,065 -- -- -- -- 58 --
Fund shares redeemed........ -- -- -- -- -- 1,966 2,872
Futures variation margin.... -- -- -- -- -- -- --
Advisory fees............... 199 326 624 101 49 128 105
Shareholder servicing
fees...................... 35 79 125 64 16 30 36
Accrued expenses............ 128 104 155 102 44 130 54
Accrued dividends........... -- -- -- 3,358 -- -- --
-------- -------- -------- -------- -------- ------- --------
TOTAL LIABILITIES......... 4,869 5,232 30,596 3,628 1,180 9,967 3,068
-------- -------- -------- -------- -------- ------- --------
NET ASSETS....................... $ 412,270 $ 936,986 $1,511,602 $759,888 $201,143 $357,591 $434,420
======== ======== ======== ======== ======== ======= ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of
shares authorized, $.001 par
value per share)................ $ 19 $ 46 $ 65 $ 760 $ 13 $ 26 $ 33
Additional paid-in capital....... 325,542 722,396 1,043,665 759,067 154,620 296,981 385,484
Undistributed net investment
income (loss)................... 4,058 11,541 3,000 -- 4,517 8,977 27,616
Accumulated net realized gain
(loss) on investments........... 48,420 50,500 84,601 61 16,064 21,948 1,492
Accumulated net unrealized
appreciation (depreciation) on
investments..................... 34,231 152,503 380,271 -- 25,929 29,659 19,795
-------- -------- -------- -------- -------- ------- --------
NET ASSETS....................... $ 412,270 $ 936,986 $1,511,602 $759,888 $201,143 $357,591 $434,420
======== ======== ======== ======== ======== ======= ========
Shares of common stock
outstanding..................... 19,365 45,650 65,302 759,826 13,278 26,226 33,139
Net asset value, offering and
redemption price per share...... $ 21.29 $ 20.53 $ 23.15 $ 1.00 $ 15.15 $ 13.64 $ 13.11
======== ======== ======== ======== ======== ======= ========
(A) Investments at cost.......... $ 374,598 $ 785,602 $1,143,979 $760,025 $174,897 $329,164 $410,028
======== ======== ======== ======== ======== ======= ========
|
See Notes to Financial Statements.
------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO T. ROWE T. ROWE
PRICE TOTAL INVESCO FOUNDERS PRICE PRICE BERGER
ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT
---------- -------- -------- ------------ ------------- ------------- -------- ---------
$214,199 $756,345 $612,687 $278,904 $ 438,892 $ 126,727 $186,175 $117,970
99 -- 2,189 -- 21,732 5,293 -- 376
-- -- -- 3,351 434 574 -- 140
-- -- -- -- -- 67 -- --
-- 244 -- -- -- 5 -- --
1,643 6,902 2,492 19 667 3,238 83 151
-- 59,899 3,153 2,808 3,080 -- 871 214
-- 815 -- -- -- -- -- --
2 6 6 3 6 1 2 2
-- 188 -- -- -- -- -- --
---------- -------- -------- ------------ ------------- ------------- -------- ---------
215,943 824,399 620,527 285,085 464,811 135,905 187,131 118,853
---------- -------- -------- ------------ ------------- ------------- -------- ---------
-- 2,052 -- -- -- -- -- --
-- -- -- -- -- -- -- --
796 223,174 18,081 6,613 -- 1,311 1,951 752
-- -- -- -- -- -- -- 3
-- -- -- -- -- -- -- --
1,931 26,793 25 -- 5 4,071 -- --
-- -- -- -- -- -- -- --
55 137 187 136 198 47 71 60
18 50 49 23 38 11 16 10
68 93 80 55 114 57 43 90
-- -- -- -- -- -- -- --
---------- -------- -------- ------------ ------------- ------------- -------- ---------
2,868 252,299 18,422 6,827 355 5,497 2,081 915
---------- -------- -------- ------------ ------------- ------------- -------- ---------
$213,075 $572,100 $602,105 $278,258 $ 464,456 $ 130,408 $185,050 $117,938
=========== ========== ============ ============== ============== ============== ========== =========
$ 14 $ 49 $ 36 $ 15 $ 38 $ 13 $ 11 $ 10
174,348 526,126 464,642 223,153 410,442 131,693 147,564 109,631
4,904 25,494 12,069 -- 3,315 5,568 122 547
887 12,125 30,597 12,806 7,741 (4,256) 33,472 (3,466)
32,922 8,306 94,761 42,285 42,920 (2,610) 3,881 11,216
---------- -------- -------- ------------ ------------- ------------- -------- ---------
$213,075 $572,100 $602,105 $278,258 $ 464,456 $ 130,408 $185,050 $117,938
=========== ========== ============ ============== ============== ============== ========== =========
14,082 48,801 36,468 15,621 38,415 12,902 11,141 10,016
$ 15.13 $ 11.72 $ 16.51 $ 17.81 $ 12.09 $ 10.11 $ 16.61 $ 11.78
=========== ========== ============ ============== ============== ============== ========== =========
$181,276 $750,855 $517,926 $236,619 $ 395,941 $ 129,330 $182,295 $106,746
=========== ========== ============ ============== ============== ============== ========== =========
-------------------------------
-------------------------------
T. ROWE PIMCO
PRICE LIMITED
NATURAL MATURITY
RESOURCES BOND
---------- --------
--------- --------
$111,593 $342,243
-- 1
277 498
== ==
92 3,340
89 --
-- 8
1 3
-- 30
--------- --------
112,052 346,123
--------- --------
1 --
-- --
-- 49,438
-- --
-- --
-- 7,885
-- --
48 72
9 25
40 61
-- --
--------- --------
98 57,481
--------- --------
$111,954 $288,642
=========== ========
$ 8 $ 26
101,941 272,564
1,072 14,491
6,230 (1,027)
2,703 2,588
--------- --------
$111,954 $288,642
=========== ========
7,683 26,189
$ 14.57 $ 11.02
=========== ========
$108,891 $340,132
=========== ========
|
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
ROBERTSON AST PUTNAM TWENTIETH TWENTIETH
STEPHENS AST JANUS VALUE CENTURY CENTURY
VALUE + OVERSEAS GROWTH & STRATEGIC INTERNATIONAL
GROWTH GROWTH INCOME BALANCED GROWTH
--------- --------- ---------- ---------- -------------
ASSETS
Investments in securities at value (A)............. $233,855 $255,442 $116,496 $ 30,250 $34,072
Cash in bank, including foreign currency
holdings......................................... 148 1,273 -- 9 --
Receivable for:
Securities sold.................................. 9,143 2,389 2,746 -- 444
Forward foreign currency exchange contracts
purchased...................................... -- -- -- -- --
Forward foreign currency exchange contracts
sold........................................... -- 904 -- -- 98
Dividends and interest........................... 103 196 227 162 30
Fund shares sold................................. 17 15 340 -- 977
Futures variation margin......................... -- -- -- -- --
Other assets....................................... 2 2 1 -- 1
Unrealized appreciation on interest rate swap
agreements....................................... -- -- -- -- --
-------- -------- -------- -------- --------
TOTAL ASSETS................................... 243,268 260,221 119,810 30,421 35,622
-------- -------- -------- -------- --------
LIABILITIES
Cash overdraft..................................... -- -- -- -- 31
Sale commitments, at value......................... -- -- -- -- --
Payable for:
Securities purchased............................. 6,657 3,003 2,267 733 2,385
Forward foreign currency exchange contracts
purchased...................................... -- 1,027 -- -- 10
Forward foreign currency exchange contracts
sold........................................... -- -- -- -- --
Fund shares redeemed............................. 779 172 -- 713 1
Futures variation margin......................... -- -- -- -- --
Advisory fees.................................... 119 131 44 11 19
Shareholder servicing fees....................... 20 21 10 2 3
Accrued expenses................................. 45 162 51 15 48
Accrued dividends................................ -- -- -- -- --
-------- -------- -------- -------- --------
TOTAL LIABILITIES.............................. 7,620 4,516 2,372 1,474 2,497
-------- -------- -------- -------- --------
NET ASSETS............................................ $235,648 $255,705 $117,438 $ 28,947 $33,125
======== ======== ======== ======== ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares authorized,
$.001 par value per share)........................... $ 19 $ 22 $ 10 $ 3 $ 3
Additional paid-in capital............................ 231,812 243,382 109,238 27,248 32,230
Undistributed net investment income (loss)............ -- 452 686 273 (92)
Accumulated net realized gain (loss) on investments... (4,702) (1,787) 1,862 (407) (481)
Accumulated net unrealized appreciation (depreciation)
on investments....................................... 8,519 13,636 5,642 1,830 1,465
-------- -------- -------- -------- --------
NET ASSETS............................................ $235,648 $255,705 $117,438 $ 28,947 $33,125
======== ======== ======== ======== ========
Shares of common stock outstanding.................... 18,666 21,542 9,605 2,552 2,875
Net asset value, offering and redemption price per
share................................................ $ 12.62 $ 11.87 $ 12.23 $ 11.34 $ 11.52
======== ======== ======== ======== ========
(A) Investments at cost............................... $225,336 $241,668 $110,854 $ 28,419 $32,702
======== ======== ======== ======== ========
T. ROWE
PRICE SMALL MARISCO
COMPANY CAPITAL
VALUE GROWTH
----------- -------
ASSETS
Investments in securities at value (A)............. $ 211,944 $12,248
Cash in bank, including foreign currency
holdings......................................... 1 --
Receivable for:
Securities sold.................................. -- --
Forward foreign currency exchange contracts
purchased...................................... -- --
Forward foreign currency exchange contracts
sold........................................... -- --
Dividends and interest........................... 514 1
Fund shares sold................................. 643 341
Futures variation margin......................... -- --
Other assets....................................... 1 --
Unrealized appreciation on interest rate swap
agreements....................................... -- --
------- ------
TOTAL ASSETS................................... 213,103 12,590
------- ------
LIABILITIES
Cash overdraft..................................... -- --
Sale commitments, at value......................... -- --
Payable for:
Securities purchased............................. 13,070 5,289
Forward foreign currency exchange contracts
purchased...................................... -- --
Forward foreign currency exchange contracts
sold........................................... -- --
Fund shares redeemed............................. -- --
Futures variation margin......................... -- --
Advisory fees.................................... 82 2
Shareholder servicing fees....................... 16 --
Accrued expenses................................. 39 --
Accrued dividends................................ -- --
------- ------
TOTAL LIABILITIES.............................. 13,207 5,291
------- ------
NET ASSETS............................................ $ 199,896 $7,299
======= ======
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares authorized,
$.001 par value per share)........................... $ 15 $ 1
Additional paid-in capital............................ 181,101 7,269
Undistributed net investment income (loss)............ 949 6
Accumulated net realized gain (loss) on investments... 1,023 --
Accumulated net unrealized appreciation (depreciation)
on investments....................................... 16,808 23
------- -------
NET ASSETS............................................ $ 199,896 $7,299
======= =======
Shares of common stock outstanding.................... 15,520 727
Net asset value, offering and redemption price per
share................................................ $ 12.88 $10.03
======= ======
(A) Investments at cost............................... $ 195,135 $12,225
======= =======
|
See Notes to Financial Statements.
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
------------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
AST
PUTNAM LORD ABBETT AST FEDERATED AST
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY PUTNAM FEDERATED
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD
------------- ----------- --------- --------- --------- ---------- ----------
INVESTMENT INCOME
Interest.................................. $ 865 $ 2,967 $ 5,797 $37,009 $ 512 $ 8,540 $ 30,106
Dividends................................. 7,022 15,331 10,730 -- 5,222 3,742 587
------- -------- -------- ------- ------- ------- -------
Total Investment Income............... 7,887 18,298 16,527 37,009 5,734 12,282 30,693
------- -------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees.................. 3,429 5,424 11,423 3,268 887 2,388 2,345
Shareholder servicing fees................ 390 723 1,269 654 135 320 313
Administration and accounting fees........ 311 410 519 372 135 272 267
Custodian fees............................ 309 110 199 110 40 225 54
Professional fees......................... 25 48 84 44 9 21 21
Trustees' fees and expenses............... 11 20 35 18 4 9 9
Insurance expenses........................ 4 7 13 7 1 3 3
Miscellaneous expenses.................... 10 15 24 13 6 67 65
------- -------- -------- ------- ------- ------- -------
Total Expenses........................ 4,489 6,757 13,566 4,486 1,217 3,305 3,077
Less: Advisory fee waivers and expense
reimbursements...................... -- -- (39) (566) -- -- --
------- -------- -------- ------- ------- ------- -------
Net Expenses.......................... 4,489 6,757 13,527 3,920 1,217 3,305 3,077
------- -------- -------- ------- ------- ------- -------
Net Investment Income (Loss)................. 3,398 11,541 3,000 33,089 4,517 8,977 27,616
------- -------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Securities............................ 38,273 50,708 82,896 61 16,208 18,283 1,491
Foreign currency transactions......... 10,981 -- 1,955 -- (68) 334 --
Futures contracts..................... -- -- -- -- -- 3,387 --
Option contracts...................... -- -- -- -- -- -- --
------- -------- -------- ------- ------- ------- -------
Net realized gain (loss).................. 49,254 50,708 84,851 61 16,140 22,004 1,491
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation) on:
Securities............................ 12,325 81,537 199,694 -- 13,833 22,357 10,886
Futures contracts..................... -- -- -- -- -- (289) --
Written option contracts.............. -- -- -- -- -- -- --
Interest rate swaps................... -- -- -- -- -- -- --
Translation of assets and liabilities
denominated in foreign currencies... (2,248) -- (170) -- (4) (105) --
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation).......................... 10,077 81,537 199,524 -- 13,829 21,963 10,886
------- -------- -------- ------- ------- ------- -------
Net gain (loss) on investments............ 59,331 132,245 284,375 61 29,969 43,967 12,377
------- -------- -------- ------- ------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting from Operations............... $62,729 $ 143,786 $287,375 $33,150 $34,486 $ 52,944 $ 39,993
======= ======== ======== ======= ======= ======= =======
|
See Notes to Financial Statements.
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
----------------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
PIMCO
T. ROWE TOTAL INVESCO FOUNDERS T. ROWE PRICE T. ROWE PRICE BERGER
PRICE ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH
------------- ------- ------- ------------ ------------- ------------- --------
INVESTMENT INCOME
Interest................................ $ 5,153 $29,452 $9,582 $ 1,390 $ 881 $ 6,876 $ 894
Dividends............................... 1,629 1 7,015 616 8,085 -- 891
------- -------- -------- ------- ------- ------- -------
Total Investment Income............. 6,782 29,453 16,597 2,006 8,966 6,876 1,785
------- -------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees................ 1,414 2,980 3,565 2,220 4,640 942 1,260
Shareholder servicing fees.............. 166 458 475 247 464 118 168
Administration and accounting fees...... 166 334 340 228 340 119 167
Custodian fees.......................... 49 112 77 55 297 100 45
Professional fees....................... 11 30 31 16 30 8 11
Trustees' fees and expenses............. 5 13 13 7 13 3 5
Insurance expenses...................... 2 4 5 2 5 1 2
Miscellaneous expenses.................. 65 28 22 8 57 17 5
------- -------- -------- ------- ------- ------- -------
Total Expenses...................... 1,878 3,959 4,528 2,783 5,846 1,308 1,663
Less: Advisory fee waivers and
expense reimbursements............ -- -- -- -- -- -- --
------- -------- -------- ------- ------- ------- -------
Net Expenses........................ 1,878 3,959 4,528 2,783 5,846 1,308 1,663
------- -------- -------- ------- ------- ------- -------
Net Investment Income (Loss)............... 4,904 25,494 12,069 (777) 3,120 5,568 122
------- -------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Securities.......................... 932 6,709 30,597 13,326 9,578 3,325 33,536
Foreign currency transactions....... (43) 287 -- 1 (674) (8,170) --
Futures contracts................... -- 9,091 -- -- -- -- --
Option contracts.................... -- 291 -- -- -- -- --
------- -------- -------- ------- ------- ------- -------
Net realized gain (loss)................ 889 16,378 30,597 13,327 8,904 (4,845) 33,536
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation) on:
Securities.......................... 21,216 1,133 52,553 4,904 (3,594) (4,444) (11,415)
Futures contracts................... -- 1,499 -- -- -- -- --
Written option contracts............ -- (607) -- -- -- -- --
Interest rate swaps................. -- 176 -- -- -- -- --
Translation of assets and
liabilities denominated in foreign
currencies........................ -- 1,428 -- (1) (27) 519 --
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation)........................ 21,216 3,629 52,553 4,903 (3,621) (3,925) (11,415)
------- -------- -------- ------- ------- ------- -------
Net gain (loss) on investments.......... 22,105 20,007 83,150 18,230 5,283 (8,770) 22,121
------- -------- -------- ------- ------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting from Operations............. $27,009 $45,501 $95,219 $ 17,453 $ 8,403 $(3,202) $ 22,243
======= ======== ======== ======= ======= ======= =======
|
(2) Commenced operations on December 22, 1997.
See Notes to Financial Statements.
----------------------------------------------------------------------------------------------------------------------
PORTFOLIO
----------------------------------------------------------------------------------------------------------------------
PIMCO ROBERTSON TWENTIETH TWENTIETH
T. ROWE LIMITED STEPHENS AST JANUS AST PUTNAM CENTURY CENTURY
FOUNDERS PRICE NATURAL MATURITY VALUE + OVERSEAS VALUE GROWTH STRATEGIC INTERNATIONAL
PASSPORT RESOURCES BOND GROWTH GROWTH(1) & INCOME(1) BALANCED(1) GROWTH(1)
-------- ------------- -------- --------- --------- ------------ ----------- -------------
$ 1,053 $ 552 $16,719 $ 323 $ 1,162 $ 212 $ 390 $ 63
1,187 1,792 -- 639 991 1,157 53 121
------- ------- ------- ------- ------- ------- ------ ------
2,240 2,344 16,719 962 2,153 1,369 443 184
------- ------- ------- ------- ------- ------- ------ ------
1,258 986 1,649 1,502 1,261 416 116 158
126 110 254 150 126 56 14 16
126 110 232 147 123 56 25 27
160 44 55 34 170 145 24 67
8 7 17 10 9 4 1 1
3 3 7 4 3 1 -- 1
1 1 2 1 1 1 -- --
11 11 12 4 8 4 4 6
------- ------- ------- ------- ------- ------- ------ ------
1,693 1,272 2,228 1,852 1,701 683 184 276
-- -- -- -- -- -- (14) --
------- ------- ------- ------- ------- ------- ------ ------
1,693 1,272 2,228 1,852 1,701 683 170 276
------- ------- ------- ------- ------- ------- ------ ------
547 1,072 14,491 (890) 452 686 273 (92)
------- ------- ------- ------- ------- ------- ------ ------
(3,144) 6,280 403 (4,645) (2,346) 1,862 (367) (388)
(293) (17) (134) -- 559 -- (40) (93)
-- -- 114 -- -- -- -- --
-- -- 44 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------
(3,437) 6,263 427 (4,645) (1,787) 1,862 (407) (481)
------- ------- ------- ------- ------- ------- ------ ------
5,952 (5,033) 3,362 5,704 13,774 5,642 1,831 1,371
-- -- (37) -- -- -- -- --
-- -- (35) -- -- -- -- --
-- -- 30 -- -- -- -- --
(9) 1 292 -- (138) -- (1) 94
------- ------- ------- ------- ------- ------- ------ ------
5,943 (5,032) 3,612 5,704 13,636 5,642 1,830 1,465
------- ------- ------- ------- ------- ------- ------ ------
2,506 1,231 4,039 1,059 11,849 7,504 1,423 984
------- ------- ------- ------- ------- ------- ------ ------
$ 3,053 $ 2,303 $18,530 $ 169 $12,301 $8,190 $ 1,696 $ 892
======= ======= ======= ======= ======= ======= ====== ======
----------------------------
PORTFOLIO
----------------------------
T. ROWE
PRICE SMALL MARSICO
COMPANY CAPITAL
VALUE(1) GROWTH(2)
---------- ---------
$ 504 $ 8
1,365 --
------- ------
1,869 8
------- ------
713 2
79 --
79 --
36 --
6 --
2 --
1 --
4 --
------- ------
920 2
-- --
------- ------
920 2
------- ------
949 6
------- ------
1,070 --
-- --
(47) --
-- --
------- ------
1,023 --
------- ------
16,808 23
-- --
-- --
-- --
-- --
------- ------
16,808 23
------- ------
17,831 23
------- ------
$18,780 $29
======= ======
|
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
-------------------------------------------------------
PORTFOLIO
--------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT
INTERNATIONAL EQUITY GROWTH AND INCOME
------------------------ ------------------------
1997 1996 1997 1996
--------- -------- --------- --------
FROM OPERATIONS
Net investment income (loss)......................... $ 3,398 $ 2,746 $ 11,541 $ 7,379
Net realized gain (loss) on investments.............. 49,254 20,748 50,708 13,085
Net change in unrealized appreciation (depreciation)
on investments..................................... 10,077 4,755 81,537 46,955
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets from
Operations...................................... 62,729 28,249 143,786 67,419
--------- -------- --------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income............................................. (5,413) (5,032) (7,379) (3,534)
Distributions to shareholders from capital gains..... (17,443) (5,923) (13,267) (7,139)
--------- -------- --------- --------
Total Dividends and Distributions to
Shareholders.................................... (22,856) (10,955) (20,646) (10,673)
--------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................ 125,193 101,730 426,438 217,780
Net asset value of shares issued in reinvestment of
dividends and distributions........................ 22,856 10,955 20,647 10,673
Cost of shares redeemed.............................. (121,863) (51,824) (163,736) (43,451)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions.................................... 26,186 60,861 283,349 185,002
--------- -------- --------- --------
Total Increase in Net Assets.................... 66,059 78,155 406,489 241,748
NET ASSETS
Beginning of Period.................................. 346,211 268,056 530,497 288,749
--------- -------- --------- --------
End of Period........................................ $ 412,270 $346,211 $ 936,986 $530,497
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold.......................................... 6,183 5,530 22,448 13,666
Shares issued in reinvestment of dividends and
distributions...................................... 1,229 610 1,185 707
Shares redeemed...................................... (6,057) (2,856) (8,879) (2,755)
--------- -------- --------- --------
Net Increase (Decrease) in Shares Outstanding...... 1,355 3,284 14,754 11,618
========= ======== ========= ========
|
See Notes to Financial Statements.
------------------------------------------------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------------------------------------------------
FEDERATED UTILITY
JANCAP GROWTH AST MONEY MARKET INCOME AST PUTNAM BALANCED
------------------------ --------------------------- --------------------- ---------------------
1997 1996 1997 1996 1997 1996 1997 1996
---------- --------- ----------- ----------- -------- -------- -------- --------
$ 3,000 $ 1,593 $ 33,089 $ 22,641 $ 4,517 $ 3,613 $ 8,977 $ 7,010
84,851 42,941 61 80 16,140 7,915 22,004 29,898
199,524 108,269 -- -- 13,829 978 21,963 (8,583)
---------- ---------- -------- ---------- ---------- -------- -------- --------
287,375 152,803 33,150 22,721 34,486 12,506 52,944 28,325
---------- ---------- -------- ---------- ---------- -------- -------- --------
(2,524) (753) (33,089) (22,641) (3,604) (4,103) (6,615) (5,212)
(42,072) (24,162) (80) (149) (5,148) -- (30,342) (8,816)
---------- ---------- -------- ---------- ---------- -------- -------- --------
(44,596) (24,915) (33,169) (22,790) (8,752) (4,103) (36,957) (14,028)
---------- ---------- -------- ---------- ---------- -------- -------- --------
862,306 517,512 2,492,066 1,478,919 90,589 59,384 42,308 27,031
44,596 24,915 31,988 22,199 8,752 4,103 36,957 14,028
(530,403) (209,312) (2,313,617) (1,295,804) (47,070) (56,151) (24,140) (24,083)
---------- ---------- -------- ---------- ---------- -------- -------- --------
376,499 333,115 210,437 205,314 52,271 7,336 55,125 16,976
---------- ---------- -------- ---------- ---------- -------- -------- --------
619,278 461,003 210,418 205,245 78,005 15,739 71,112 31,273
892,324 431,321 549,470 344,225 123,138 107,399 286,479 255,206
---------- ---------- -------- ---------- ---------- -------- -------- --------
$1,511,602 $ 892,324 $ 759,888 $ 549,470 $201,143 $123,138 $357,591 $286,479
========== ========== ======== ========== ========== ======== ======== ========
40,825 30,067 2,492,065 1,478,919 6,689 4,958 3,259 2,155
2,311 1,569 31,988 22,199 711 351 3,095 1,158
(25,329) (12,155) (2,313,617) (1,295,804) (3,718) (4,710) (1,850) (1,954)
---------- ---------- -------- ---------- ---------- -------- -------- --------
17,807 19,481 210,436 205,314 3,682 599 4,504 1,359
========== ========== ======== ========== ========== ======== ======== ========
|
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------
PORTFOLIO
--------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE
FEDERATED HIGH YIELD ASSET ALLOCATION
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
FROM OPERATIONS
Net investment income (loss)........................... $ 27,616 $ 10,610 $ 4,904 $ 2,587
Net realized gain (loss) on investments................ 1,491 1,294 889 2,313
Net change in unrealized appreciation (depreciation) on
investments.......................................... 10,886 6,820 21,216 6,558
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets from
Operations........................................ 39,993 18,724 27,009 11,458
--------- -------- --------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (10,610) (4,032) (2,585) (1,316)
Distributions to shareholders from capital gains....... (1,263) -- (2,403) (226)
--------- -------- --------- --------
Total Dividends and Distributions to Shareholders.... (11,873) (4,032) (4,988) (1,542)
--------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 269,597 151,204 74,080 52,390
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 11,874 4,032 4,987 1,542
Cost of shares redeemed................................ (80,433) (48,358) (8,162) (3,098)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions...................................... 201,038 106,878 70,905 50,834
--------- -------- --------- --------
Total Increase in Net Assets...................... 229,158 121,570 92,926 60,750
NET ASSETS
Beginning of Period.................................... 205,262 83,692 120,149 59,399
--------- -------- --------- --------
End of Period.......................................... $434,420 $205,262 $213,075 $120,149
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold............................................ 21,771 13,287 5,224 4,228
Shares issued in reinvestment of dividends and
distributions........................................ 1,000 368 377 128
Shares redeemed........................................ (6,550) (4,248) (570) (249)
--------- -------- --------- --------
Net Increase (Decrease) in Shares Outstanding........ 16,221 9,407 5,031 4,107
========= ======== ========= ========
|
See Notes to Financial Statements.
-------------------------------------------------------------------------------------------------------
PORTFOLIO
-------------------------------------------------------------------------------------------------------
PIMCO FOUNDERS CAPITAL T. ROWE PRICE
TOTAL RETURN BOND INVESCO EQUITY INCOME APPRECIATION INTERNATIONAL EQUITY
--------------------- ---------------------- ----------------------- ----------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- --------- -------- --------- --------- --------- --------
$ 25,494 $ 15,701 $ 12,069 $ 7,107 $ (777) $ (527) $ 3,120 $ 2,541
16,378 (3,854) 30,597 9,984 13,327 (527) 8,904 2,395
3,629 1,208 52,553 24,709 4,903 24,027 (3,621) 34,967
-------- -------- -------- --------- -------- --------- --------- ---------
45,501 13,055 95,219 41,800 17,453 22,973 8,403 39,903
-------- -------- -------- --------- -------- --------- --------- ---------
(15,321) (6,111) (7,141) (3,685) -- -- (2,360) (1,759)
-- (6,703) (9,950) (4,986) -- (1,655) (2,682) --
-------- -------- -------- --------- -------- --------- --------- ---------
(15,321) (12,814) (17,091) (8,671) -- (1,655) (5,042) (1,759)
-------- -------- --------- -------- --------- --------- ---------
239,491 196,298 325,090 184,426 159,953 237,559 303,075 222,719
15,321 12,814 17,091 8,671 -- 1,655 5,042 1,759
(72,902) (74,678) (166,884) (54,262) (119,216) (130,924) (249,581) (55,730)
-------- -------- -------- --------- -------- --------- --------- ---------
181,910 134,434 175,297 138,835 40,737 108,290 58,536 168,748
-------- -------- -------- --------- -------- --------- --------- ---------
212,090 134,675 253,425 171,964 58,190 129,608 61,897 206,892
360,010 225,335 348,680 176,716 220,068 90,460 402,559 195,667
-------- -------- -------- --------- -------- --------- --------- ---------
$572,100 $360,010 $ 602,105 $348,680 $ 278,258 $ 220,068 $ 464,456 $402,559
======== ======== ======== ========= ======== ========= ========= =========
21,382 18,267 21,367 14,201 9,416 15,149 24,350 19,721
1,429 1,211 1,227 705 -- 115 419 161
(6,415) (6,938) (11,049) (4,116) (6,897) (8,512) (19,694) (4,907)
-------- -------- -------- --------- -------- --------- --------- ---------
16,396 12,540 11,545 10,790 2,519 6,752 5,075 14,975
======== ======== ======== ========= ======== ========= ========= =========
|
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
------------------------------------------------------
PORTFOLIO
--------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE
INTERNATIONAL BOND BERGER CAPITAL GROWTH
----------------------- ------------------------
1997 1996 1997 1996
-------- -------- --------- --------
FROM OPERATIONS
Net investment income (loss).......................... $ 5,568 $ 3,520 $ 122 $ 223
Net realized gain (loss) on investments............... (4,845) 1,092 33,536 1,487
Net change in unrealized appreciation (depreciation)
on investments...................................... (3,925) 458 (11,415) 10,400
-------- -------- --------- --------
Net Increase (Decrease) in Net Assets from
Operations....................................... (3,202) 5,070 22,243 12,110
-------- -------- --------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income.............................................. (1,563) (697) (223) (150)
Distributions to shareholders from capital gains...... (2,503) (884) (1,347) --
-------- -------- --------- --------
Total Dividends and Distributions to Shareholders... (4,066) (1,581) (1,570) (150)
-------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................. 57,168 60,046 210,696 147,599
Net asset value of shares issued in reinvestment of
dividends and distributions......................... 4,066 1,581 1,570 150
Cost of shares redeemed............................... (21,793) (12,483) (184,136) (69,441)
-------- -------- --------- --------
Increase (Decrease) in Net Assets from Share
Transactions..................................... 39,441 49,144 28,130 78,308
-------- -------- --------- --------
Total Increase in Net Assets..................... 32,173 52,633 48,803 90,268
NET ASSETS
Beginning of Period................................... 98,235 45,602 136,247 45,979
-------- -------- --------- --------
End of Period......................................... $130,408 $ 98,235 $ 185,050 $136,247
======== ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold........................................... 5,634 5,742 13,595 10,695
Shares issued in reinvestment of dividends and
distributions....................................... 405 156 109 12
Shares redeemed....................................... (2,152) (1,183) (12,032) (4,945)
-------- -------- --------- --------
Net Increase (Decrease) in Shares Outstanding....... 3,887 4,715 1,672 5,762
======== ======== ========= ========
|
(1) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
----------------------------------------------------------------------------------------------------
PORTFOLIO
----------------------------------------------------------------------------------------------------
T. ROWE PRICE PIMCO LIMITED ROBERTSON STEPHENS
FOUNDERS PASSPORT NATURAL RESOURCES MATURITY BOND VALUE + GROWTH
--------------------- ----------------------- --------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996(1)
-------- -------- ---------- -------- -------- -------- -------- -------
$ 547 $ 974 $ 1,072 $ 423 $ 14,491 $ 10,849 $ (890) $ (66)
(3,437) (20) 6,263 2,036 427 (1,321) (4,645) (57)
5,943 5,257 (5,032) 7,352 3,612 (1,512) 5,704 2,814
-------- -------- -------- -------- ------- -------- -------- --------
3,053 6,211 2,303 9,811 18,530 8,016 169 2,691
-------- -------- -------- -------- ------- -------- -------- --------
(805) (129) (417) (29) (10,857) (761) -- --
(129) -- (2,073) (34) -- (303) -- --
-------- -------- -------- -------- ------- -------- -------- --------
(934) (129) (2,490) (63) (10,857) (1,064) -- --
-------- -------- -------- -------- ------- -------- -------- --------
74,511 103,946 63,364 87,969 141,511 104,208 265,275 52,408
933 129 2,489 63 10,857 1,064 -- --
(77,268) (20,969) (42,246) (18,508) (80,412) (65,151) (78,586) (6,309)
-------- -------- -------- -------- ------- -------- -------- --------
(1,824) 83,106 23,607 69,524 71,956 40,121 186,689 46,099
-------- -------- -------- -------- ------- -------- -------- --------
295 89,188 23,420 79,272 79,629 47,073 186,858 48,790
117,643 28,455 88,534 9,262 209,013 161,940 48,790 --
-------- -------- -------- -------- ------- -------- -------- --------
$117,938 $117,643 $ 111,954 $ 88,534 $288,642 $209,013 $235,648 $48,790
======== ======== ======== ======== ======= ======== ======== ========
6,247 9,188 4,198 6,706 13,311 9,943 20,523 5,032
78 12 172 5 1,049 102 -- --
(6,422) (1,843) (2,804) (1,428) (7,504) (6,177) (6,296) (593)
-------- -------- -------- -------- ------- -------- -------- --------
(97) 7,357 1,566 5,283 6,856 3,868 14,227 4,439
======== ======== ======== ======== ======= ======== ======== ========
|
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------------------------
PORTFOLIO
----------------------------------------------------------------------------------------------------------------------------
TWENTIETH TWENTIETH T. ROWE PRICE
AST JANUS AST PUTNAM CENTURY CENTURY SMALL MARSICO
OVERSEAS VALUE GROWTH STRATEGIC INTERNATIONAL COMPANY CAPITAL
GROWTH & INCOME BALANCED GROWTH VALUE GROWTH
--------- ------------ --------- ------------- ------------- -------
1997(2) 1997(2) 1997(2) 1997(2) 1997(2) 1997(3)
--------- ------------ --------- ------------- ------------- -------
FROM OPERATIONS
Net investment income (loss)........... $ 452 $ 686 $ 273 $ (92) $ 949 $ 6
Net realized gain (loss) on
investments.......................... (1,787) 1,862 (407) (481) 1,023 --
Net change in unrealized appreciation
(depreciation) on investments........ 13,636 5,642 1,830 1,465 16,808 23
-------- -------- ------- -------- -------- -------
Net Increase (Decrease) in Net Assets
from Operations................... 12,301 8,190 1,696 892 18,780 29
-------- -------- ------- -------- -------- -------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net
investment income.................... -- -- -- -- -- --
Distributions to shareholders from
capital gains........................ -- -- -- -- -- --
-------- -------- ------- -------- -------- -------
Total Dividends and Distributions to
Shareholders...................... -- -- -- -- -- --
-------- -------- ------- -------- -------- -------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............. 295,567 121,563 29,464 48,070 210,455 9,665
Net asset value of shares issued in
reinvestment of dividends and
distributions........................ -- -- -- -- -- --
Cost of shares redeemed................ (52,163) (12,315) (2,213) (15,837) (29,339) (2,395)
-------- -------- ------- -------- -------- -------
Increase in Net Assets from Capital
Share Transactions................ 243,404 109,248 27,251 32,233 181,116 7,270
-------- -------- ------- -------- -------- -------
Total Increase in Net Assets...... 255,705 117,438 28,947 33,125 199,896 7,299
NET ASSETS
Beginning of Period.................... -- -- -- -- -- --
-------- -------- ------- -------- -------- -------
End of Period.......................... $255,705 $117,438 $28,947 $ 33,125 $ 199,896 $ 7,299
======== ======== ======= ======== ======== =======
SHARES ISSUED AND REDEEMED
Shares sold............................ 25,962 10,693 2,754 4,258 17,898 966
Shares issued in reinvestment of
dividends and distributions.......... -- -- -- -- -- --
Shares redeemed........................ (4,420) (1,088) (202) (1,383) (2,378) (239)
-------- -------- ------- -------- -------- -------
Net Increase (Decrease) in Shares
Outstanding....................... 21,542 9,605 2,552 2,875 15,520 727
======== ======== ======= ======== ======== =======
|
See Notes to Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
--------- ------------ --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
AST Putnam 1997 $ 19.22 $ 0.36 $ 2.96 $ 3.32 $ (0.30) $ (0.95) $ (1.25) $21.29
International 1996 18.20 0.16 1.55 1.71 (0.32) (0.37) (0.69) 19.22
Equity 1995 17.61 0.14 1.44 1.58 -- (0.99) (0.99) 18.20
1994 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19) 17.61
1993 12.74 0.14 4.46 4.60 -- -- -- 17.34
Lord Abbett 1997 $ 17.17 $ 0.24 $ 3.76 $ 4.00 $ (0.23) $ (0.41) $ (0.64) $20.53
Growth and 1996 14.98 0.23 2.48 2.71 (0.17) (0.35) (0.52) 17.17
Income 1995 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40) 14.98
1994 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32) 12.00
1993 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10) 12.06
JanCap Growth 1997 $ 18.79 $ 0.06 $ 5.16 $ 5.22 $ (0.05) $ (0.81) $ (0.86) $23.15
1996 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82) 18.79
1995 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
1994 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
1993 10.53 0.03 1.22 1.25 -- -- -- 11.78
AST Money 1997 $ 1.00 $ 0.0507 $ 0.0002 $ 0.0509 $ (0.0507) $(0.0002) $ (0.0509) $ 1.00
Market 1996 1.00 0.0492 0.0005 0.0497 (0.0492) (0.0005) (0.0497) 1.00
1995 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494) 1.00
1994 1.00 0.0367 0.0002 0.0369 (0.0367) (0.0002) (0.0369) 1.00
1993 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252) 1.00
Federated 1997 $ 12.83 $ 0.32 $ 2.87 $ 3.19 $ (0.36) $ (0.51) $ (0.87) $15.15
Utility 1996 11.94 0.36 0.97 1.33 (0.44) -- (0.44) 12.83
Income 1995 9.87 0.40 2.09 2.49 (0.42) -- (0.42) 11.94
1994 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18) 9.87
1993(2) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam 1997 $ 13.19 $ 0.33 $ 1.85 $ 2.18 $ (0.31) $ (1.42) $ (1.73) $13.64
Balance 1996 12.53 0.32 1.02 1.34 (0.25) (0.43) (0.68) 13.19
1995 10.49 0.26 2.06 2.32 (0.28) -- (0.28) 12.53
1994 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09) 10.49
1993(2) 10.00 0.08 0.49 0.57 -- -- -- 10.57
|
+ Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions are charged. This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(2) Commenced operations on May 4, 1993.
See Notes to Financial Statements.
---------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
------------------------------- -------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
---------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
18.15% $ 412,270 116% $ 0.0209 1.15% 1.15% 1.04% 1.04%
9.65% 346,211 124% 0.0151 1.16% 1.26% 0.88% 0.78%
10.00% 268,056 59% -- 1.17% 1.27% 0.88% 0.78%
2.64% 238,050 49% -- 1.22% 1.32% 0.55% 0.46%
36.11% 150,646 32% -- 1.52% 1.52% 0.28% 0.28%
23.92% $ 936,986 41% $ 0.0640 0.93% 0.93% 1.60% 1.60%
18.56% 530,497 43% 0.0655 0.97% 0.97% 1.92% 1.92%
28.91% 288,749 50% -- 0.99% 0.99% 2.50% 2.50%
2.22% 92,050 60% -- 1.06% 1.06% 2.45% 2.45%
13.69% 48,385 57% -- 1.22% 1.33% 2.05% 1.94%
28.66% $ 1,511,563 94% $ 0.0628 1.07% 1.08% 0.24% 0.23%
28.36% 892,324 79% 0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.18% $ 759,888 N/A N/A 0.60% 0.69% 5.06% 4.98%
5.08% 549,470 N/A N/A 0.60% 0.71% 4.87% 4.76%
5.05% 344,225 N/A -- 0.60% 0.72% 5.38% 5.26%
3.75% 288,588 N/A -- 0.64% 0.76% 3.90% 3.78%
2.55% 114,074 N/A -- 0.65% 0.84% 2.53% 2.34%
26.42% $ 201,143 91% $ 0.0395 0.90% 0.90% 3.34% 3.34%
11.53% 123,138 81% 0.0446 0.93% 0.93% 3.14% 3.14%
26.13% 107,399 71% -- 0.93% 0.93% 4.58% 4.58%
(6.95%) 71,205 54% -- 0.99% 0.99% 5.11% 5.11%
7.90% 57,643 5% -- 1.18%(1) 1.18%(1) 5.09%(1) 5.09%(1)
18.28% $ 357,591 170% $ 0.0282 1.03% 1.03% 2.81% 2.81%
11.23% 286,479 276% 0.0516 0.94% 0.94% 2.66% 2.66%
22.60% 255,206 161% -- 0.94% 0.94% 3.28% 3.28%
0.09% 145,624 87% -- 0.99% 0.99% 3.08% 3.08%
5.70% 91,591 46% -- 1.13%(1) 1.13%(1) 2.53%(1) 2.53%(1)
---------------------------------------------------------------------------------------------------------------------------
|
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
----------- ------------ --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
Federated 1997 $ 12.13 $ 0.75 $ 0.83 $ 1.58 $(0.54) $(0.06) $ (0.60) $ 13.11
High 1996 11.14 0.56 0.90 1.46 (0.47) -- (0.47) 12.13
Yield 1995 9.69 0.38 1.46 1.84 (0.39) -- (0.39) 11.14
1994(3) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
T. Rowe Price 1997 $ 13.27 $ 0.33 $ 2.03 $ 2.36 $(0.26) $(0.24) $ (0.50) $ 15.13
Asset 1996 12.01 0.27 1.28 1.55 (0.25) (0.04) (0.29) 13.27
Allocation 1995 9.94 0.26 2.02 2.28 (0.21) -- (0.21) 12.01
1994(3) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
PIMCO Total 1997 $ 11.11 $ 0.48 $ 0.58 $ 1.06 $(0.45) $ -- $ (0.45) $ 11.72
Return Bond 1996 11.34 0.46 (0.10) 0.36 (0.28) (0.31) (0.59) 11.11
1995 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
1994(3) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity 1997 $ 13.99 $ 0.31 $ 2.84 $ 3.15 $(0.26) $(0.37) $ (0.63) $ 16.51
Income 1996 12.50 0.27 1.79 2.06 (0.24) (0.33) (0.57) 13.99
1995 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
1994(3) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders 1997 $ 16.80 $(0.05) $ 1.06 $ 1.01 $ -- $ -- $ -- $ 17.81
Capital 1996 14.25 (0.03) 2.85 2.82 -- (0.27) (0.27) 16.80
Appreciation 1995 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
1994(3) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price 1997 $ 12.07 $ 0.09 $ 0.08 $ 0.17 $(0.07) $(0.08) $ (0.15) $ 12.09
International 1996 10.65 0.06 1.44 1.50 (0.08) -- (0.08) 12.07
Equity 1995 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
1994(3) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
T. Rowe Price 1997 $ 10.90 $ 0.20 $(0.57) $(0.37) $(0.16) $(0.26) $ (0.42) $ 10.11
International 1996 10.60 0.23 0.38 0.61 (0.14) (0.17) (0.31) 10.90
Bond 1995 9.68 0.31 0.75 1.06 (0.14) -- (0.14) 10.60
1994(4) 10.00 0.27 (0.59) (0.32) -- -- -- 9.68
|
+ Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions are charged. This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(3) Commenced operations on January 4, 1994.
(4) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
---------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
--------------------------------- ---------------------------------
SUPPLEMENTAL DATA AFTER AFTER
---------------------------------------------------- ADVISORY BEFORE ADVISORY ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- --------------- ------------- ---------------
13.59% $ 434,420 28% N/A 0.98% 0.98% 8.83% 8.83%
13.58% 205,262 43% N/A 1.03% 1.03% 8.02% 8.02%
19.57% 83,692 30% -- 1.11% 1.11% 8.72% 8.72%
(3.10%) 21,308 41% -- 1.15%(1) 1.34%(1) 9.06%(1) 8.87%(1)
18.40% $ 213,075 10% $ 0.0299 1.13% 1.13% 2.95% 2.95%
13.14% 120,149 31% 0.0366 1.20% 1.20% 3.02% 3.02%
23.36% 59,399 18% -- 1.25% 1.29% 3.53% 3.49%
(0.60%) 23,463 32% -- 1.25%(1) 1.47%(1) 3.64%(1) 3.42%(1)
9.87% $ 572,100 320% N/A 0.86% 0.86% 5.56% 5.56%
3.42% 360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57%(1) 5.57%(1)
23.33% $ 602,105 73% $ 0.0595 0.95% 0.95% 2.54% 2.54%
17.09% 348,680 58% 0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41%(1) 3.41%(1)
6.01% $ 278,258 77% $ 0.0538 1.13% 1.13% (0.32%) (0.32%)
20.05% 220,068 69% 0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59%(1) 2.34%(1)
1.36% $ 464,456 19% $ 0.0036 1.26% 1.26% 0.71% 0.71%
14.17% 402,559 11% 0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45%(1) 0.43%(1)
(3.42%) $ 130,408 173% N/A 1.11% 1.11% 4.73% 4.73%
5.98% 98,235 241% N/A 1.21% 1.21% 5.02% 5.02%
11.10% 45,602 325% -- 1.53% 1.53% 6.17% 6.17%
(3.20%) 15,218 163% -- 1.68%(1) 1.68%(1) 7.03%(1) 7.03%(1)
---------------------------------------------------------------------------------------------------------------------------
|
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
----------- ------------ --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
Gerger Capital 1997 $ 14.39 $ 0.01 $ 2.36 $ 2.37 $(0.02) $(0.13) $ (0.15) $ 16.61
Growth 1996 12.40 0.01 2.01 2.02 (0.03) -- (0.03) 14.39
1995 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
1994(5) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
Founders 1997 $ 11.63 $ 0.03 $ 0.21 $ 0.24 $(0.08) $(0.01) $ (0.09) $ 11.78
Passport 1996 10.33 0.09 1.24 1.33 (0.03) -- (0.03) 11.63
1995(6) 10.00 0.03 0.30 0.33 -- -- -- 10.33
T. Rowe Price 1997 $ 14.47 $ 0.14 $ 0.35 $ 0.49 $(0.07) $(0.32) $ (0.39) $ 14.57
Natural 1996 11.11 0.05 3.35 3.40 (0.02) (0.02) (0.04) 14.47
Resources 1995(6) 10.00 0.04 1.07 1.11 -- -- -- 11.11
PIMCO 1997 $ 10.81 $ 0.55 $ 0.22 $ 0.77 $(0.56) $ -- $ (0.56) $ 11.02
Limited 1996 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07) 10.81
Maturity Bond 1995(6) 10.00 0.05 0.42 0.47 -- -- -- 10.47
Robertson 1997 $ 10.99 $(0.05) $ 1.68 $ 1.63 $ -- $ -- $ -- $ 12.62
Stephens Value (7) 10.00 (0.01) 1.00 0.99 -- -- -- 10.99
+ Growth
AST Janus 1997(8) $ 10.00 $ 0.02 $ 1.85 $ 1.87 $ -- $ -- $ -- $ 11.87
Overseas
Growth
AST Putnam 1997(8) $ 10.00 $ 0.07 $ 2.16 $ 2.23 $ -- $ -- $ -- $ 12.23
Value
Growth & Income
Twentieth 1997(8) $ 10.00 $ 0.11 $ 1.23 $ 1.34 $ -- $ -- $ -- $ 11.34
Century
Strategic
Balanced
Twentieth 1997(8) $ 10.00 $(0.03) $ 1.55 $ 1.52 $ -- $ -- $ -- $ 11.52
Century
International
Growth
T. Rowe Price 1997(8) $ 10.00 $ 0.06 $ 2.82 $ 2.88 $ -- $ -- $ -- $ 12.88
Small Company
Marsico 1997(9) $ 10.00 $ 0.01 $ 0.02 $ 0.03 $ -- $ -- $ -- $ 10.03
Capital
Growth
|
+ Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions are charged. This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(5) Commenced operations on October 20, 1994.
(6) Commenced operations on May 2, 1995.
(7) Commenced operations on May 2, 1996.
(8) Commenced operations on January 2, 1997.
(9) Commenced operations on December 22, 1997.
See Notes to Financial Statements.
---------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
--------------------------------- ---------------------------------
SUPPLEMENTAL DATA AFTER AFTER
---------------------------------------------------- ADVISORY BEFORE ADVISORY ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- --------------- ------------- ---------------
16.68% $ 185,050 305% $ 0.0603 0.99% 0.99% 0.07% 0.07%
16.34% 136,247 156% 0.0614 1.01% 1.01% 0.24% 0.24%
24.42% 45,979 84% -- 1.17% 1.17% 0.70% 0.70%
(0.30% ) 3,030 5% -- 1.25%(1) 1.70%(1) 1.41%(1) 0.97%(1)
2.03% $ 117,938 73% $ 0.0110 1.35% 1.35% 0.43% 0.43%
12.91% 117,643 133% 0.0190 1.36% 1.36% 1.25% 1.25%
3.30% 28,455 4% -- 1.46%(1) 1.46%(1) 0.94%(1) 0.94%(1)
3.39% $ 111,954 44% $ 0.0221 1.16% 1.16% 0.98% 0.98%
30.74% 88,534 31% 0.0238 1.30% 1.30% 1.08% 1.08%
11.10% 9,262 2% -- 1.35%(1) 1.80%(1) 1.28%(1) 0.83%(1)
7.46% $ 288,642 54% N/A 0.88% 0.88% 5.71% 5.71%
3.90% 209,013 247% N/A 0.89% 0.89% 5.69% 5.69%
4.70% 161,940 205% -- 0.89%(1) 0.89%(1) 4.87%(1) 4.87%(1)
14.83% $ 235,648 219% $ 0.0568 1.23% 1.23% (0.59%) (0.59%)
9.90% 48,790 77% 0.0529 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
18.70% $ 255,705 94% $ 0.0158 1.35%(1) 1.35%(1) 0.36%(1) 0.36%(1)
22.30% $ 117,438 81% $ 0.0375 1.23%(1) 1.23%(1) 1.24%(1) 1.24%(1)
13.40% $ 28,947 76% $ 0.0337 1.25%(1) 1.35%(1) 2.02%(1) 1.92%(1)
15.10% $ 33,125 171% $ 0.0064 1.75%(1) 1.75%(1) (0.58%)(1) (0.58%)(1)
28.80% $ 199,896 7% $ 0.0477 1.16%(1) 1.16%(1) 1.20%(1) 1.20%(1)
0.30% $ 7,299 -- $ 0.0550 1.00%(1) 1.00%(1) 3.62%(1) 3.62%(1)
---------------------------------------------------------------------------------------------------------------------------
|
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
American Skandia Trust (the "Trust") is an open-end management investment company, registered under the Investment Company Act of 1940, as amended. The Trust was organized on October 31, 1988 as a Massachusetts business trust. The Trust operates as a series company and, at December 31, 1997, issued 24 classes of shares of beneficial interest: AST Putnam International Equity Portfolio ("Putnam International Equity"), Lord Abbett Growth and Income Portfolio ("Growth and Income"), JanCap Growth Portfolio ("Growth"), AST Money Market Portfolio ("Money Market"), Federated Utility Income Portfolio ("Utility Income"), AST Putnam Balanced Portfolio ("Balanced"), Federated High Yield Portfolio ("High Yield"), T. Rowe Price Asset Allocation Portfolio ("Asset Allocation"), PIMCO Total Return Bond Portfolio ("Total Return Bond"), INVESCO Equity Income Portfolio ("Equity Income"), Founders Capital Appreciation Portfolio ("Capital Appreciation"), T. Rowe Price International Equity Portfolio ("T. Rowe International Equity"), T. Rowe Price International Bond Portfolio ("International Bond"), Berger Capital Growth Portfolio ("Berger Capital Growth"), Founders Passport Portfolio ("Passport"), T. Rowe Price Natural Resources Portfolio ("Natural Resources"), PIMCO Limited Maturity Bond Portfolio ("Limited Maturity Bond"), Robertson Stephens Value + Growth Portfolio ("Value + Growth"), AST Janus Overseas Growth Portfolio ("Overseas Growth"), AST Putnam Value Growth & Income Portfolio ("Value Growth & Income"), Twentieth Century Strategic Balanced Portfolio ("Strategic Balanced"), Twentieth Century International Growth Portfolio ("International Growth"), T. Rowe Price Small Company Value Portfolio ("Small Company Value"), and Marsico Capital Growth Portfolio ("Marsico Capital Growth") (collectively the "Portfolios").
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the Trust, in conformity with generally accepted accounting principals, in the preparation of its financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Security Valuation
Portfolio securities are valued at the close of trading on the New York Stock Exchange. Equity securities are valued at the last reported sales price on the securities exchange on which they are primarily traded, or at the last reported sales price on the NASDAQ National Securities Market. Securities not listed on an exchange or securities market, or securities in which there were no transactions, are valued at the average of the most recent bid and asked prices.
Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Debt securities of Money Market are valued at amortized cost, which approximates market value. The amortized cost method values a security at its cost at the time of purchase and thereafter assumes a constant amortization to maturity of any discount or premium. For Portfolios other than Money Market, debt securities which mature in 60 days or less are valued at cost (or market value 60 days prior to maturity), adjusted for amortization to maturity of any premium or discount.
Securities for which market quotations are not readily available are valued at fair value as determined in good faith by, or at the direction of, the Board of Trustees.
Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are converted each business day into U.S. dollars based on the prevailing rates of exchange. Purchases and sales of portfolio securities and income and expenses are converted into U.S. dollars on the respective dates of such transactions.
Gains and losses resulting from changes in exchange rates applicable to foreign securities are not reported separately from gains and losses arising from movements in securities prices.
Net realized foreign exchange gains and losses include gains and losses from sales and maturities of foreign currency exchange contracts, gains and losses realized between the trade and settlement dates of foreign securities transactions, and the difference between the amount of net investment income accrued on foreign securities and the U.S. dollar amount actually received. Net unrealized foreign exchange gains and losses include gains and losses from changes in the value of assets and liabilities other than portfolio securities, resulting from changes in exchange rates.
Foreign Currency Exchange Contracts
A foreign currency exchange contract ("FCEC") is a commitment to purchase or sell a specified amount of a foreign currency at a specified future date, in exchange for either a specified amount of another foreign currency or U.S. dollars.
FCECs are valued at the forward exchange rates applicable to the underlying currencies, and changes in market value are recorded as unrealized gains and losses until the contract settlement date.
Risks could arise from entering into FCECs if the counterparties to the contracts were unable to meet the terms of their contracts. In addition, the use of FCECs may not only hedge against losses on securities denominated in foreign currency, but may also reduce potential gains on securities from favorable movements in exchange rates.
Futures Contracts and Options
A financial futures contract calls for delivery of a particular security, market index, or currency at a specified price and future date. The seller of the contract agrees to make delivery called for in the contract and the buyer agrees to take delivery at a specified future date. Such contracts require an initial deposit, in cash or cash equivalents, equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Portfolio each day, depending on the daily change in the value of the contract. Futures contracts are valued based on their quoted daily settlement prices. Fluctuations in value are recorded as unrealized gains and losses until such time that the contracts are terminated.
An option is a right to buy or sell a particular security at a specified price within a limited period of time. The buyer of the option, in return for a premium paid to the seller, has the right to buy, in the case of a call option, or sell, in the case of a put option, the underlying security of the contract. The premium received in cash from writing options is recorded as an asset with an equal liability that is adjusted to reflect the option's value. The premium received from writing options which expire is recorded as realized gains. The premium received from writing options which are exercised or closed are offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. If a put
option is exercised, the premium reduces the cost basis of the security or currency purchased. Options are valued based on their quoted daily settlement prices.
Risks could arise from entering into futures and written options transactions from the potential inability of counterparties to meet the terms of their contracts, the potential inability to enter into a closing transaction because of an illiquid secondary market, and from unexpected movements in interest or exchange rates or securities values.
Repurchase Agreements
A repurchase agreement is a commitment to purchase government securities from a seller who agrees to repurchase the securities at an agreed upon price and date. The excess of the resale price over the purchase price determines the yield on the transaction. Under the terms of the agreement, the market value, including accrued interest, of the government securities will be at least equal to their repurchase price. Repurchase agreements are recorded at cost, which, combined with accrued interest, approximates market value.
Repurchase agreements entail a risk of loss in the event that the seller defaults on its obligation to repurchase the securities. In such case, the Portfolio may be delayed or prevented from exercising its right to dispose of the securities.
Swap Agreements
A swap agreement is a two-party contract under which an agreement is made to exchange returns from predetermined investments or instruments, such as a particular interest rate, foreign currency, or "basket" of securities representing a particular index. The gross returns to be exchanged or "swapped" between the parties are calculated based on a "notional amount", which, each business day, is valued to determine each party's obligation under the contract. Fluctuations in value are recorded as unrealized gains and losses during the term of the contract.
Commonly used swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa.
Risks could arise from entering into swap agreements from the potential inability of counterparties to meet the terms of their contracts, and from the potential inability to enter into a closing transaction. It is possible that developments in the swaps market, including potential governmental regulation, could affect the Portfolios's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Investment Transactions and Investment Income
Securities transactions are accounted for on the trade date. Realized gains and losses from securities sold are recognized on the specific identification basis. Dividend income is recorded on the ex-dividend date. Corporate actions, including dividends, on foreign securities are recorded on the ex-dividend date or, if such information is not available, as soon as reliable information is available from the Trust's sources. Interest income is recorded on the accrual basis and includes the accretion of discount and amortization of premium.
Distributions to Shareholders
Dividends, if any, from net investment income are declared and paid at least annually by all Portfolios other than Money Market. In the case of Money Market, dividends are declared daily and paid monthly. Net realized gains from investment transactions, if any, are distributed at least annually. Distributions to shareholders are recorded on the ex-dividend date.
3. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
The Portfolios have entered into investment management agreements with American
Skandia Investment Services, Inc. (the "Investment Manager") which provide that
the Investment Manager will furnish each Portfolio with investment advice and
investment management and administrative services. The Investment Manager has
engaged the following firms as Sub-advisors for their respective Portfolios:
Putnam Investment Management, Inc. for Putnam International Equity, Balanced,
and Value Growth & Income; Lord Abbett & Co. for Growth and Income; Janus
Capital Corporation for Growth and Overseas Growth; J. P. Morgan Investment
Management Inc. for Money Market; Federated Investment Counseling for Utility
Income and High Yield; T. Rowe Price Associates, Inc. for Asset Allocation,
Natural Resources, and Small Company Value; Pacific Investment Management Co.
for Total Return Bond and Limited Maturity Bond; INVESCO Trust Co. for Equity
Income; Founders Asset Management, Inc. for Capital Appreciation and Passport;
Rowe Price-Fleming International, Inc., a United Kingdom Corporation, for T.
Rowe International Equity and International Bond; Berger Associates, Inc. for
Berger Capital Growth; Robertson, Stephens & Company Investment Management, L.P.
for Value + Growth; American Century Investment Management, Inc. for Strategic
Balanced and International Growth; and Marsico Capital Management, LLC for
Marsico Capital Growth. The Investment Manager receives a fee, computed daily
and paid monthly, based on an annual rate of 1.00%, .75%, .90%, .50%, .75%,
.75%, .75%, .85%, .65%, .75%, .90%, 1.00%, .80%, .75%, 1.00%, .90%, .65%, 1.00%,
1.00%, .75%, .85%, 1.00%, .90%, and .90% of the average daily net assets of the
Putnam International Equity, Growth and Income, Growth, Money Market, Utility
Income, Balanced, High Yield, Asset Allocation, Total Return Bond, Equity
Income, Capital Appreciation, T. Rowe International Equity, International Bond,
Berger Capital Growth, Passport, Natural Resources, Limited Maturity Bond, Value
+ Growth, Overseas Growth, Value Growth & Income, Strategic Balanced,
International Growth, Small Company Value, and Marsico Capital Growth
Portfolios, respectively. The fees for Putnam International Equity are at the
rate of .85% for average daily net assets in excess of $75 million, for Utility
Income are at the rate of .60% for average daily net assets in excess of $50
million, and for Balanced are at the rate of .70% for average daily net assets
in excess of $300 million. The Investment Manager voluntarily waived .05% from
its fee for the Money Market Portfolio during 1997 and, since November 1, 1997,
voluntarily waived .05% from its fee for the Growth Portfolio on average daily
net assets in excess of $1 billion.
The Investment Manager pays each Sub-advisor a fee, computed daily and paid monthly, based on an annual rate of .65%, .50%, .60%, .25%, .50%, .45%, .50%, .50%, .30%, .50%, .65%, .75%, .40%, .55%, .60%, .60%, .30%, .60%, .65%, .45%, .50%, .70%, .60%, and .45% of the average daily net assets of the Putnam International Equity, Growth and Income, Growth, Money Market, Utility Income, Balanced, High Yield, Asset Allocation, Total Return Bond, Equity Income, Capital Appreciation, T. Rowe International Equity, International Bond, Berger Capital Growth, Passport, Natural Resources, Limited Maturity Bond, Value + Growth, Overseas Growth, Value Growth & Income, Strategic Balanced, International Growth, Small Company Value, and Marsico Capital Growth Portfolios, respectively. The
Sub-advisors for the Growth, Money Market, and T. Rowe International Equity Portfolios are currently voluntarily waiving a portion of their fee payable by the Investment Manager. The annual rates of the fees payable by the Investment Manager to the Sub-advisors of all Portfolios, other than International Bond and Marsico Capital Growth, are reduced for Portfolio net assets in excess of specified levels.
The Investment Management Agreement with each Portfolio provides that the Investment Manager will reimburse the Portfolio to prevent its expenses from exceeding a specific percentage limit. During the year ended December 31, 1997, the Investment Manager reimbursed Money Market and Strategic Balanced in the amount of $238,802 and $13,582, respectively.
Certain officers and Trustees of the Trust are officers or directors of the Investment Manager. The Trust pays no compensation directly to its officers or interested Trustees.
4. TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company under the Internal Revenue Code and to distribute all of its taxable income, including any net realized gains on investments, to shareholders. Accordingly, no provision for federal income or excise tax has been made.
Income and capital gains of the Portfolios are determined in accordance with both tax regulations and generally accepted accounting principles. Such may result in temporary and permanent differences between tax basis earnings and earnings reported for financial statement purposes. Temporary differences that result in over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Permanent differences in the recognition of earnings are reclassified to additional paid-in capital. Distributions in excess of tax-basis earnings are recorded as a return of capital.
Capital Loss Carryforwards
At December 31, 1997, the following Portfolios had, for federal income tax purposes, capital loss carryforwards available to offset future net realized capital gains.
EXPIRATION
DECEMBER 31,
-----------------------
AMOUNT 2004 2005
---------- -------- ----------
Capital Appreciation........................................... $3,166,259 $ -- $3,166,259
Limited Maturity Bond.......................................... 606,299 606,299 --
Value + Growth................................................. 3,619,886 7,892 3,611,994
Overseas Growth................................................ 1,943,421 -- 1,943,421
Strategic Balanced............................................. 355,092 -- 355,092
International Growth........................................... 225,626 -- 225,626
|
5. PORTFOLIO SECURITIES
Purchases and sales of securities, during the period ended December 31, 1997, were as follows ($ in thousands):
U.S. GOVERNMENT SECURITIES OTHER SECURITIES
--------------------------------- ---------------------------------
PURCHASES SALES PURCHASES SALES
-------------- -------------- -------------- --------------
Putnam International Equity........ $ -- $ -- $ 425,935 $ 425,960
Growth and Income.................. 8,109 21,269 555,171 258,368
Growth............................. -- -- 1,317,930 1,094,418
Utility Income..................... -- -- 154,803 119,144
Balanced........................... 234,531 228,482 257,620 269,777
High Yield......................... 7,308 6,876 271,987 76,730
Asset Allocation................... 5,807 275 83,864 16,321
Total Return Bond.................. 1,197,416 1,267,253 269,034 58,102
Equity Income...................... 16,605 4,833 475,191 319,797
Capital Appreciation............... -- -- 202,210 170,805
T. Rowe International Equity....... -- -- 134,593 85,493
International Bond................. 1,568 1,471 220,738 183,519
Berger Capital Growth.............. -- -- 489,257 459,117
Passport........................... -- -- 76,161 84,692
Natural Resources.................. -- -- 64,251 43,047
Limited Maturity Bond.............. 238,995 85,503 49,558 27,245
Value + Growth..................... -- -- 492,568 311,200
Overseas Growth.................... -- -- 332,226 109,443
Value Growth & Income.............. -- -- 148,264 45,951
Strategic Balanced................. 4,825 -- 33,423 10,211
International Growth............... -- -- 57,563 27,744
Small Company Value................ -- -- 175,690 5,616
Marsico Capital Growth............. -- -- 6,378 --
|
At December 31, 1997, the cost and unrealized appreciation or depreciation in value of the investments owned by the Portfolios, for federal income tax purposes, were as follows ($ in thousands):
GROSS GROSS NET UNREALIZED
AGGREGATE UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------- ------------ ------------ --------------
Putnam International Equity..................... $ 375,161 $ 50,793 $(15,153) $ 35,640
Growth and Income............................... 785,810 167,311 (15,016) 152,295
Growth.......................................... 1,143,981 401,726 (21,533) 380,193
Money Market.................................... 760,025 -- -- --
Utility Income.................................. 132,632 26,731 (895) 25,836
Balanced........................................ 329,116 34,456 (4,555) 29,901
High Yield...................................... 410,043 21,129 (1,349) 19,780
Asset Allocation................................ 181,278 36,825 (3,904) 32,921
Total Return Bond............................... 750,932 6,797 (1,384) 5,413
Equity Income................................... 517,926 98,176 (3,415) 94,761
Capital Appreciation............................ 236,635 56,715 (14,446) 42,269
T. Rowe International Equity.................... 396,300 89,073 (46,481) 42,592
International Bond.............................. 129,399 1,978 (4,650) (2,672)
Berger Capital Growth........................... 183,355 13,453 (10,633) 2,820
Passport........................................ 106,801 18,002 (6,833) 11,169
Natural Resources............................... 93,500 16,066 (13,348) 2,718
Limited Maturity Bond........................... 340,201 2,877 (835) 2,042
Value + Growth.................................. 226,418 19,307 (11,870) 7,437
Overseas Growth................................. 242,071 22,319 (8,948) 13,371
Value Growth & Income........................... 110,884 8,026 (2,414) 5,612
Strategic Balanced.............................. 28,430 1,986 (166) 1,820
International Growth............................ 32,864 2,081 (873) 1,208
Small Company Value............................. 195,135 22,490 (5,681) 16,809
Marsico Capital Growth.......................... 12,225 52 (29) 23
|
6. WRITTEN OPTIONS TRANSACTIONS
Written options transactions, during the year ended December 31, 1997, were as follows (in thousands):
TOTAL RETURN BOND LIMITED MATURITY BOND
--------------------- ---------------------
NUMBER OF NUMBER OF
CONTRACTS PREMIUM CONTRACTS PREMIUM
--------- ------- --------- -------
Balance at beginning of year............................. 962 $ 669 143 $ 44
Written.................................................. 750 495 -- --
Expired.................................................. (1,712) (1,164) (143) (44)
Exercised................................................ -- -- -- --
Closed................................................... -- -- -- --
------ ------- ---- ----
Balance at end of year................................... -- $ -- -- $ --
====== ======= ==== ====
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APPENDIX
Description of Certain Debt Securities Ratings
Moody's Investors Service, Inc. ("Moody's")
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or exceptionally stable, margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; 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 which are 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.
Caa -- Bonds which are 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 which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Standard & Poor's Corporation ("Standard & Poor's")
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a strong capacity to pay interest and repay principal, and differs from the highest rated issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions.
BB -- Debt rated 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. The BB rating is also used for debt subordinated to senior debt that is assigned an actual or implied BBB rating.
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 or 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, economic or financial conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.
C -- 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 Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-) -- Ratings from AA to CCC may be modified by the addition of a plus of minus sign to show relative standing within the major rating categories.
c -- The letter c indicates that the holder's option to tender the security for purchase may be canceled under certain prestated conditions enumerated in the tender option documents.
L -- The letter L indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is federally insured and interest is adequately collateralized. In the case of certificates of deposit, the letter L indicates that the deposit, combined with other deposits being held in the same and right capacity, will be honored for principal and accrued predefault interest up to the federal insurance limits within 30 days after closing of the insured institution or, in the event that the deposit is assumed by a successor insured institution, upon maturity.
p -- The letter p indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
* -- Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
r -- The r is attached to highlight derivative, hybrid, and certain other obligations that Standard & Poor's believes may experience high volatility or high variability in expected returns due to noncredit risks. Examples of such obligations are: securities whose principal or interest return is indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and principal-only mortgage securities.
Description of Certain Commercial Paper Ratings
Moody's
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 -- Issuers rated Prime-3 (or related supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime rating categories.
Standard & Poor's
A-1 -- This highest category indicates that the degree of safety regarding time payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign designation.
A-2 -- Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of the changes in circumstances than obligations carrying the higher designations.
B -- Issues rated B are regarded as having only speculative capacity for timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
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 Standard & Poor's believes that such payments will be made during such grace period.
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial statements contained in Part A:
(1) Financial Highlights for the period April 19, 1989
(commencement of operations) to December 31, 1997.
Financial Statements contained in Part B:
(2) Audited Financial Statements for the Trust for the year
ended December 31, 1997.
(a) Independent Auditors' Report;
(b) Schedules of Investments as of December 31, 1997;
(c) Statements of Assets and Liabilities as of December 31, 1997;
(d) Statements of Operations for the year ended December 31, 1997;
(e) Statements of Changes in Net Assets for the years ended December 31, 1996 and
December 31, 1997;
(f) Financial Highlights for the period April
19, 1989 (commencement of operations) to
December 31, 1997; and
(g) Notes to Financial Statements.
(b) Exhibits
1. (a) Declaration of Trust of Registrant.
(b) Amendment to Agreement and Declaration of Trust of Registrant.
(c) Amendment to Declaration of Trust of Registrant.
2. By-laws of Registrant.
3. None.
4. Articles III and VI of the Registrant's Declaration of Trust and Article 11 of the Registrant's
By-laws.
5. (a) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Lord Abbett Growth and Income Portfolio.
(b) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the JanCap Growth Portfolio.
(c) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST Money Market.
(d) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Federated High Yield Portfolio.
(e) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the T. Rowe Price Asset Allocation Portfolio.
(f) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the T. Rowe Price International Equity Portfolio.
(g) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Founders Capital Appreciation Portfolio.
(h) Investment Management Agreement between
Registrant and American Skandia Life
Investment Management, Inc. for the INVESCO
Equity Income Portfolio.
(i) Investment Management Agreement between
Registrant and American Skandia Life
Investment Management, Inc. for the PIMCO
Total Return Portfolio.
(j) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for T. Rowe Price Natural Resources Portfolio.
(k) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for PIMCO Limited Maturity Bond Portfolio.
i (l) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the T. Rowe Price International Bond Portfolio.
i (m) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Robertson Stephens Value + Growth Portfolio.
ii (n) Investment Management Agreement between
Registrant and American Skandia Investment
Services, Incorporated for the AST Janus
Overseas Growth Portfolio.
ii (o) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the T. Rowe Price Small Company Value Portfolio.
ii (p) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Founders Passport Portfolio.
ii (q) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Twentieth Century International Growth Portfolio.
ii (r) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Twentieth Century Strategic Balanced Portfolio.
ii (s) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Putnam Value Growth & Income Portfolio.
ii (t) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Putnam International Equity Portfolio.
ii (u) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Putnam Balanced Portfolio.
v (v) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Lord Abbett Small Cap Value Portfolio.
v (w) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Cohen & Steers Realty Portfolio.
v (x) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Stein Roe Venture Portfolio.
v (y) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Bankers Trust Enhanced 500 Portfolio.
v (z) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Marsico Capital Growth Portfolio.
* (aa) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Neuberger&Berman Mid-Cap Value Portfolio.
* (bb) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Neuberger&Berman Mid-Cap Growth Portfolio.
(cc) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Lord, Abbett & Co. for the Lord Abbett Growth and Income Portfolio.
(dd) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Janus Capital Corporation for the JanCap Growth Portfolio.
(ee) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
J.P. Morgan Investment Management Inc. for the AST Money Market Portfolio.
(ff) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Federated Investment Counseling for the Federated High Yield Portfolio.
(gg) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
T. Rowe Price Associates, Inc. for the T. Rowe Price Asset Allocation Portfolio.
(hh) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Rowe Price-Fleming International, Inc. for the T. Rowe Price International Equity
Portfolio.
(ii) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Founders
Asset Management LLC for the Founders Capital Appreciation Portfolio.
(jj) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Pacific Investment Management Company for the PIMCO Total Return Portfolio.
(kk) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
T. Rowe Price Associates, Inc. for the T. Rowe Price Natural Resources Portfolio.
(ll) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Pacific Investment Management Company for the PIMCO Limited Maturity Bond Portfolio.
i (mm) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Rowe Price-Fleming International, Inc. for the T. Rowe Price International Bond
Portfolio.
ii (nn) Sub-advisory Agreement between American
Skandia Investment Services, Incorporated
and Janus Capital Corporation for the AST
Janus Overseas Growth Portfolio.
ii (oo) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
T. Rowe Price Associates, Inc. for the T. Rowe Price Small Company Value Portfolio.
(pp) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Founders Asset Management LLC for the Founders Passport Portfolio.
ii (qq) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Investors Research Corporation for the Twentieth Century International Growth
Portfolio.
ii (rr) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Investors Research Corporation for the Twentieth Century Strategic Balanced Portfolio.
ii (ss) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Putnam Investment Management, Inc. for the AST Putnam Value Growth & Income Portfolio.
ii (tt) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Putnam Investment Management, Inc. for the AST Putnam International Equity Portfolio.
ii (uu) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Putnam Investment Management, Inc. for the AST Putnam Balanced Portfolio.
iv (vv) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
INVESCO Trust Company for the INVESCO Equity Income Portfolio.
iv (ww) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Robertson, Stephens & Company Investment Management, L.P. for the Robertson Stephens
Value + Growth Portfolio.
v (xx) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Lord, Abbett & Co. for the Lord Abbett Small Cap Value Portfolio.
v (yy) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Cohen & Steers Capital Management, Inc. for the Cohen & Steers Realty Portfolio.
v (zz) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Stein Roe & Farnham Incorporated for the Stein Roe Venture Portfolio.
v (aaa) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Bankers Trust Global Investment Management for the Bankers Trust Enhanced 500
Portfolio.
v (bbb) Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Marsico Capital Management,
LLC for the Marsico Capital Growth
Portfolio.
* (ccc) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Neuberger&Berman Management, Incorporated for the Neuberger&Berman MidCap Value
Portfolio.
* (ddd) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Neuberger&Berman Management, Incorporated for the Neuberger&Berman MidCap Growth
Portfolio.
6. (a) Sales Agreement between Registrant and American Skandia Life Assurance
Corporation.
ii (b) Sales Agreement between Registrant and Kemper Investors Life Insurance Company.
7. None.
8. (a) Custodian Agreement between Registrant and Morgan Stanley Trust Company.
(b) Amended Custodian Agreement between Registrant and Provident National Bank.
(c) Amended Transfer Agency Agreement between Registrant and Provident Financial
Processing Corporation.
9. (a) Amended Administration Agreement between Registrant and Provident Financial Processing
Corporation.
iii (b) Service Agreement between American Skandia Investment Services, Incorporated and
Kemper Investors Life Insurance Company.
10. Consent of Counsel for the Registrant.
11. Independent Auditors' Consent.
12. None.
13. Certificate re: initial $100,000 capital.
14. None.
15. None.
16. Calculation of Performance Information.
17. Financial Data Schedules.
18. None.
--------------------------
* To be filed by amendment.
i Filed as an Exhibit to Post-Effective Amendment No. 18 to Registration Statement, which Amendment was filed via
EDGAR on April 30, 1996, and is incorporated herein by reference.
ii Filed as an Exhibit to Post-Effective Amendment No. 20 to Registration
Statement, which Amendment was filed via EDGAR on December 24, 1996,
and is incorporated herein by reference.
iii Filed as an Exhibit to Post-Effective Amendment No. 21 to Registration
Statement, which Amendment was filed via EDGAR on February 28, 1997,
and is incorporated herein by reference.
iv Filed as an Exhibit to Post-Effective Amendment No. 23 to Registration
Statement, which Amendment was filed via EDGAR on October 7, 1997, and
is incorporated herein by reference.
v Filed as an Exhibit to Post-Effective Amendment No. 24 to Registration
Statement, which Amendment was filed via EDGAR on December 19, 1997,
and is incorporated herein by reference.
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ITEM 25. Persons Controlled By or Under Common Control with Registrant
See Registrant's Prospectus under "Organization and Management of the Trust" and Registrant's Statement of Additional Information under "Management."
ITEM 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of December 1, 1997
-------------- ----------------------
Lord Abbett Growth and Income Portfolio 4
AST Money Market Portfolio 3
JanCap Growth Portfolio 3
AST Janus Overseas Growth Portfolio 4
Federated Utility Income Portfolio 4
Federated High Yield Portfolio 4
T. Rowe Price Asset Allocation Portfolio 4
T. Rowe Price International Equity Portfolio 4
T. Rowe Price Natural Resources Portfolio 4
T. Rowe Price International Bond Portfolio 4
T. Rowe Price Small Company Value Portfolio 4
Founders Capital Appreciation Portfolio 4
Founders Passport Portfolio 4
INVESCO Equity Income Portfolio 4
PIMCO Total Return Bond Portfolio 4
PIMCO Limited Maturity Bond Portfolio 4
Berger Capital Growth Portfolio 4
Robertson Stephens Value + Growth Portfolio 4
Twentieth Century International Growth Portfolio 4
Twentieth Century Strategic Balanced Portfolio 5
Twentieth Century Value Growth & Income Portfolio 4
AST Putnam International Equity Portfolio 3
AST Putnam Balanced Portfolio 4
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ITEM 27. Indemnification
Article VIII of the Registrant's Declaration of Trust provides as follows:
The Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or trustees of
another organization in which the Trust has any interest as a shareholder,
creditor or otherwise) (hereinafter referred to as a "Covered Person") against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by as fines and penalties, and counsel fees reasonably
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or any other proceeding, whether civil or criminal, before any
court or administrative legislative body, in which such Covered Person may be or
may have been involved as a party or otherwise or with which such Covered Person
may be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Covered Person except with respect to any matter as
to which such Covered Person shall have been finally adjudicated in any such
action, suit or other proceeding (a) not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust or (b) to be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties) shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such Covered Person repay amounts so paid to the
Trust if it is ultimately determined that indemnification of such expenses is
not authorized under this Article, provided, however, that either (1) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (providing that a majority of the disinterested Trustees then in the
office act on the matter), or independent legal counsel in a written opinion
shall have determined, based upon a review of readily available facts (as
opposed to a full trial type inquiry) that there is reason to believe that such
Covered Person will be found entitled to indemnification under this Article.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant or expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser
American Skandia Investment Services, Incorporated ("ASISI"), One Corporate Drive, Shelton, Connecticut 06484, serves as the investment manager to the Registrant. Information as to the officers and directors of ASISI is included in ASISI's Form ADV (File No. 801-40532), including the amendments to such Form ADV filed with the Commission on August 13, 1997, April 11, 1997, October 22, 1996, March 22, 1996 and April 11, 1995, and is incorporated herein by reference.
ITEM 29. Principal Underwriter
Registrant's shares are presently offered exclusively as an investment medium for life insurance companies writing both variable annuity and variable life insurance policies. Pursuant to an exemptive order of the Commission, Registrant may also sell its shares directly to qualified plans. If Registrant does so, it intends to use American Skandia Marketing, Incorporated ("ASM, Inc.") or another affiliated broker-dealer as underwriter, if so required by applicable law. ASM, Inc. is registered as a broker-dealer with the Commission and the National Association of Securities Dealers. It is an affiliate of American Skandia Life Assurance Corporation, being a wholly-owned subsidiary of American Skandia Investment Holding Corporation.
The following individuals, all of whom have as their principal business address, One Corporate Drive, Shelton, Connecticut 06484, are the current officers and/or directors of ASM, Inc.:
Jan R. Carendi Chairman, Chief Executive Officer & Director Gordon C. Boronow Deputy Chief Executive Officer &Director Wade A. Dokken President, Deputy Chief Executive Officer & Director Thomas M. Mazzaferro Executive Vice President, Chief Financial Officer & Director Kimberly A. Bradshaw Vice President & National Accounts Manager Robert Brinkman Senior Vice President, National Sales Manager Daniel Darst Senior Vice President National Marketing Director & Director Paul DeSimone Vice President, Corporate Controller & Director Walter G. Kenyon Vice President & National Accounts Manager Lawrence Kudlow Senior Vice President & Chief Economist N. David Kuperstock Vice President, Product Development & Director Brian O'Connor Vice President & National Sales Manager, Internal Wholesaling Hayward Sawyer Senior Vice President, National Sales Manager & Director Christian Thwaites Vice President, Qualified Plans Bayard F. Tracy Senior Vice President, National Sales Manager & Director M. Priscilla Pannell Corporate Secretary Kathleen A. Chapman Assistant Corporate Secretary |
Of the above, the following individuals are also officers and/or directors of Registrant: Jan R. Carendi (President, Principal Executive Officer & Trustee); Gordon C. Boronow (Vice President & Trustee); and Thomas M. Mazzaferro (Treasurer).
ITEM 30. Location of Accounts and Records
Records regarding the Registrant's securities holdings are maintained at Registrant's Custodians, PNC Bank, Airport Business Center, International Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, and Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201. Certain records with respect to the Registrant's securities transactions are maintained at the offices of the various sub-advisors to the Registrant. The Registrant's corporate records are maintained at its offices at One Corporate Drive, Shelton, Connecticut 06484. The Registrant's financial and interestholder ledgers and similar financial records are maintained at the offices of its Administrator, PFPC Inc., 103 Bellevue Parkway, Wilmington, DE 19809. Certain records regarding the shareholders of the Registrant are maintained at the offices of the Registrant's transfer agent, Boston Financial Data Services, Inc., Two Heritage Drive, Quincy, Massachusetts 02171.
ITEM 31. Management Services
None.
ITEM 32. Undertakings
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Amendment to its Registration Statement to be signed on its behalf by the Undersigned, thereunto duly authorized, in the City of Shelton and State of Connecticut, on the 2nd day of March, 1998.
By: /s/ Eric C. Freed
Eric C. Freed
Secretary
|
Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Jan R. Carendi President (Principal 3/2/98
Jan R. Carendi Executive Officer)
and Trustee
/s/ Gordon Boronow* Vice President 3/2/98
Gordon C. Boronow and Trustee
/s/ Eric C. Freed Secretary 3/2/98
Eric C. Freed
/s/ Thomas M. Mazzaferro Treasurer 3/2/98
Thomas M. Mazzaferro
/s/ Richard G. Davy, Jr. Controller 3/2/98
Richard G. Davy, Jr.
/s/ David E. A. Carson* Trustee 3/2/98
David E. A. Carson
/s/ Julian A. Lerner* Trustee 3/2/98
Julian A. Lerner
/s/ Thomas M. O'Brien* Trustee 3/2/98
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 3/2/98
F. Don Schwartz
|
*By: /s/ Eric C. Freed
Eric C. Freed
*Pursuant to Powers of Attorney previously filed with Post-Effective
Amendment No. 22 to the Registration Statement, as filed with the Commission on
April 30, 1997.
|
Registration No. 33-24962
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
FILED WITH POST-EFFECTIVE AMENDMENT NO. 25
TO FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 AND
INVESTMENT COMPANY ACT OF 1940
AMERICAN SKANDIA TRUST
Exhibits
Table of Contents
Exhibit Number Description
1(a) Form of Declaration of Trust of Registrant
1(b) Amendment to Agreement and Declaration of Trust of
Registrant.
1(c) Amendment to Declaration of Trust of Registrant.
2 Form of By-laws of Registrant.
4 Articles III and VI of the
Registrant's Declaration of
Trust and Article 11 of the
Registrant's By-laws.
5(a) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the Lord Abbett Growth and Income
Portfolio.
5(b) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the JanCap Growth Portfolio.
5(c) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the AST Money Market.
5(d) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the Federated High Yield Portfolio.
5(e) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the T. Rowe Price Asset Allocation
Portfolio.
5(f) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the T. Rowe Price International Equity
Portfolio.
5(g) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the Founders Capital Appreciation
Portfolio.
5(h) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the INVESCO Equity Income Portfolio.
5(i) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for the PIMCO Total Return Portfolio.
5(j) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for T. Rowe Price Natural Resources Portfolio.
5(k) Investment Management Agreement between Registrant
and American Skandia Life Investment Management,
Inc. for PIMCO Limited Maturity Bond Portfolio.
5(aa) Investment Management Agreement between Registrant
and American Skandia Investment Services, Inc. for
Neuberger&Berman MidCap Value Portfolio.
5(bb) Investment Management Agreement between Registrant
and American Skandia Investment Services, Inc. for
Neuberger&Berman MidCap Growth Portfolio.
5(cc) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and Lord, Abbett &
Co. for the Lord Abbett Growth and Income Portfolio.
5(dd) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and Janus Capital
Corporation for the JanCap Growth Portfolio.
5(ee) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and J.P. Morgan
Investment Management Inc. for the AST Money Market
Portfolio.
5(ff) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and Federated
Investment Counseling for the Federated High Yield
Portfolio.
5(gg) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and T. Rowe Price
Associates, Inc. for the T. Rowe Price Asset
Allocation Portfolio.
5(hh) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and Rowe
Price-Fleming International, Inc. for the T. Rowe
Price International Equity Portfolio.
5(ii) Sub-advisory Agreement between American Skandia
Investment Services, Inc. and Founders Asset
Management LLC for the Founders Capital
Appreciation Portfolio.
5(jj) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and Pacific
Investment Management Company for the PIMCO Total
Return Portfolio.
5(kk) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and T. Rowe Price
Associates, Inc. for the T. Rowe Price Natural
Resources Portfolio.
5(ll) Sub-advisory Agreement between American Skandia
Life Investment Management, Inc. and Pacific
Investment Management Company for the PIMCO Limited
Maturity Bond Portfolio.
5(pp) Sub-advisory Agreement between American Skandia
Investment Services, Inc. and Founders Asset
Management LLC for the Founders Passport Portfolio.
5(ccc) Sub-advisory Agreement between American Skandia
Investment Services, Inc. and Neuberger&Berman
Management Incorporated for the Neuberger&Berman
MidCap Value Portfolio.
5(ddd) Sub-advisory Agreement between American Skandia
Investment Services, Inc. and Neuberger&Berman
Management Incorporated for the Neuberger&Berman
MidCap Growth Portfolio.
6(a) Sales Agreement between Registrant and American
Skandia Life Assurance Corporation.
8(a) Custodian Agreement between Registrant and Morgan
Stanley Trust Company for the Henderson
International Growth Portfolio.
8(b) Amended Custodian Agreement between Registrant and
Provident National Bank.
8(c) Amended Transfer Agency Agreement between
Registrant and Provident Financial Processing
Corporation.
9(a) Amended Administration Agreement between Registrant
and Provident Financial Processing Corporation.
10 Consent of Counsel for the Registrant
11. Independent Auditors' Consent
13 Certificate re: initial $100,000 capital.
16 Calculation of Performance Information
17 Financial Data Schedules
|
HENDERSON GLOBAL ASSET TRUST
AGREEMENT AND DECLARATION OF TRUST
AGREEMENT AND DECLARATION OF TRUST made this 31st day of October, 1988, by the Trustees hereunder, and by the holders of shares of beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into their hands as trustees of a Massachusetts voluntary association with transferable shares in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities and other assets, which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the pro rata benefit of the holders from time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I NAME AND DEFINITIONS
Section 1. Name. This Trust shall be known as "Henderson Global Asset Trust", and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided: (a) The "Trust" refers to the Massachusetts business trust established by this Agreement and Declaration of Trust, as amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust named herein or elected in accordance with Article IV;
(c) "Shares" means the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time or, if more than one series of Shares is authorized by the Trustees, the equal proportionate transferable units into which each series of Shares shall be divided from time to time
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission", "Interested Person", "Principal Underwriter" and "Majority Shareholder Vote" (the 67% or 50% requirement of the third sentence of Section 2(a)(42) of the 1940 Act, whichever may be applicable) shall have the meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust as amended or restated from time to time; and
(h) "By-laws" shall mean the By-laws of the Trust as amended from time to time.
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to provide investors a managed investment primarily in securities and debt instruments and to carry on such other business as the Trustees may from time to time determine pursuant to their authority under this Declaration of Trust.
ARTICLE III
SHARES
Section 1. Division of Beneficial Interest. The Shares of the Trust shall be issued in one or more series as the Trustees may, without shareholder approval, authorize. Each series shall be preferred over all other series in respect of the assets allocated to that series. The beneficial interest in each series shall at all times be divided into Shares, with $.001 par value, each of which shall represent an equal proportionate interest in the series with each other Share of the same series, none having priority or preference over another. The number of Shares authorized shall be unlimited. The Trustees may from time to time divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the series.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent. No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the issuance of Share certificates, the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or Any transfer or similar agent, as the case may be, shall be conclusive as to who are the Shareholders of each series and as to the number of Shares of each series held from time to time by each Shareholder.
Section 3. Investment in the Trust. The Trustees shall accept investments in the Trust from such persons and on such terms and for such consideration, which may consist of cash or tangible or intangible property or a combination thereof, as they from time to time authorize.
All consideration received by the Trust for the issue or sale of Shares of each series, together with all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation thereof, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to the series of Shares with respect to which the same were received by the Trust for all purposes, subject only to the rights of creditors, and shall be so handled upon the books of account of the Trust and are herein referred to as "assets of" such series.
Section 4. No Preemptive Rights Shareholders shall have no preemptive or other right to subscribe to any additional shares or other securities issued by the Trust.
Section 5. Status of Shares and Limitation of personal Liability. Shares shall be deemed to be personal property giving only the rights provided in this instrument. Every Shareholder by virtue of having become a Shareholder hall be held to have expressly assented and agreed to the terms hereof and to have become a party hereto. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the same nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but only to the rights of said decedent under this Trust. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders partners. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally any Shareholder, nor except as specifically provided herein to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay.
ARTICLE IV
THE TRUSTEES
Section 1. Election. The persons who shall act as Trustees until the first annual meeting or until their successors are duly chosen and qualify are the initial Trustees executing this Agreement and Declaration of Trust or any counterpart thereof., The number of Trustees shall be as provided in the By-laws or as fixed from time to time by the Trustees. The shareholders may elect Trustees at any meeting of Shareholders called by the Trustees for that purpose. Each Trustee shall serve during the continued lifetime of the Trust Until he dies, resigns or is removed, or, if sooner, until the next meeting of Shareholders called for the purpose of electing Trustees and the election and qualification of his successor. Any Trustee may resign at any time by written instrument signed by him and delivered to any officer of the Trust, to each other Trustee or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Except to the extent expressly provided in a written agreement with the Trust, no Trustee resigning and no Trustee removed shall have any right to any compensation for any period following his resignation or removal, or any right to damages on account of such removal.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death, declination, resignation, retirement, removal or incapacity of the Trustees, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Trustees and they shall have all powers no I necessary or convenient to carry out that responsibility. Without limiting the foregoing, the Trustees may adopt By-laws not inconsistent with this Declaration of Trust providing for the conduct of the business of the Trust and may amend and repeal them to the extent that such By-laws do not reserve that right to the Shareholders; they may enlarge or reduce their number, may fill vacancies in their number, including vacancies caused by enlargement of their number, and may remove Trustees with or without cause; they may elect and remove, with or without cause, such officers and appoint and terminate such agents as they consider appropriate; they may appoint from their own number, and terminate, any one or more committees consisting of two or more Trustees, including an executive committee which may, when the Trustees are not in session, exercise some or all of the power and authority of the Trustees as the Trustees may determine; they may employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities, retain a transfer agent or a Shareholder servicing agent, or both, provide for the distribution of Shares by the Trust, through one or more principal underwriters or otherwise, set record dates for the determination of Shareholders with respect to various matters, and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all of the assets of the Trust;
(c) To act as a distributor of shares and as underwriter of, or broker or dealer in, securities or other property;
(d) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper;
(e) To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities;
(f) To hold any security or property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in the name of the Trustees or of the Trust or in the name of a custodian, sub-custodian or other depositary or a nominee or nominees or otherwise;
(g) To allocate assets, liabilities and expenses of the Trust to a particular series of shares or to apportion the same among two or more series, provided that any liabilities or expenses incurred by a particular series of Shares shall be payable solely out of the assets of that series;
(h) To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer, any security of which is or was held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer, and to pay calls or subscriptions with respect to any security held in the Trust;
(i) To join with other security holders in acting through a committee, depositary, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depositary or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depositary or trustee as the Trustees shall deem proper;
(j) To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including but not limited to claims for taxes;
(k) To enter into joint ventures, general or limited partnerships and any other combinations or associations;
(1) To borrow funds;
(m) To enter into contracts of every kind and description;
(n) To endorse or guarantee the payment of any notes or other obligations of any person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; and to mortgage and pledge the Trust property or any part thereof to secure any of or all such obligations;
(o) To purchase and pay for entirely out of Trust property such insurance as they may deem necessary or appropriate for the conduct of the business, including without limitation, insurance policies insuring the assets of the Trust and payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, trustees, officers, employees, agents, investment advisers or managers principal underwriters, or independent contractors of the Trust individually against all claims and liabilities of every nature arising by reason of holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such person as Shareholder, Trustee, officer, employee, agent, investment adviser or manager, principal underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such person against such liability;
(p) To pay pensions for faithful service, as deemed appropriate by the Trustees, and to adopt, establish and carry out pension, profit-sharing share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust; and
(q) To engage in any other lawful act or activity in which corporations organized under the Massachusetts Business Corporation Law may engage.
The Trustees shall not in any way be bound or limited by any present or future law or custom in regard to investments by trustees.
Except as otherwise provided herein or from time to take in the By-laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of Trustees (a quorum being present), within or without Massachusetts, including any meeting held by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting, or by written consents of a majority of the Trustees then in office.
Section 4. Payment of Expenses by Trust. The Trustees are authorized to pay or to cause to be paid out of the principal or income of the Trust, or partly out of principal and partly out of income, as they deem fair, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust, in connection with the management thereof, or in connection with the financing of the sale of Shares, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, any investment adviser, manager, or sub-adviser, principal underwriter, auditor, counsel, custodian, transfer agent, shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur, provided, however, that all expenses, fees, charges, taxes and liabilities incurred or arising in connection with a particular series of Shares as determined by the Trustees, shall be payable solely out of the assets of that series.
Section 5. Ownership of Assets of the Trust. Title to all of the assets of each series of Shares and of the Trust shall at all times be considered as vested in the Trustees.
Section 6. Advisory, Management and Distribution Services. The Trustees may, at any time and from time to time, contract for exclusive or nonexclusive advisory and/or management services with any corporation, trust, association or other organization (the "Manager"), every such contract to comply with such requirements and restrictions as may be set forth in the By-laws; and any such contract may provide for one or more subadvisers who shall perform all or part of the obligations of the Manager under such contract and may contain such other terms interpretive of or in addition to said requirements and restrictions as the Trustees may determine, including, without limitations authority to determine from time to time what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held uninvested and to make changes in the Trust's investments. The Trustees may also, at any time and from time to time, contract with the Manager or any other corporation, trust, association or other organization, appointing it exclusive or nonexclusive distributor or principal underwriter for the Shares, every such contract to comply with such requirements and restrictions as may be set forth in the By-laws; and any such contract may contain such other terms interpretive of or in addition to said requirements and restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, adviser, principal underwriter or distributor or agent of or for any corporation, trust, association, or other organization, or of or for any parent or affiliate of any organization, with which an advisory or management contract, or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other agency contract may have been or may hereafter be made, or that any such organization, or any parent or affiliate thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with which an advisory or management Contract or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other agency contract may have been or may hereafter be made also has an advisory or management contract, or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other agency contract with one or more other corporations, trusts, associations or other organizations, or has other business or interests shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Shareholders shall have such power to vote as is provided for in, and may hold meetings and take actions pursuant to the provisions of the By-laws.
ARTICLE VI
DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES
Section 1. Distributions. The-Trustees may each year, or more frequently if they so determine, distribute to the Shareholders of each series such income and capital gains relating to such series, accrued or realized, as the Trustees may determine, after providing for actual and accrued expenses and liabilities (including such reserves as the Trustees may establish) determined in accordance with good accounting practices, The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital and their determination shall be binding upon the Shareholders. Distributions of each year's income of each series shall be distributed pro rata to Shareholders of a series in proportion to the number of Shares of such series held by each of them. Such distributions shall be made in cash or hares or a combination thereof as determined by the Trustees. Any such distribution paid in Shares of a series will be paid at the net asset value thereof as determined in accordance with the By-laws.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder f6 redemption, upon
the presentation of any certificate for the Shares to be purchased, a proper
instrument of transfer and a request directed to the Trust or a person
designated by the Trust that the Trust purchase such Shares, or in accordance
with such other procedures for redemption as the Trustees may from time to
time authorize; and the Trust will pay therefor the net asset value thereof,
as next determined in accordance with the By-laws, less such redemption
charge or fee as the Trustees may determine from time to time. Payment for
said Shares shall be made by the Trust to the Shareholder within seven days
after the date on which the request is made. The obligation set forth in this
Section 2 is subject to the provision that in the event that any time the New
York Stock Exchange is closed for other than customary weekends or holidays
or, if permitted by rules of the Commission, during periods when trading on
the Exchange is restricted or during any emergency which makes it impractical
for the Trust to dispose of its investments or to determine fairly the value
of its net assets, or during any other period permitted by order of the
commission for the protection of investors, such obligation may be suspended
or postponed by the Trustees. The Trust may also purchase or repurchase
Shares at a price not exceeding the net asset value of such Shares in effect
when the purchase or repurchase or any contract to purchase or repurchase is
made.
Section 3. Redemptions at the Option of the Trust. The Trust shall have the right at its option and at any time to redeem Shares of any Shareholder at the net asset value thereof as determined in accordance with the By-laws: (i) if at such time such Shareholder owns fewer Shares of a particular series than, or Shares of a particular series having an aggregate net asset value of less than, an amount determined from time to time for such series by the Trustees; or (ii) to the extent that such Shareholder owns Shares of a particular series of Shares equal to or in excess of a percentage of the outstanding Shares of that series determined from time to time by the Trustees; or (iii) to the extent that such Shareholder owns Shares of the Trust representing a percentage equal to or in excess of such percentage of the aggregate number of outstanding Shares of the Trust or the aggregate net asset value of the Trust determined from time to time by the Trustees.
Section 4. Dividends, Distributions, Redemptions and Repurchases. No dividend or distribution (including, without limitation, any distribution paid upon termination of the Trust or of any series) with respect to, nor any redemption or repurchase of, the Shares of any series shall be effected by the Trust other than from the assets allocated to such series.
ARTICLE VII
COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES
Section 1. Compensation. The Trustees as such shall be entitled to reasonable compensation from the Trust; they may fix the amount of their compensation. Nothing herein shall in any way prevent the employment of any Trustee for advisory, management, legal, accounting, investment banking, underwriting, brokerage, or investment dealer or other services and payment for the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agency, employee, manager or principal underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, but nothing herein contained shall protect any Trustee against any liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
Section 1. Trustees, Officers, etc. The Trust shall indemnify each of its Trustees and officers (including persons who serve at the Trust's request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise) (hereinafter referred to as a "Covered Person") against all liabilities and expenses, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by any Covered Person in connection with the defense or disposition of, any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such Covered Person may be or may have been threatened, while in office or thereafter, by reason of being or having been such a Covered Person except with respect to any matter as to which such Covered Person shall have been finally adjudicated in any such action, suit or other proceeding (a) not to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust or (b) to be liable to the Trust or it's Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office. Expenses, including counsel fees so incurred by any such Covered Person (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties) shall be paid from time to time by the Trust in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Covered Person to repay amounts so paid to the Trust if it is ultimately determined that indemnification of such expenses is not authorized under this Article, provided however, that either (a) such Covered Person shall have provided appropriate security for such undertaking, (b) the Trust shall be insured against losses arising from any such advance payments or (c) either a majority of the disinterested Trustees acting on the matter (provided that a majority of the disinterested Trustees then in office act on the matter), or independent legal counsel in a written opinion shall have determined, based upon a review of readily available facts (as opposed to a full trial type inquiry) that there is reason to believe that such Covered Person will be found entitled to indemnification under this Article.
Section 2. Compromise-Payment. As to any matter dispose of
(whether by a compromise payment, pursuant to a consent decree or otherwise)
without an adjudication by a court, or by any other body before which the
proceeding was brought, that such Covered Person either (a) did not act in
good faith in the reasonable belief that his or her action was in the best
interests of the Trust or (b) is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office,
indemnification shall be provided if (a) approved as in the best interests of
the Trust, after notice that it involves such indemnification, by at least a
majority of the disinterested Trustees acting on the,matter (provided that a
majority of the disinterested Trustees then in office act on the matter) upon
a determination, based upon a review of readily available facts (as opposed
to a full trial type inquiry) that such Covered Poison acted in good faith in
the reasonable belief that his or her action was in the best interests of the
Trust and is not liable to the Trust or its Shareholders by reasons of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved it the conduct of his or her office, or (b) there has been
obtained an opinion in writing of independent legal counsel, based upon a
review of readily available facts (as opposed to a full trial type inquiry)
to the effect that such Covered Person appears to have acted in good faith in
the reasonable belief that his or her action was in the best interests of the
Trust and that such indemnification would not protect such Covered Person
against any liability to the Trust to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her
office. Any approval pursuant to this Section shall not prevent the recovery
from any Covered Person of any amount paid to such Covered Person in
accordance with this Section as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have
acted in good faith in the reasonable belief that such Covered Person's
action was in the best interests of the Trust or to have been liable to the
Trust or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
such covered Person's office.
Section 3. Indemnification Not Exclusive. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which such Covered Person may be entitled. As used in this Article VIII, the term "Covered Person" shall include such person's heirs, executors and administrators and a "disinterested Trustee" is a Trustee who is not an "interested person" of the Trust as defined in Section 2(a)(19) of the 1940 Act (or who has been exempted from being an "interested person" by any rule, regulation or order of the commission) and against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending. Nothing contained in this Article shall affect any rights to indemnification to which personnel of the Trust, other than Trustees or officers, and other persons may be entitled by contract or otherwise under law, nor the power of the Trust to purchase and maintain liability insurance on behalf of any such person; provided, however, that the Trust shall not purchase or maintain any such liability insurance in contravention of applicable law, including without limitation the 1940 Act.
Section 4. Shareholders. In case any Shareholder or former Shareholder shall be held to be personally liable solely by reason of his or her being or having been a Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her hairs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled to be held harmless from and indemnified against all loss and expense arising from such liability, but only out of the assets of the particular series of Shares of which he or she is or was a Shareholder.
ARTICLE IX
MISCELLANEOUS
Section 1. Trustees, Shareholders, etc. Not Personally Liable; Notice. All persons extending credit to, contracting with or having any claim against the Trust or a particular series of Shares shall look only to the assets of the Trust or the assets allocated to that particular series of Shares for payment under such credit, contract or claim; and neither the Shareholders nor the Trustees, nor any of the Trut's officers, employees or agents, whether past, present or future, shall be personally liable therefor. Nothing in this Declaration of Trust shall protect any Trustee against any liability to which such Trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officer or officers shall give notice that this Declaration of Trust is on file with the Secretary of The Commonwealth of Massachusetts and shall recite that the same was executed or made by or on behalf of, the Trust or by them as Trustee or Trustees or as officers or officer and not individually and that the obligations of such instrument are not binding upon any of them or the Shareholders individually but are binding only upon the assets and property of the Trust, and may contain such further recital as he or she or they may deem appropriate, but the omission thereof shall not operate to bind any Trustee or Trustees or officer or officers or Shareholder or Shareholders individually.
Section 2. Principal office; Registered Agent. The principal business office of the Trust is to be located at one Exchange Place, Boston, Massachusetts, 02109-2873. The name of the Trust's registered agent is The Boston Company Advisors, Inc., One Exchange Place, Boston, Massachusetts 02109-2873.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The exercise by the Trustees of their powers and discretions hereunder shall be binding upon everyone interested. A Trustee shall be liable for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required.
Section 4. Liability of Third Persons Dealing with Trustees. No person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order.
Section 5. Duration and Termination of Trust. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be terminated at any time by the vote of Shareholders holding at least a majority of the Shares of each series entitled to vote or by the Trustees by written notice to the Shareholders. Any series of Shares may be terminated at any time by vote of Shareholders holding at least a majority of the Shares of such series entitled to vote or by the Trustees by written notice to the Shareholders of such series.
Upon termination of the Trust or of any one or more series of Shares, after paying or otherwise providing for all charges, taxes, expenses and liabilities, whether due or accrued or anticipated, of the Trust or of the particular series as may be determined by the Trustees, the Trust shall in accordance with such procedures as the Trustees consider appropriate reduce the remaining assets to distributable form in cash or shares or other securities, or any combination thereof, and distribute the proceeds to the Shareholders of the series involved, ratably according to the number of Shares of such series held by the several Shareholders of such series on the date of termination.
Section 6. Filing of Copies, References, Headings. The original or a copy of this instrument and of each amendment hereto shall be kept at the office of the Trust where it may be inspected by Any shareholder. A copy of this instrument and of each amendment hereto shall be filed by the Trust with the Secretary of the Commonwealth of Massachusetts and with the Boston City Clerk, as well as any other governmental office where such filing may from time to time be required. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to whether or not any such amendments have been made and as to any matters in connection with the Trust, hereunder, And, with the same effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this instrument or of any such amendments. In this instrument and in any such amendment, references to this instrument and all expressions like "herein", "hereof" and "hereunder" shall be deemed to refer to this instrument as amended or affected by any such amendments. Headings are placed herein for convenience of reference only.
And shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. This instrument may be executed in any number of counterparts each of which shall be deemed an original.
Section 7. Applicable Law. This Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of The Commonwealth of Massachusetts. The Trust shall be of the type commonly called a Massachusetts business trust, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a trust.
Section 8. Amendments. This Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the then Trustees when authorized to do so by vote of Shareholders holding a majority of the Shares of each series entitled to vote, except that an amendment which shall affect the holders of one or more series of Shares but not the holders of all outstanding series shall be authorized by vote of the Shareholders holding a majority of the Shares entitled to vote of each series Affected and no vote of Shareholders of a series not affected shall be required. Amendments having the purpose of changing the name of the Trust or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision contained herein shall not require authorization by Shareholder vote.
IN WITNESS WHEREOF, the undersigned have executed this Instrument as of the day and year first above written.
/s/Andrew Jardine Andrew Jardine, President and Trustee 3 Finsbury Avenue, London EC2M /s/ Kenneth D. Colabella Kenneth D. Colabella, Secretary Treasurer and Trustee 545 First Avenue, Suite 7B New York, New York 10016 |
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
|
On this 31st day of October, 1988 before me personally appeared Andrew Jardine and Kenneth D. Colabella to me known to be the individuals described in and who executed the foregoing instrument, and acknowledged that they executed the same as their free act and deed.
/s/ Thomas R. Westle, Esq. Notary Public, State of New York Commission Expires June 30, 1992 |
AMENDMENT TO
AGREEMENT AND DECLARATION OF TRUST
OF
HENDERSON GLOBAL ASSET TRUST
WHEREAS, the Trustees have previously established a trust to carry on the business of an investment company; and
WHEREAS, the Trustees now desire the change the name of the Trust from "Henderson Global Asset Trust" to "Henderson International Growth Fund";
NOW, THEREFORE, the Trustees hereby declare that effective April 23, 1990 this Agreement and Declaration of Trust is hereby amended as follows:
Article I, Section 1. is hereby amended and restated to read as follows:
ARTICLE I
NAME AND DEFINITIONS
Section 1. Name. This Trust shall be known as Henderson International Growth Fund," and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 11th day of May,1990.
/s/ Richard Garland Richard Garland, Trustee and Vice President |
3 Finsbury Avenue London EC2M 2PA England
AMENDMENT TO AGREEMENT AND DECLARATION OF TRUST
OF
HENDERSON INTERNATIONAL GROWTH FUND
Amendment dated May 28, 1992 to Agreement and Declaration of Trust of Henderson International Growth Fund by the Trustee hereunder,
WINESSETH that Article IX, Section 2 of the Agreement and Declaration of Trust is amended to read, in its entirety as follows:
Section 2. Principal Office, Registered Agent. The principal business office of the Trust is to be located at American Skandia Trust, c/o The Prentice-Hall Corporation System, Inc., 84 State Street, Boston, Massachusetts 02109. The name of the Trust's registered agent is The Prentice-Hall Corporation System, Inc., 84 State Street, Boston, Massachusetts 02109. The Trust will also maintain an office at One Corporate Drive, Shelton, Connecticut 06484.
IN WITNESS WHEREOF, the undersigned trustee has executed this instrument, as of the day and year first above written.
/s/ Gordon C. Boronow Gordon C. Boronow One Corporate Drive Shelton, Connecticut 06484 |
Sworn to me before me this 29th day of May, 1992
/s/ M. Priscilla Pannell Notary Public My Commission Expires Mar. 31, 1994 |
BY-LAWS
OF
HENDERSON GLOBAL ASSET TRUST
ARTICLE 1
Agreement and Declaration of Trust and Principal Office
1.1Agreement and Declaration of Trust. These By-laws shall be subject to the Agreement and Declaration of Trust, as from time to time in effect (the "Declaration of Trust"), of Henderson Global Asset Trust, the Massachusetts business trust established by the Declaration of Trust (the "Trust").
1.2 Principal Office of the Trust. The principal office of the Trust shall be located within or without Massachusetts as the Trustees may determine or as they may authorize.
ARTICLE 2
Meetings of Trustees
2.1 Regular Meetings. Regular meetings of the Trustees may be held without call or notice at such places and at such time as the Trustees may from time to time determine, provided that notices of the first regular meeting following any such determination shall be given to absent Trustees. A regular meeting of the Trustees may be held without call or notice immediately after and at the same place as the annual shareholders.
2.2 Special Meetings. Special meetings of the Trustees may be held at any time and at any place designated in the call of the meeting when called by the chairman of the Trustees, the President or the Treasurer or by two or more Trustees, sufficient notice thereof being given to each Trustee by the Secretary or an Assistant Secretary or by the officer or Trustees calling the meeting.
2.3 Notice. It shall be sufficient notice to the Trustee of a special meeting to send notice by mail at least forty-eight hours or by telegram, telex or telecopy or other electronic facsimile transmission method at least twenty-four hours before the meeting addressed to the Trustee at his or her usual or last known business or residence address or to given notice to him or her in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him or her before the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting.
2.4 Quorum: At any meeting of the Trustees a majority of the Trustees then in office shall constitute a quorum. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice.
ARTICLE 3
Officers
3.1 Enumeration; Qualification. The officers of the Trust shall be a President,, a Treasurer, a Secretary, and such other officers including a Chairman of the Trustees, if any, as the Trustees from time to time may in their discretion elect. The Trustee may also have such agents as the Trustees from time to time may in their discretion appoint. The Chairman of the Trustees, if one is elected, shall be a Trustee and may but need not be a shareholder; and any other officer may but need not be a Trustee or a shareholder. Any two or more offices may be held by the same person.
3.2 Election. The President, the Treasurer, and the secretary shall be elected annually by the Trustees. Other officers, if any, may be elected or appointed by the Trustees at said meeting or at any other time. Vacancies in any office may be filled it at any time.
3.3 Tenure. The chairman of the Trustees, if one is elected, the President, the Treasurer and the Secretary shall hold office until their respective successors are chosen and qualified or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer shall hold office and each agent shall retain authority at the pleasure the Trustees.
3.4 Powers. Subject to the other provisions of these By-laws, each officer shall have, in addition to the duties and powers herein and in the Declaration of Trust set forth, such duties and powers as are commonly incident to the office occupied by him or her as if the Trust were organized as a Massachusetts business corporation and such other duties and powers as the Trustees may from time to time designate.
3.5 Chairman; President. Unless the Trustees otherwise provide, the Chairman of the Trustees or, if there is none or in the absence of the Chairman, the President shall preside at all meetings of the shareholders and of the Trustees. The President shall be the chief executive officer.
3.6 Treasurer. The Treasurer shall be the chief financial and accounting officer of the Trust, and shall, subject to the provisions of the Declaration of Trust and to any arrangement made by the Trustees with a custodian, investment advisor or manager, or transfer, shareholder servicing or similar agent, be in charge of the valuable papers, books of account and accounting records of the Trust, and shall have such other duties and powers as may be designated from time to time by the Trustees or by the President.
3.7 Secretary. The Secretary shall record all proceedings of the shareholders and the Trustees in books to be kept therefor, which books or a copy thereof shall be kept at the principal office of the Trust. In the absence of the Secretary from any meeting of the shareholders or Trustees, an assistant secretary, or if there be none or if he or she is absent, a temporary secretary chosen at such meeting shall record the proceedings thereof in the aforesaid books.
3.8 Resignations. Any officer may resign at any time by written instrument signed by him or her and delivered to the Chairman, the President or the Secretary or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Except to the extent expressly provided in a written agreement with the Trust, no officer resigning and no officer removed shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages on account of such removal.
ARTICLE 4
Committees
4.1 Quorum; Voting. A majority of the members of any Committee of the Trustees shall constitute a quorum for the transaction of business, and any action of such a committee may be taken at a meeting by a vote of a majority of the members present (a quorum being present) or evidenced by one or more writings signed by such a majority. Members of a Committee may participate in a meeting of such Committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting.
ARTICLE 5
Reports
5.1 General. The Trustees and officers shall render reports at the time and in the manner required by the Declaration of Trust or any applicable law. Officers and Committees shall render such additional reports as they may deem desirable or as may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1 General. The initial fiscal year of the Trust shall be established by the Board of Trustees and any changes thereto shall be made by the Trustees.
ARTICLE 7
Seal
7.1 General. The seal of the Trust shall consist of a flat-faced die with the word "Massachusetts," together with the name of the Trust and the year of its organization cut or engraved thereon but, unless otherwise required by the Trustees, the seal shall not be necessary to be placed on, and its absence shall not impair the validity of, any document, instrument or other paper executed and delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 General. Except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, contracts, notes and other obligations made by the Trustees shall be signed by the President or by the Treasurer and need not6 bear the seal of the Trust.
ARTICLE 9
Issuance of Share certificates
9.1 Share Certificates. In lieu of issuing certificates for shares, the Trustees or the transfer agent may either issue receipts thereof or may keep accounts upon the books of the Trust for the record holders of such shares who shall in either case be deemed, for all pur0poses hereunder, to be or the holder of certificates for such shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof.
The Trustees may at any time authorize the issuance of share certificates.. In that event, each shareholder shall be entitled to a certificate stating the number of shares owned by him, in such form as shall be prescribed from time to time by the Trustees. Such certificates shall be signed by the President or Vice President and by the Treasurer or Assistant Treasurer, or by the Secretary or any Assistant Secretary. Such signatures may be facsimile if the certificate is signed by a transfer agent, or by a registrar, other than a Trustee, officer or employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall cease to be such officer before such certificate is issued, it may be issued by the Trust with the same effect as if the were such officer at the time of its issue.
9.2 Loss of Certificates. In case of the alleged loss or destruction or the mutilation of a share certificate a duplicate certificate may be issued in place thereof, upon such terms as the Trustees shall prescribe.
9.3 Issuance Of New Certificate to Pledge. A pledge of shares transferred as collateral security shall be entitled to a new certificate if the instrument of transfer substantially describes the debt or duty that is intended to be secured thereby. Such new certificates shall express on its face that it is held as collateral security, and the name of the pledge shall be stated thereon,; who alone shall be liable as a shareholder and entitled to vote thereon.
9.4 Discontinuance of Issuance of Certificates. The Trustees may at any, time discontinue the issuance of shares certificates and may, by written notice to each shareholder, require the surrender of share certificates to the Trust for cancellation. Such surrender and cancellation shall not effect the ownership of shares in the Trust.
ARTICLE 10
Provisions Relating to the Conduct of the Trust's Business
10.1 Certain Definitions. When used herein the following words shall have the following meaning: "Distributor" shall mean any one or more corporations, firms or associations which have distributor's or principal underwriter's contracts in affect with the Trust providing that redeemable shares issued by the Trust shall be offered and sold by such Distributor. "Advisor" shall mean any corporation, firm or association which may at the time have an advisory or management contract with the Trust and any corporation, firm or association which may at any time have a sub-advisory contract relating to the Trust with any such Advisor.
10.2 Limitation on Holdings by the Trust of Certain Securities and on Dealings with Officers or Trustees. The Trust may not purchase or retain shares or securities issued by an issuer if one or more of the holders of the shares or securities issued by an issuer or one or more of the officers or directors of such issuer is an officer or Trustee of the Trust or officer or director of the Advisor and if one or more of such officers, Trustees or directors owns beneficially more than 1/2 of 1% of the shares or securities, or both, or such issuer and such officers, Trustees and directors owning more than 1/2 of 1% of such shares or securities together own beneficially more the 5% of such share or securities. Each officer and Trustee of the Trust shall keep the Treasurer of the Trust informed of the names of all issuers shares or securities of which are held in the portfolio of the Trust in which such officer or Trustee owns as much as 1/2 of 1% of the outstanding shares or securities.
The Trust will not lend any of its assets to the Distributor or Advisor or to any officer or director of the Distributor or Advisor or any officer or Trustee of the Trust, and shall not permit any officer or Trustee or any officer or director of the Distributor or Advisor to deal for or on behalf of the Trust with himself or herself as principal or agent, or with any partnership, association or corporation in which he or she has a financial interest; provided that the foregoing provisions shall not prevent (a) officers and Trustees of the Trust or officers and directors of the Distributor or Advisor from buying, holding or selling shares in the Trust Or from being partners, officers or directors of or otherwise financially interested in the Distributor or the Advisor; (b) purchases or sales of securities or other property if such transaction is permitted by or is exempt or exempted from the provisions of the Investment Company Act of 1940 or any Rule or Regulation thereunder; (c) employment of legal counsel, registrar, transfer agent, shareholder servicing agent, dividend disbursing agent or custodian who is, or has a partner, shareholder officer or director who is, an officer or Trustee of the Trust or a officer or director of the Distributor or Advisor; (d) sharing statistical, research, legal and management expenses and office hire and expenses with any other investment company in which an officer or Trustee of the Trust or an officer or director of the Distributor or Advisor is an officer or director or otherwise financially interested.
10.3 Limitation on Dealing in Securities of the Trust by Certain Officers, Trustees, Distributor or Advisor. Neither the Distributor nor Advisor, nor any officer or Trustee of the Trust or officer or director of the Distributor or Advisor shall take long or short positions in securities issued by the Trust; provided, however, that:
(a) the Distributor may Purchase from the Trust and otherwise deal in shares issued by the Trust pursuant to the terms of its contract with the Trust;
(b) any officer or Trustee of the Trust or officer or director of the Distributor or Advisor or any trustee or fiduciary for the benefit of any of them may at any time, or from time to time, purchase from the Trust or from the Distributor shares issued by the Trust at the price available to the public or to such officer, Trustee, director, trustee or fiduciary, no such officer, purchase to be in contravention of any applicable state or federal requirement; and
(c) the Distributor or the Advisor may at any time, or from time to time, purchase for investment shares issued by the Trust.
10.4 Securities and Cash of the Trust to be held by Custodian subject to certain Terms and Conditions.
(a) All securities and cash owned by this Trust shall be held by or deposited with a company which is a member of a national securities exchange as defined in the securities Exchange Act of 1934, or one or more banks or trust companies having (according to its last published report) not less than $5,000,000 aggregate capital, surplus and undivided profits (any such member of a national securities exchange or bank or trust company being hereby designated as "Custodian"), provided such a Custodian can be found ready and willing to act; subject to such rules, regulations and orders, if any, as the Securities and Exchange Commission may adopt, this Trust may, or may permit any custodian to, deposit all or any part of the securities owned by this Trust in a system for the central handling of securities pursuant to which all securities of any particular class or series of any issue deposited within the system may be transferred or pledged by bookkeeping entry, without physical delivery. The Custodian may appoint, subject to the approval of the Trustees, one or more subcustodians.
(b) The Trust shall enter into a written contract with each Custodian regarding the powers, duties and compensation of such Custodian with respect to the cash and securities at the Trust held by such Custodian. Said contract and all amendments thereto shall be approved by the Trustees.
(c) The Trust shall upon the resignation or inability to serve of any Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve, use its best efforts to obtain a successor Custodian,
(ii) require that the cash and securities owned by the Trust be delivered directly to the successor Custodian; and
(iii) in the event that no successor custodian can, be found, submit to the shareholders, before permitting delivery of the cash and securities owned by the Trust otherwise than to a successor Custodian, the question whether the Trust shall be liquidated or shall function without a Custodian.
10. 5 Requirement and Restrictions Regarding the Management Contract. Every advisory or management contract entered into by the Trust shall provide that in the event that the total expenses of the Trust for any fiscal year would exceed the limits imposed on investment company expenses by any statue or regulatory authority of any jurisdiction in which shares of the Trust are offered for sale, the compensation due the Advisor for such fiscal year shall be reduced by the amount of such excess by a reduction or refund thereof.
10.6 Reports to Shareholders; Distributions from Realized Gains. The Trust shall send to each shareholder of record at least semi-annually a statement of the condition of the Trust and of the results of its operations, containing all information required by applicable laws or regulations.
10.7 Determination of Net Asset Value Per Share. The Fund will determine the net asset value of its shares once daily as of the close of trading on The New York Stock Exchange on each day that the Exchange is open for business. It is expected that the Exchange will be closed on Saturdays and Sundays and on New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset value is determined by dividing the market value of the Fund's investments as of the close of trading plus any cash or other assets (including dividends receivable and accrued interest) less all liabilities (including accrued expenses) by the number of Fund shares outstanding. Securities traded on the New York Stock Exchange or the American Stock Exchange will be valued at the last sale price or, if no sale, at the mean between the latest bid and asked price. Securities traded in any other U.S. or foreign market shall be valued in a manner as similar as possible to the above, or if not so traded, on the basis of the latest available price. With respect to those securities for which no trades have taken place that day, the value shall be determined by taking the mean between the latest "bid" and "asked" prices. Securities sold short against the box will be valued at market as determined above, however, in instances where the Fund has sold securities short against a long position in the issuer's convertible securities, for the purpose of valuation, the securities in the short position will be valued at the "asked" price rather-than the mean of the a last "bid" and "asked" prices. Gold bullion investments will be valued at their respective fair market values determined on the basis of the mean between the last current bid and asked prices based on dealer or exchange quotations. Where there are no readily available quotations for securities they will be valued at fair market value as determined by the Board of Trustees of the Fund acting in good faith.
In valuing the portfolio investments of any series for determination of net asset value per share of such series, securities for which market quotations are readily available shall be valued at prices which, in the opinion of the Trustees or the person designated by the Trustees to make the determination, most nearly represent the market value of such securities, and other securities and assets shall be valued at their fair value as determined by or pursuant to the direction of the Trustees, which in the case of short-term debt obligations, commercial paper and repurchase agreements may, but need not, be on the basis of quoted yields for securities of comparable maturity, quality and type, or on the basis of amortized cost. Expenses and liabilities of the Trust shall be accrued each day. Liabilities may include such reserves for taxes, estimated accrued expenses and contingencies as the Trustees or their designates may in their sole discretion deem fair and reasonable under the circumstances. No accruals shall be made in respect of taxes on unrealized appreciation of securities owned unless the Trustees shall otherwise determine. Dividends payable by the Trust shall be deducted as at the time of but immediately prior to the determination of net asset value per share on the record date therefor.
ARTICLE 11
Shareholders' Voting Powers and Meetings
11.1 Voting Powers. The Shareholders hall have power to vote only (i) for the election of Trustees as provided in Article IV, Section 1 of the Declaration of Trust, provided, however, that not meeting of Shareholders is required to be called for the purpose of electing Trustee unless and until suck time as less than a majority of the Trustees have been elected by the shareholders, (ii) with respect to any Manager or Sub-Manager as provided in Article IV, Section 6 of the Declaration of Trust to the extent required by the Investment Company Act of 1940 and the rules and regulations thereunder (iii) with respect to an termination of this Trust to the extent and as provided in Article IX, Section 4 of the Declaration of Trust, (iv) with respect to any amendment of the Declaration of Trust to the extent and-as provided in Article IX, Section 7 of the Declaration of Trust, (v) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should hot be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, and (vi) with respect to such additional matters relating to the Trust as may be required by law, the Declaration of Trust, these By-laws or any registration of the with the Commission (or any successor agency) or any State, or as the Trustee may consider necessary or desirable. Each whole Share shall be entitled to one vote and each fractional Share shall be entitled to a proportionate fractional vote. On any matter submitted to a vote of Shareholders all Shares of the Trust then entitled to vote shall be voted by individual series, except (i) when required by the 1940 Act, Shares shall be voted in the aggregate and not by individual series and (ii) when the Trustees have determined that the matter affects only the interests of one or more series, then only Shareholders of such series shall be entitled to vote thereon. There shall be no cumulative voting in the election of Trustees. Shares held in the name of two or more persons shall be valid if executed by any of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Until Shares are issued, the Trustees may exercise all right of Shareholders and may take any action required by law, the Declaration of Trust or these By-laws to be taken by Shareholders.
11.2 Voting Power and Meetings. Meetings of the Shareholders may be called by the Trustees for the purpose of electing Trustees as provided in Article IV, section 1 of the Declaration of Trust and for such other purposes as may be prescribed by law, by the Declaration of Trust or by these By-laws. Meetings of the Shareholders may also be called by the Trustees from time to time for the purpose of taking action upon any other matter deemed by the Trustees to be necessary or desirable. A meeting of Shareholders may be held at any place designated by the Trustees. Written notice of any meeting of Shareholders hall be given or caused to be given by the Trustees by mailing such notice at least seven days before such meeting, postage prepaid, stating the time and place of the meeting, to each Shareholder at the Shareholder's address as it appears on the records of the Trust. Whenever notice of a meeting is required to be given to a Shareholder under the Declaration of Trust or those By-laws a written waiver thereof, executed before or-after the meeting by such Shareholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such
11.3 Quorum and Required Vote. A majority of Shares entitled to vote shall be a quorum for the transaction of business at a Shareholders' meetings except that where any provision Of law or of the Declaration of Trust or these By-laws permits or requires that holders of any series shall vote as a series, then a majority of the aggregate number of Shares of that series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that series. Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. Except when a larger vote is required by any provision of law or the Declaration of Trust or those By-laws, a majority of the Shares voted shall decide any questions and a plurality shall elect a Trustee, provided that where any provision of law or of the Declaration of Trust or these By-laws permits or requires that the holders of any series shall vote as a series, then a majority of the Shares of that series voted on the matter (or a plurality with respect to the election of a Trustee) shall decide that matter insofar as that series is concerned.
11.4 Action by Written Consent. Any action taken by Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof as shall be required by any express provision of law or the Declaration of Trust or these By-laws) consent to the action in writing and such written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
11.5 Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting or any adjournment thereof or who are entitled to receive payment of any dividend or of any other distribution, the Trustees may from time to time fix a time, which shall be not more than 60 days before the date of any meeting of shareholders or the date for the payment of any dividend or of any other distribution, as the record date for determining the Shareholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution, and in such case only Shareholders of record on such record date shall have such right notwithstanding any transfer of shares on the books of the Trust after the record date, or without fixing such record date the Trustees may for any of such purposes closed the register or transfer books for all or any part of such period.
ARTICLE 12
Amendments to the By-laws
12.1 General. These By-laws may be amended or repealed in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such a majority.
AMERICAN SKANDIA TRUST
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 1st day of May, 1992 by and between American Skandia Trust, a Massachusetts business trust (the "Fund") and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H.
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the Lord Abbett Growth and Income Portfolio of the Fund (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities; subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of -Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional-Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions-with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of -the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker0-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or the reserves to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment manager shall determine and the Investment Manager will report on said allocations to the board of Trustees of the Fund regularly as requested by the board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times by subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements In carrying out its obligations under this Agreement, the Investment Manager shall at all conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rule and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein-; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal laws.
6. Expenses: The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax return; or
(ii) any of the costs (including applicable office space, facilities and equipment) of the services of any of the personnel operating under the direction of such principal financial officer. Notwithstanding the obligation of the Fund to bear the expense of the functions referred to in clauses (i) and (ii) of this subparagraph (c), the Investment Manager may pay the salaries, including any applicable employment or payroll taxes and other salary costs, of the principal financial officer and other personnel carrying out such functions and the Fund shall reimburse the Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal, auditing or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager way perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, to approval of the Fund's Board of Trustees, and where required, the shareholders of Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of 0.75% of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.25% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve -as officers or directors of the Investment Manager to the extent permitted by law; and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on May 1, 1992 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of
a majority of the Portfolio's outstanding voting securities (as defined in
Section 2(a)(42) of the Investment company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes case in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived bye either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. . Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constiti8tue a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling dercis8ion of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
AMERICAN SKANDIA TRUST
Attest: By /s/Thomas M. Mazzaferro
Thomas M. Mazzaferro
/s/Jacqueline Crader
Jacqueline Crader
|
AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT INC
Attest: By /s/Gordon C. Boronow
Gordon C. Boronow
/s/Jacqueline Crader
Jacqueline Crader
|
AMERICAN SKANDIA TRUST
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 8th day of September, 1992 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager").
WITNESETH
WHEREAS, the Fund is registered as an open-end, diversified management investment under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the JanCap Growth Portfolio of the Fund (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or: dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the board of Trustees of the Fund regularly as requested by the board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by. Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements, In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs. (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of mainteaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office space, facilities and equipment) of the services Of any of the personnel operating under the direction of such principal financial officer. Notwithstanding the obligation of the Fund to bear the expense of the functions referred to in clauses.(i) and (ii) of this subparagraph (c), the Investment Manager may pay the salaries, including any applicable employment or payroll taxes and other salary costs, of the principal financial officer and other personnel carrying out such functions and the Fund shall reimburse the Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal, auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agents costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meeting, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organization and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustee the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager
may engage, subject to approval of the Fund's Board of Trustees, and where
required, the shareholders Portfolio, a sub-advisor to provide advisory services
in relation to the Portfolio. Under such sub-advisory agreement, the Investment
Manager may delegate to the sub-advisor the duties outlined in subparagraphs
(e), (f), (g) and (h) of paragraph 2 hereof
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of 0.90, of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.35% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the Fund's current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors Of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent Permitted by law; and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on _______, 1992 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any-security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed. on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall. be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST /s/Patricia Randol By: /s/ Thomas M. Mazzaferro Patricia Randol Thomas M. Mazzaferro Attest: AMERICAN SKANDIA LIFE INVESTMENT MANAGEMENT, INC. /s/Mary Ellen O'Leary By: /s/Gordon C. Boronow Mary Ellen O'Leary Gordon C. Boronow |
AMERICAN SKANDIA TRUST
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 8th day of September, 1992 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the AST Money Market Portfolio of the Fund (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to the filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board Of Trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data; domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determination with or through such persons, brokers or dealers, in conformity with policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4 Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any direction of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers, Act and any rules and regulations adopted thereunder, as amended; and
(b) of the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act including the investment objectives, policies restrictions, and permissible investments specified therein-; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the, services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, trading function in order to carry out its obligations under subparagraphs (f), (g) and (b) of paragraph thereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear
(i) any of the cost (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office space, facilities and
equipment) of the services of any of the personnel operating under- the
direction of such principal financial officer. Notwithstanding the obligation of
the Fund to bear the expense of the functions referred to in clauses (i) and
(ii) of this subparagraph (c), the Investment Manager may pay the salaries,
including any applicable employment or payroll taxes and other salary costs, of
the principal financial officer and other personnel carrying out such functions
and the Fund shall reimburse the Investment Manager therefor upon proper
accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal, auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Declaration of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund's expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the- Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in fall compensation for services rendered hereunder an annual investment advisory lee, payable monthly, of 0.50% of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation would exceed 65% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the Fund's current fiscal year where shall elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law; and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on 1992 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually.
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification, In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart and or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST /s/Patricia Randol By: /s/ Thomas M. Mazzaferro Patricia Randol Thomas M. Mazzaferro Attest: AMERICAN SKANDIA LIFE INVESTMENT MANAGEMENT, INC. /s/Mary Ellen O'Leary By: /s/Gordon C. Boronow Mary Ellen O'Leary Gordon C. Boronow |
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of January, 1994, by and between American Skandia Trust, a Massachusetts business trust (the "Fund'), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder, and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the Federated High Yield Portfolio of the Fund (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager will give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter
supervise, such executive, administrative, clerical and shareholder servicing
services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of
prospectuses and supplements thereto, proxy material tax returns, reports to
the Portfolio's shareholders, reports to and filings with the Securities and
Exchange Commission, state Blue Sky authorities and other applicable
regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a
regular basis, written financial reports and analyses on the Portfolios
securities transactions and the operations of comparable investment
companies;
(e) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data
domestic, foreign or otherwise, whether affecting the economy generally or
the Portfolio, and whether concerning the individual issuers whose securities
are included in the Portfolio or the activities in which they engage, or with
respect to securities which the Investment Manager considers desirable for
inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and We of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that action, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it an behalf of the Portfolio to such brokers and dealers who also provide research or statistical material or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis there
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager, shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services, of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund, including the reviewing of calculations of net asset value and preparing tax returns; or.
(ii) any of the costs (including applicable office space,
facilities and equipment) of the services, of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund to
bear the expense of the functions referred to in clauses (i) and
(ii) of this subparagraph (c), the Investment Manager may pay
the salaries, including any applicable employment or payroll
taxes and other salary costs, of the principal financial officer
and other personnel carrying out such functions and the Fund
shall reimburse the Investment Manager therefor upon proper
accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9 Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of 0.75% of the Portfolio's average daily net assets.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.15% of the average daily net assets of the Portfolio the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity- The services of the Investment Manager to the Portfolio are not to be deemed to be exclusion, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law; and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on January 3, 1994 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually.-
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term 'assignment' for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Availability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or age of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this ins t are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall be IZ High Street Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/ Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
|
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of January, 1994 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management Inc., a Connecticut corporation (the 'Investment Manager');
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the Investment Company Act), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the T. Rowe Price Asset Allocation Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of the fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(d) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealer for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follow.
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear.
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax returns, or
(ii) any of the costs (including applicable office space, facilities and equipment) of the services, of any of the personnel operating under the direction of such principal financial officer. Notwithstanding the obligation of the Fund to bear the expense of the functions referred to in clauses (i) and (ii) of this subparagraph (c), the Investment Manager may pay the salaries, including any applicable employment or payroll taxes and other salary costs, of the principal financial officer and other personnel carrying out such functions and the Fund shall reimburse the Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Declaration of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of .85% of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.25% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first mouth of the need succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement,
11. Non-Exclusivity, The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law, and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on January 3, 1994 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of
a majority of the Portfolio's outstanding voting securities (as defined in
Section 2(a)(42) of the Investment Company Act; and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a: majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered Or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities expenses and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
|
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of January, 1994 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of, the assets of the T. Rowe Price International Equity Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its-services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and
thereafter supervise, such executive, administrative, clerical and
shareholder servicing services as are deemed advisable by the Fund's Board of
Trustees;
(c) arrange, but not pay for, the periodic updating of
prospectuses and supplements thereto, proxy material tax returns, reports to
the Portfolio's shareholders, reports to and filings with the Securities and
Exchange Commission, state Blue Sky authorities and other applicable
regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) (h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of Fund, as amended; and
(e) (e) any other provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the review of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office
space, facilities and equipment) of the services of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund
to bear the expense of the functions referred to in clauses
(i) and (ii) of this subparagraph (c), the Investment Manager
may pay the salaries, including any applicable employment or
payroll taxes and other salary costs, of the principal
financial officer and other personnel carrying out such
functions and the Fund shall reimburse the Investment Manager
therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal auditing, taxes or governmental fees, the cost of preparing share certificate, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Declaration of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (f) (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of 1.00 % of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.75% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law, and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12 Term and Approval. This Agreement shall become effective on January 3, 1994 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually:
(a)(i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice; to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument b executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be Out Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
|
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of January, 1994 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the 'Investment Advisers Act); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the Founders Capital Appreciation Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt where-of is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis, written financial reports and analyses On the Portfolios securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio,
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The, Investment Manager may consider the sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio an a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio maybe greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund. 5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended, and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office space,
facilities and equipment) of the services, of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund
to bear the expense of the functions referred to in clauses
(i) and (ii) of this subparagraph (c), the Investment Manager
may pay the salaries, including any applicable employment or
payroll taxes and other salary costs, of the principal
financial officer and other personnel carrying out such
functions and the Fund shall reimburse the Investment Manager
therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be home by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost, in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (c), (f), (g) and (h) of paragraph 2 hereof
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of .90% of the average daily net assets of the Portfolio
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.30% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such a statute or regulatory authority, to pay to the Fund such expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity, The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of Fund way serve as officers or directors of the Investment Manager to the extent permitted by law, and that the officers and directors of the Investment, Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on January 3, 1994 and shall continue in force and effect from you to year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice it is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
|
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of January, 1994 by and between American Skandia Trust a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the INVESCO Equity Income Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-deafer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular action or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office
space, facilities and equipment) of the services of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund to
bear the expense of the functions referred to in clauses (i) and
(ii) of this subparagraph (c), the Investment Manager may pay
the salaries, including any applicable employment or payroll
taxes and other salary costs, of the principal financial officer
and other personnel carrying out such functions and the Fund
shall reimburse the Investment Manager therefor upon proper
accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be borne by the Fund unless specifically provided otherwise in paragraph 6. These expenses include but are not limited to brokerage commission, legal auditing, taxes or governmental fees, the cost of preparing share certificate, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of .75% of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.20% of the average daily net assets of the Portfolio the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first mouth of the next an g fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the, portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law, and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm at corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on January 3, 1994 and shall continue in force and affect from year to year, provided that such continuance is specifically approved at least annually.
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the. completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence Of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for say act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund shall be 126 High Street Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Ad, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
|
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of January, 1994 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Life Investment Management, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the PIMCO Total Return Bond Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the. cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determined in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain at its expense and without cost to the Fund a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund, including the reviewing of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office space, facilities and equipment) of the services, of the personnel operating under the direction of such principal financial officer. Notwithstanding the obligation of the Fund to bear the expense of the functions referred to in clauses (i) and (ii) of this subparagraph (c), the Investment Manager may pay the salaries, including any applicable employment or payroll taxes and other salary costs, of the principal financial officer and other personnel carrying out such functions and the Fund shall reimburse the Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares will be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to brokerage commissions, legal, auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expenses that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of .65% of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.05% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if requested to do so pursuant to such applicable statute and regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the, portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity, The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law, and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from servicing as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on January 3, 1994 and shall continue in force effect from year to year, provided that such continuance is specifically approved at least annually.
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding securities as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment; the term 'assignment' for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice it is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of. Interpretation. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/ Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
|
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 1st day of May, 1995, by and between American Skandia Trust a Massachusetts business trust (the "Fund"), and American Skandia Investment Services, Incorporated, a Connecticut corporation (the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations promulgated thereunder, and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the T. Rowe Price Natural Resources Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the Portfolio and shall, in such capacity, manage the investment operations of the Portfolio, including the purchase, retention, disposition and lending of duties, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgments, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph I hereof, the Investment Manager shall.
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis, written financial reports and analyses on the Portfolio's securities actions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees;
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Funds Portfolio and Statement of Additional information, or as the Board of Trustees may determine from time to time. Generally, the. Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be designated to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that, particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other services to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program
undertaken by the Investment Manager pursuant to this Agreement, as well as
any other activities undertaken by the Investment Manager on behalf of the
Fund pursuant thereto, shall at all times be subject to arty directives of
the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out
its obligations under this Agreement, the Investment Manager shall at all
times conform to:
(a) all applicable provisions of the Investment Company Act and Investment Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund; the services of a President, Secretary and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office
space, facilities and equipment) of the services of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund
to bear the expense of the functions referred to in clauses
(i) and (ii) of this subparagraph (c), the Investment Manager
may pay the salaries, including any applicable employment or
payroll taxes and other salary costs, of the principal
financial officer and other personnel carrying out such
functions and the Fund shall reimburse the Investment Manager
therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations a. the Fund and the offerings of its shares shall be borne by the Fund unless specifically provided otherwise in this paragraph 6. These expenses include but are not limited to broker commissions, legal, auditing, taxes or governmental fees, the cost of preparing share certificates custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and quailing shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to its benefit, expenses relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of pros and statements of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not required by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, subject to examination by the Fun's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the Investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement, the Investment Manager may delegate to the sub-adviser the duties outlined in subparagraph (e), (i), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full compensation for services rendered an annual investment advisory fee, payable monthly, of .90% of the average daily net assets of the Portfolio.
10. Expense Limitation. if, for any year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, into and extraordinary expenses such as litigation, would exceed 1.35% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess , and if required to do so pursuant to such applicable statute or mandatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of next succeeding fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal year" shall exclude the portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund may serve as officers or directors of the Investment Manager to the extent permitted by law, and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers or directors of any other firm or corporation including other investment companies.
12. Term and Approval. This Agreement shall become effective on May 1, 1995 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice, to the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolios outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment' for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act,
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any A holder of the Portfolio for any act omission in the course or, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this intent is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose abilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it is agreed that the address of the Fund be 126 High Street Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton Connecticut 06494.
17. Questions of Interpretations Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of any such court; by rues, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/ Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
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INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 1st day of May, 1995 by and between American Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia Investment Services, Incorporated, a Connecticut corporal (the "Investment Manager");
WITNESETH
WIEREAS, the Fund is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended the "Investment Company Act"), and the rules and regulations promulgated thereunder, and
WHEREAS, the Investment Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement to provide for the management of the assets of the PIMCO Limited Maturity Bond Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act investment manager for the Portfolio and shall. in such capacity, manage the operations of the Portfolio, including the purchase, retention, disposition and lending of securities, subject at all times to the policies and control of the Fund's Board of Trustees. The Investment Manager shall give the Portfolio the benefit of its best judgment, efforts and facilities in rendering its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph 1 hereof. the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such executive, administrative, clerical and shareholder servicing services as are deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and supplements thereto, proxy material, tax returns, reports to the Portfolio's shareholders, reports to and filings with the Securities and Exchange Commission, state Blue Sky authorities and other applicable regulatory authorities;
(d) provide to the Board of Trustees of die Fund on a regular basis, written financial reports and analyses on the Portfolio's securities transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and whether concerns the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with to securities which the Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be entered in the Portfolio's portfolio and regularly report them in writing to the Board of Trustees,
(g) formulate and implement continuing programs for the purchases and sales of the securities of such issuers and regularly report in writing thereon to the Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund necessary to carry into effect such purchase and sale programs and supervisory functions as aforesaid, including the placing of orders for the purchase and sale of portfolio securities,
3. Broker-Dealer Relationships. The Investment Manager is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. The Investment Manager shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Fund's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, the Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Investment Manager may consider sale of the shares of the Portfolio, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Fund may determine, the Investment Manager shall not be to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Investment Manager for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Investment Manager, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's ongoing responsibilities with respect to the Portfolio. The Investment Manager is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other service; to the Fund or the Investment Manager. Such allocation shall be in such amounts and proportions as the Investment Manager shall determine and the Investment Manager will report on said allocations to the Board of Trustees of the Fund regularly as requested by the Board and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the Investment Manager pursuant to this Agreement, as well as any other activities undertaken by the Investment Manager on behalf of the Fund pursuant thereto, shall at all times be subject to any directives of the Board of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment advisers Act and any rules and regulations adopted thereunder, as amended, and
(b) the provisions of the Registration Statements of the Fund under the Securities Act of 1933 and the Investment Company Act, including the investment objectives, policies and restrictions, and permissible investments specified therein; and
(c) the provisions of the Declaration of Trust of the Food, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost to the Fund, the services of a President, Secretary, and one or more Vice Presidents of the Fund, to the extent at such additional officers may be required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and without cost to the Fund, a trading function in order to carry out its obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and equipment) of the services of a principal financial officer of the Fund whose normal duties consist of maintaining the financial accounts and books and records of the Fund; including the reviewing of Calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office
space, facilities and equipment) of the services of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund to
bear the expense of the functions referred to in clauses (i) and
(ii) of this subparagraph (c), the Investment Manager may pay
the salaries, including any applicable employment or payroll
taxes and other salary costs, of the principal financial officer
and other personnel carrying out such functions and the Fund
shall reimburse the Investment Manager therefor upon proper
accounting.
(d) All of the ordinary business expenses incurred in the operations of the Fund and the offering of its shares shall be home by the Fund unless specifically provided otherwise in this paragraph
6. These expenses include but are not limited to brokerage commissions, legal, auditing, taxes or governmental fees, the cost of preparing share certificates, custodian, depository, transfer and shareholder service agent costs, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, insurance premiums on property or personnel (including officers and trustees if available) of the Fund which inure to it s benefit, expense relating to trustee and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders, the fees and other expenses incurred by the Fund in connection with membership in investment company organizations and the cost of printing copies of prospectuses and statement of additional information distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of Trustees, the Investment Manager may perform services on behalf of the Fund which are not requited by this Agreement. Such services will be performed on behalf of the Fund and the Investment Manager's cost in rendering such services may be billed monthly to the Fund, submit to examination by the Fund's independent accountants. Payment or assumption by the Investment Manager of any Fund expense that the investment Manager is not required to pay or assume under this Agreement shall not relieve the Investment Manager of any of its obligations to the Fund nor obligate the Investment Manager to pay or assume any similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may engage, subject to approval of the Fund's Board of Trustees, and where required, the shareholders of the Portfolio, a sub-advisor to provide advisory services in relation to the Portfolio. Under such sub-advisory agreement the Investment Manager may delegate to the sub-advisor the duties outlined in subparagraphs (e), (t), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in fall compensation for services rendered hereunder an annual investment advisory fee, payable monthly, of .65% of the average daily net assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all ordinary business expenses of the Portfolio, including all investment advisory and administration fees but excluding brokerage commissions and fees, taxes, interest and extraordinary expenses such as litigation, would exceed 1.05% of the average daily net assets of the Portfolio, the Investment Manager agrees to pay the Fund such excess expenses, and if required to do so pursuant to such applicable statute or regulatory authority, to pay to the Fund such excess expenses no later than the last day of the first month of the next succeeding fiscal year of the Fund. For the purposes of this paragraph the term "fiscal year" shall exclude the portion of the Fund's current fiscal year which shall have elapsed prior to the date hereof and shall include the portion of the then current fiscal year which shall have elapsed at the date of termination of this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the Portfolio are not to be deemed to be exclusive, and the Investment Manager shall be free to render investment advisory and corporate administrative or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that officers or directors of the Investment Manager may serve as officers or trustees of the Fund, and that officers or trustees of the Fund easy serve as officers or directors of the Investment Manager to the extent permitted by law; and that the officers and directors of the Investment Manager are not prohibited from engaging in any other business activity or from rendering services to any other person or from serving as partners, officers or directors of any other firm or corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on May 1, 1995 and shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not parties to this Agreement or interested persons of a party to this Agreement (other than as Fund trustees), by votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the payment of any penalty or prejudice't6 the completion of any transactions already initiated on behalf of the Portfolio, by vote of the Fund's Board of Trustees or by vote of a majority of the Portfolio's outstanding voting securities, or by the Investment Manager, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by either party. This Agreement automatically terminates in the event of its assignment, the term "assignment" for the purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of willful misfeasance, bad faith gross negligence or reckless disregard of obligations or duties hereunder on the part of the Investment Manager or any of its officers, trustees or employees, it shall not be subject to liability to the Fund or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security
15. Liability of Trustees and Shareholders. A copy of the Agreement and Declaration of Trust of the Fund is on the with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the trustees of the Fund as trustees and not individually and that the obligations of this instrument are not binding upon any of the trustees or shareholders individually but are binding only upon the assets and property of the Fund. Federal and state laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Fund or Investment Manager they may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice, it Is agreed that the address of the Fund shall be 126 High Street, Boston, Massachusetts, 02110, and the address of the Investment Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or prove o In having a counterpart in or otherwise derived from a term or provision of the Investment Company Act, shall be resolved by reference to such term or provision of the Act and to interpretations thereof, if any, by the United States Courts or in the absence of any controlling decision of arty such decision of any such court, by rules, regulations or orders of the Securities and Exchange Commission issued pursuant to said Act. In addition, where the effect of a requirement of the Investment Company Act, reflected in any provision of this Agreement is released by rules, regulation or order of the Securities and Exchange Commission, such provision shall be deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day and year first above written.
Attest: AMERICAN SKANDIA TRUST
/s/Joan Chanda By: /s/Gordon C. Boronow
Joan Chanda Gordon C. Boronow
Attest: AMERICAN SKANDIA LIFE INVESTMENT
MANAGEMENT, INC.
/s/Patricia Randol By: /s/Thomas M. Mazzaferro
Patricia Randol Thomas M. Mazzaferro
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(to be filed by future amendment)
(to be filed by future amendment)
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Life Investment Management, Inc. (the "Advisor") and Lord Abbett & Co. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Advisor to act as investment manager for the Lord Abbett Growth and Income Portfolio, (the "Portfolio") under the terms of a management agreement, dated May 1, 1992, with the Trust (the "Management Agreement"); and
WHEREAS the Advisor has engaged the Sub-advisor and the Trustees have approved the engagement of the Sub-advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Advisor and the Sub-Advisor agree as follows:
1. Investment Services. The Sub-Advisor will furnish the Advisor with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, -investment policies and restrictions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Advisor will promptly furnish Sub-Advisor with any amendments to such documents.
Subject to the supervision and control of the Advisor, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will Place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to executed. The Portfolio will be maintained by a custodian bank (the 'Custodian") and the Advisor will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Advisor for payment from the Portfolio against receipt of securities purchased or for delivery from the Portfolio of securities sold against receipt of payment therefore. No assets may be withdrawn from the Portfolio other than to pay for investments purchased except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate the pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
Nothing in this Agreement shall be implied to prevent the Advisor from engaging other sub-advisors to provide investment advise and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such services, or to prevent Advisor from providing such services in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Advisor has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustee approving the engagement of the Sub-Advisor as sub-advisor to the Advisor and approving the form of this agreement;
(d) The resolutions of the Trustees selecting the Advisor as investment manager to the Trust and approving the form of the Advisor's Management Agreement with the Trust;
(e) The Advisor's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Advisor as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of non-public information regarding such companies that is available to Advisor or the Trust, or which, in the sole opinion of the Advisor, it believes such nonpublic information would be deemed to be available to Advisor and/or the Trust.
The Advisor will furnish the Sub-Advisor from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Advisor. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Advisor.
3. Delivery of Documents to the Advisor. The Sub-Advisor has furnished the Advisor with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Advisor from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments and or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish (i) all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transaction. Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisor's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of, execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of the shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. Accordingly, the cost the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker or dealer that provides research services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Sub-Advisor, determines in good faith that such amount of commission was reasonable in relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisor's ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers and dealers who also provide research or statistical material, or other serviced to the Portfolio or the Sub-Advisor. Such allocation shall be ins such amounts and proportions as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor The Sub-Advisor shall furnish the Advisor monthly, quarterly and annual reports concerning transaction and performance of the Portfolio in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and records with respect to the Portfolio to be inspected and audited by the Trust, the Advisor or their agents at all reasonable times during normal business hours. The Sub-advisor shall immediately notify and forward to both Advisor and legal counsel for the Trust any legal process served upon it on behalf of the Advisor of the Trust.
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below.
For all services rendered, the Advisor will pay the Sub-Advisor at the annual rate of .50 of 1% of the portion of the net assets of the Portfolio not in excess of $200,000,000.00; .40 of 1% of the portion over $200,000.000.00 but not in excess of $500,000,000.00; .35 of 1% of the portion over but not in excess of $700,000.000.00; .35 of 1 % of the portion over $700,000,000.00 but not in excess of $900,000,000.00; and .30 of 1% of the portion in excess of $900,000,000.00.
In computing the fee to be paid to the Sub-advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Advisor and Sub-Advisor shall be considered as partners or participants in a joint venture. Sub-Advisor will pay its own expenses for the services to be provided pursuant to this Agreement and will not be obligated to pay any expenses of Advisor or the Trust. Advisor and the Trust will not be obligated to pay any expenses of Sub-advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Advisor, the Trust or such persons the Advisor may designate in connection with the Portfolio. It is also understood that any information in connection supplied to the Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
10. Liability. The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best effort then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or it's shareholders or to the Advisor for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Advisor may have under applicable law.
11. Other Activities of Sub-Advisor. The-Advisor agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all respects free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institutions will be made on a basis that is equitable to all of portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment, as defined in the ICA, or upon termination of the Advisor's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Advisor within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been authorized to give instruction to a Custodian of the Trust. The manager of the Portfolio shall be approved by Advisor and will not be changed without prior notice to Advisor.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the fort address set forth below, provided that either party may, by notice, designate a different address for such party.:
Advisor: American Skandia Investment Management, Inc.
Attention: Thomas Mazzaferro
Tower One Corporate Drive
Shelton, Connecticut, 06484
Sub-advisor: Lord, Abbett & Co.
Attention: Kenneth B. Cutler
The General Motors Building
767 Fifth Avenue
New York, New York 10153
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14. Arbitration. Any dispute as to whether compensation is payable under this Agreement to Sub-Advisor the amount of any compensation due or whether either party has breached this Sub-Advisor shall make reasonable efforts to resolve such dispute amicably between themselves. If such discussions fail to result in an amicable settlement, then the parties shall arbitrate such dispute using the arbitration services of the National Association of Securities Dealers, Inc. pursuant to its rules and procedures at a location to be determined by the arbitrator.
The Advisor may withhold paying compensation until the arbitrators render their decision, subsequent to which such compensation will be payable as of the next following date such compensation is payable to the Sub-Advisor. Interest shall be payable on any compensation withheld during arbitration at a the prime rate of The Chase Manhattan Bank, N.A.. during the period such compensation is withheld.
15. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of New York.
The effective date of this agreement is May 1, 1992.
FOR THE ADVISOR FOR THE SUB-ADVISOR: /s/Thomas Mazzaferro /s/Kenneth B. Cutler Thomas Mazzaferro Kenneth B. Cutler Vice President and Chief Financial Officer Partner Date: 5/1/92 Date: 5/1/92 |
SUB-INVESTMENT MANAGEMENT AGREEMENT
This Sub-Investment Management Agreement (this "Agreement") is entered into as of September 8, 1992 by and between American Skandia Life Investment Management, Inc., a Connecticut corporation ("Investment Manager") and Janus Capital Corporation, a Colorado corporation ("Sub-Investment Manager").
WHEREAS, Investment Manager has entered into an Investment Management Agreement dated September 8, 1992 (the "Investment Management Agreement") with American Skandia Trust, a Massachusetts business trust (the "Trust"), to act as adviser to the JanCap Growth Portfolio, a series of the Trust (the "Portfolio");
WHEREAS, the Investment Management Agreement provides that Investment Manager may, engage a sub-investment manager to furnish investment information and advice to assist Investment Manager in carrying out its responsibilities under the Investment Management Agreement;
WHEREAS, Investment Manager and the Trustees of the Trust desire to retain Sub-Investment Manager to render investment adviser services to Investment Manager in the manner and on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, Investment Manager and Sub-Investment Manager agree as follows:
1. Sub-Investment Management Services.
(a) Sub-Investment Manager shall, subject to the supervision of Investment Manager, manage the investment and reinvestment of the assets of the Portfolio. Sub-Investment Manager is authorized, in its discretion and without prior consultation with Investment Manager, to buy, sell, lend, and otherwise trade in any stocks, bonds, and other securities and investment instruments on behalf of the Portfolio, and so long as consistent with the foregoing, without regard to the length of time the securities have been held and the resulting rate of portfolio turnover or any tax considerations. Subject to the investment objectives, policies, and restrictions concerning the Portfolio set forth in the Trust's declaration of trust and in its registration statements under the Investment Company Act of 1940, the majority or the whole of the Portfolio may be invested in such proportions of stocks, bonds, other securities or investment instruments, or cash as Sub-Investment Manager shall determine. Sub-Investment Manager is responsible for compliance with the provisions of Section 817(h) of the Internal Revenue Code of 1986, as amended, applicable to the Portfolio.
(b) Sub-Investment Manager shall furnish Investment Manager monthly, quarterly, and annual reports concerning transactions and performance of the Portfolio in such form as may be mutually agreed upon, and agrees to review the Portfolio and discuss the management of it. Sub-Investment Manager shall permit the financial statements, books and records with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager, or their agents at all reasonable times during normal business hours. Sub-Investment Manager shall immediately notify and forward to Investment Manager any legal process served upon it on behalf of the Investment Manager or the Trust. Sub-Investment Manager shall also provide Investment Manager with such other information and reports as may reasonably be requested by Investment Manager from time to time. The investment policies and all other actions of the Portfolio are and shall at all times be subject to the control and direction of Investment Manager and the Trustees of the Trust.
(c) Sub-Investment Manager shall provide to Investment Manager a copy of Sub-Investment Manager's Form ADV as filed with the Securities and Exchange Commission and a list of persons who Sub-Investment Manager wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio. Sub-Investment Manager will furnish Investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments or supplements to the foregoing, if any, as soon as reasonably practicable.
2. Obligations of Investment Manager and the Portfolio.
(a) Investment Manager regarding such matters as the composition of assets in the Portfolio, cash requirements and cash available for investment in the Portfolio, and all other information as may be reasonably necessary for Sub-Investment Manager to perform its responsibilities hereunder.
(b) Investment Manager has herewith furnished Sub-Investment Manager a copy of the Portfolio's registration statement currently in effect and agrees during the continuance of this Agreement to furnish Sub-Investment Manager copies of any amendments or supplements thereto before or at the time the amendments or supplements become effective. Investment Manager agrees to furnish Sub-Investment Manager with minutes of meetings of the Trustees of the Trust applicable to the Portfolio to the extent they may affect the duties of Investment Manager, a certified copy of any financial statements or reports prepared for the Trust, including the Portfolio, by certified or independent public accountants, and with copies of any financial statements or reports made by the Portfolio to its shareholders or to any governmental body or securities exchange, and any further materials or information which Sub-Investment Manager may reasonably request to enable it to perform its functions under this Agreement.
(c) Investment Manager shall provide Sub-Investment Manager
with reports of its administrator, Provident Financial Processing Corporation,
on the monitoring of the Portfolio for compliance with the requirements of
Section 817(h) of the IRC and the rules promulgated thereunder.
3. Custodian. Investment Manager shall provide Sub-Investment Manager with a copy of the Portfolio's agreement with the Custodian (the "Custodian") designated to hold the assets in the Portfolio and any modification thereto (the "Custody Agreement") in advance. The Portfolio assets shall be maintained in the custody of the Custodian identified in, and in accordance with the terms and conditions of, the Custody Agreement. Sub-Investment Manager shall have no liability for the acts or omissions of the Custodian. Any assets added to the Portfolio shall be delivered directly to the Custodian.
4. Rights. Investment Manager agrees and acknowledges that Sub-Investment Manager is the sole owner of the name and mark "Janus" and that all use of any designation comprised in whole or part of Janus (a "Janus Mark") under this Agreement shall inure, to the benefit of Sub-Investment Manager. The use by Investment Manager on its own behalf or on behalf of the Portfolio of any Janus Mark in any advertisement or sales literature or other materials promoting the Portfolio shall be with the prior written consent of Sub-Investment Manager. Investment Manager shall not, and Investment Manager shall use its best efforts to cause the Portfolio not to, without prior written consent of Sub-Investment Manager, make representations regarding Sub-Investment Manager in any disclosure document, advertisement or sales literature or other materials promoting the Portfolio. Upon termination of this Agreement for any reason, Investment Manager shall cease, and Investment Manager shall use its best efforts to cause the Portfolio to cease, all use of any Janus Mark(s) as soon as reasonably practicable.
5. Expenses. Investment Manager shall assume and pay all its organizational, operational, and business expenses not specifically assumed or agreed to be paid by Sub-Investment Manager pursuant hereto, including, without limitation, (a) interest and taxes; (b) brokerage commissions and other costs in connection with the purchase or sale of securities or investment instruments with respect to the Portfolio; and (c) custodian fees and expenses. Any reimbursement of advisory fees required by any expense limitation provision shall be the sole responsibility of Investment Manager. Investment Manager and Sub-Investment Manager shall not be considered as partners or participants in a joint venture. Sub-Investment Manager will pay its own expenses for the services to be provided pursuant to this Agreement to the extent not assumed by Investment Manager above, and will not be obligated to pay any expenses of Investment Manager, the Trust, or the Portfolio.
6. Purchase and Sale of Assets.
(a) Absent instructions from Investment Manager to the contrary, Sub-Investment Manager shall place all orders for the purchase and sale of securities for the Portfolio with brokers or dealers selected by Sub-Investment Manager which may include brokers or dealers affiliated with Sub-Investment Manager. Sub-Investment Manager shall hold harmless and indemnify Investment Manager for any loss, liability, cost, damage or expense (including reasonable attorneys fees and costs) arising from any claim or demand by any past or present shareholder of the Portfolio arising out of the placement of orders for the purchase and sale of securities for the Portfolio with brokers or dealers affiliated with Sub-Investment Manager. Purchase or sell orders for the Portfolio may be aggregated with contemporaneous purchase or sell orders of other clients of Sub-Investment Manager. Sub-Investment Manager shall use its best efforts to obtain execution of Portfolio transactions at prices which are advantageous to the Portfolio and at commission rates that are reasonable in relation to the benefits received. However, Sub-Investment Manager may select brokers or dealers on the basis that they provide brokerage, research, or other services or products to the Portfolio and/or other accounts serviced by Sub-Investment Manager, provided that Sub-Investment Manager shall use its best efforts to ensure that such services benefit Sub-Investment Manager's accounts, including the Portfolio, equitably. Sub-Investment Manager may pay a broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission or dealer spread another broker or dealer would have charged for effecting that transaction if Sub-Investment Manager deals in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research products and/or services provided by such broker or dealer. This determination, with respect to brokerage and research services or products, may be viewed m terms of either that particular transaction or the overall responsibilities which Sub-Investment Manager and its affiliates have with respect to the Portfolio and to accounts over which they exercise investment discretion, and not all such services or products may be used by Sub-Investment Manager in managing the Portfolio. Sub-Investment Manager shall report on allocations of brokerage transactions effected by affiliated brokers to Investment Manager in accordance with procedures agreed upon by Investment Manager and Sub-Investment Manager.
(b) Generally, Sub-Investment Manager's primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the best net price and in the most effective manner possible. Sub-Investment Manager may consider sale of the shares of the Portfolio, as well as recommendations of Investment Manager, subject to the requirements of best net price and most favorable execution. Consistent with this policy, Sub-Investment Manager will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer, the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis.
7. Compensation of Sub-Investment Manager. Investment Manager shall pay to Sub-Investment Manager a monthly fee in accordance with the fee schedule attached to this Agreement. Monthly fees shall be calculated by Investment Manager based upon the average daily net assets of the Portfolio (including cash or cash equivalents) for the preceding month for investment advisory services rendered during that preceding month, and shall be payable to Sub-Investment Manager by the fifteenth day of the succeeding month. The fee for the first month during which Sub-Investment Manager shall render investment advisory services under Agreement shall be based upon the number of days the account was open in that month. If this Agreement is terminated, the fee shall be based upon the number of days the account was open during the month in which the Agreement is terminated.
8. Non-Exclusivity. Investment Manager and the Portfolio agree that the services of Sub-Investment Manager are not to be deemed exclusive and that Sub-Investment Manager and its affiliates are free to act as investment manager and provide other services to various investment companies and other managed accounts. This Agreement shall not in any way limit or restrict Sub-Investment Manager or any of its directors, officers, employees, or agents from buying, selling, or trading any securities or other investment instruments for its or their own account or for the account of others for whom it or they may be acting, provided that such activities will not adversely affect or otherwise impair the performance by Sub-Investment Manager of its duties and obligations under this Agreement. Investment Manager and the Portfolio, recognize and agree that Sub-Investment Manager may provide advice to or take action with it to other clients, which advice or action, including the timing and nature of such action, may differ from or be identical to advice given or action taken with respect to the Portfolio. Sub-Investment Manager shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise provided or authorized, have no authority to act for or represent the Portfolio or Investment Manager m any way or otherwise be deemed an agent of the Portfolio or Investment Manager other than in furtherance of its duties and responsibilities as set forth in this Agreement.
9. Liability. Except as may otherwise be provided by the Investment Company Act of 1940 or federal securities laws, neither Sub-Investment Manager nor any of its officers, directors, employees, or agents shall be subject to any liability to Investment Manager, the Portfolio, or any shareholder of the Portfolio for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the course of, connected with, or arising out of any service to be rendered under this Agreement, except by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under this Agreement. Investment Manager and the Portfolio shall hold harmless and indemnify Sub-Investment Manager for any loss, liability, cost, damage, or expense (including reasonable attorneys fees and costs) arising from any claim or demand by any past or present shareholder of the Portfolio that is not based upon the investment advice provided by Sub-Investment Manager pursuant to this Agreement. Sub-Investment Manager shall use its best efforts and good faith in performing its services hereunder, but Investment Manager acknowledges and agrees that Sub-Investment Manager makes no representation or warranty, express or implied, that any level of performance or investment results will be achieved by the Portfolio or that the Portfolio will perform comparably with any standard or index, including other clients of Sub-Investment Manager, whether public or private.
10. Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by agreement of the parties to this Agreement and by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the portfolio. Any such renewal shall be approved by a vote of a majority of the Trustees who are not interested persons under the Investment Company Act of 1940, cast in person at a meeting called for the purpose of voting on such renewal. This Agreement may be terminated without penalty at any time by either party upon 60 days written notice to the other party, and will automatically terminate in the event of its assignment, as defined in the Investment Company Act of 1940, or upon termination of the Investment Manager's Agreement with the Trust.
11. Amendment. This Agreement may be amended only if such amendment is specifically approved by (a) the vote of a majority of the outstanding voting securities of the Portfolio, if required by applicable law, and (b) the vote of a majority of those directors of the Portfolio who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval.
12. General.
(a) Sub-Investment Manager may perform its services through any employee, officer, or agent of Sub-Investment Manager, and Investment Manager shall not be entitled to the advice, recommendation, or judgment of any specific person.
(b) If any term or provision or this Agreement or the application thereof to any, person or circumstances is held to be invalid or unenforceable to any extent, the remainder of this Agreement or the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.
(c) This Agreement shall be governed by and interpreted in accordance with the laws of the State of Colorado exclusive of conflicts of laws.
AMERICAN SKANDIA LIFE
INVESTMENT MANAGEMENT INC.
By /s/Thomas M. Mazzaferro
Name: Thomas M. Mazzaferro
Title: Vice President
Attest:
/s/Mary Ellen O'Leary
Mary Ellen O'Leary
Title: Staff Counsel
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JANUS CAPITAL CORPORATION
By: /s/David C. Tucker
Name: David C. Tucker
Title: Vice President
Attest:
/s/Stephanie L. Stetle
Stephanie L. Stetle
Title: Assistant Secretary
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SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Investment Manager") and J.P. Morgan Investment Management Inc. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment Manager to act as investment manager for the AST Money Market Portfolio (the "Portfolio") under the terms of a management agreement, dated September 8, 1992, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Investment Manager with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Investment Manager and the Trust, their officers, employees and Trustees concerning the business of the Trust. Investment Manager will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Investment Manager will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Investment Manager to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA and subchapters L and M (including, respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of die Internal Revenue Code, applicable to the Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply with (i) other applicable provisions of state or federal law; (ii) the provision of the Declaration of Trust and By-laws of the Trust; (iii) policies and determinations of the Trust and Investment Manager, (iv) the fundamental policies and investment restrictions of the Trust, as set out in the Trust's registration statement under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and Statement of Additional Information of the Trust; and (vi) investment guidelines or other instructions received in writing from Investment Manager. Sub-Advisor shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment Manager from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Investment Manager from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of this agreement;
(d), The resolutions of the Trustees selecting the Investment Manager as investment manager to the Trust and approving the form of the Investment Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Investment Manager or the Trust, or which, in the sole opinion of the Investment Manager, it believes such non-public information would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Investment Manager. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Investment Manager.
3. . Delivery of Documents to the Investment Manager. The Sub-Advisor has furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager as requested by the Investment Manager and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Investment Manager and legal counsel for the Trust any legal process served upon it on behalf of the Investment Manager or the Trust The Sub-Advisor shall promptly notify the Investment Manager of any changes in any information required to be disclosed in the Trust's Registration Statement
7. Compensation Of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below,
For, all services rendered, the Investment Manager will calculate and pay the Sub-Advisor at the annual rate of- .25 of 1% of' the portion of the net assets of the Portfolio not in excess of $100 million; .20 of 1% of the portion over $100 million but not in excess of $200 million; .15 of 1% of the portion over $200 million but not in excess of $1 billion; and .10 of 1% of the portion in excess of $1 billion.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any a of Investment Manager of the Trust. Except as otherwise provided herein, Investment Manager and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Investment Manager, the Trust or such persons the Investment Manager may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Investment Manager for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Investment Manager or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Investment Managers Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Investment Manager-. American Skandia Investment Services,
Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas Mazzaferro
President & Chief Operating Officer
Sub-Advisor. J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Attention: Paul J. Brignola
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14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Investment Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Investment Manager and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Investment Manager, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Investment Manager or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Investment Manager, the Trust or any affiliated person of the Investment Manager or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Investment Manager or any affiliated person or controlling person of Investment Manager deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Investment Managers responsibilities as investment manager of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Investment Manager, any of Investment Manager's employees or representatives or any of or any person acting on behalf of Investment Manager, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The investment manager represents and wan-ants that (i) the appointment of the Sub-Advisor by the Investment Manager has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/Paul Brignola
Thomas Mazzaferro Paul Brignola
President & Chief Operating Officer Vice President
Date: April 17, 1996 Date: April 30, 1996
--------------- --------------
Attest: /s/Ivette Aquilino Attest: /s/Martin Hack
Ivette Aquilino Martin Hack
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SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Investment Manager") and Federated Investment Counseling (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment Manager to act as investment manager for the Federated High Yield Portfolio (the "Portfolio") under the terms of a management agreement, dated January 3, 1994, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Investment Manager with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Investment Manager and the Trust, their officers, employees and Trustees concerning the business of the Trust. Investment Manager will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Investment Manager will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Investment Manager to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA and subchapters L and M (including, respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of die Internal Revenue Code, applicable to the Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply with (i) other applicable provisions of state or federal law; (ii) the provision of the Declaration of Trust and By-laws of the Trust; (iii) policies and determinations of the Trust and Investment Manager, (iv) the fundamental policies and investment restrictions of the Trust, as set out in the Trust's registration statement under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and Statement of Additional Information of the Trust; and (vi) investment guidelines or other instructions received in writing from Investment Manager. Sub-Advisor shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment Manager from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Investment Manager from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of this agreement;
(d), The resolutions of the Trustees selecting the Investment Manager as investment manager to the Trust and approving the form of the Investment Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Investment Manager or the Trust, or which, in the sole opinion of the Investment Manager, it believes such non-public information would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Investment Manager. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager as requested by the Investment Manager and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Investment Manager and legal counsel for the Trust any legal process served upon it on behalf of the Investment Manager or the Trust The Sub-Advisor shall promptly notify the Investment Manager of any changes in any information required to be disclosed in the Trust's Registration Statement
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below,
For all services rendered, the Investment Manager will calculate and pay the Sub-Advisor at the annual rate of .50 of 1% of' the portion of the net assets of the Portfolio under $30 million; .40 of 1% of the portion of the net assets equal to or in excess of $30 million but under $50 million; .30 of 1% of the portion equal to or in excess of $50 million but under $75 million; and .25 of 1% of the portion equal to or in excess of $75 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any a of Investment Manager of the Trust. Except as otherwise provided herein, Investment Manager and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Investment Manager, the Trust or such persons the Investment Manager may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Investment Manager for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Investment Manager or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Investment Managers Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Investment Manager-. American Skandia Investment Services,
Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas Mazzaferro
President & Chief Operating Officer
Sub-Advisor. Federated Investment Counseling
Federated Investors Tower
1001 Liberty Tower
Pittsburgh, PA 15222-3779
Attention: Mark L. Mallon
President
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14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Investment Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Investment Manager and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Investment Manager, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Investment Manager or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Investment Manager, the Trust or any affiliated person of the Investment Manager or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Investment Manager or any affiliated person or controlling person of Investment Manager deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Investment Managers responsibilities as investment manager of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Investment Manager, any of Investment Manager's employees or representatives or any of or any person acting on behalf of Investment Manager, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The investment manager represents and wan-ants that (i) the appointment of the Sub-Advisor by the Investment Manager has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/Mark L. Mallon
Thomas Mazzaferro Mark L. Mallon
President & Chief Operating Officer
Date: April 19, 1996 Date: April 30, 1996
--------------- --------------
Attest: /s/Ivette Aquilino Attest: /s/Sandra A. Kelly
Ivette Aquilino Sandra A. Kelly
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SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Advisor") and T. Rowe Price Associates, Inc. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Advisor to act as Advisor for the T. Rowe Price Asset Allocation Portfolio (the "Portfolio") under the terms of a management agreement, dated January 3, 1994, with the Trust (the "Management Agreement"); and
WHEREAS the Advisor has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Advisor and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Advisor with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Advisor and the Trust, their officers, employees and Trustees concerning the business of the Trust. Advisor will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Advisor, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Advisor will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Advisor to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal. All transactions will be consummated by payment to or delivery by the Custodian, or such depositories or agents as may be designated by the Custodian, as custodian for the Trust, of all cash and/or securities due to or from the Portfolio, and the Sub-Advisor shall not have possession or custody thereof or any s responsibility or liability with respect thereto. The Sub-Advisor shall advise the Custodian and confirm in writing to the Trust all investment orders placed by it with brokers and dealer at the time and in the manner set forth in the Trust all investment orders placed by it with brokers and dealers at the time and in the manner set forth in the procedures mutually agreed upon by both parties. The Trust shall issue to the Custodian such instructions as may be appropriate in connection with the settlement of any transaction initiated by the Sub-Advisor. The Trust shall be responsible for all custodial arrangements and the payment of all custodial charges and fees, and upon the giving of proper instructions to the Custodian, the Sub-Advisor shall have no responsibility or liability with respect to custodial arrangements or the acts, omissions or other conduct of the Custodian.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA applicable to it, and the regulations promulgated thereunder.
Nothing in this Agreement shall be implied to prevent the Advisor from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Advisor from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Advisor has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Advisor and approving the form of this agreement;
(d) The resolutions of the Trustees selecting the Advisor as Advisor to the Trust and approving the form of the Advisor's Management Agreement with the Trust;
(e) The Advisor's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Advisor as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Advisor or the Trust, or which, in the sole opinion of the Advisor, it believes such non-public information would be deemed to be available to Advisor and/or the Trust.
The Advisor will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Advisor. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Advisor.
3. Delivery of Documents to the Advisor. The Sub-Advisor has furnished the Advisor with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Advisor from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Advisor, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Advisor as requested by the Advisor and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Advisor monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Advisor or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Advisor and legal counsel for the Trust any legal process served upon it on behalf of the Advisor or the Trust The Sub-Advisor shall promptly notify the Advisor of any changes in any information required to be disclosed in the Trust's registration statement
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below.
For all services rendered, the Advisor will calculate and pay the Sub-Advisor at the annual rate of: .50 of 1% of' the portion of the net assets of the Portfolio not in excess of $25 million; plus .35 of 1% of the portion of the net assets over $25 million but not in excess of $50 million; and .25 of 1% of the portion in excess of $50 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Advisor and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any a of Advisor of the Trust. Except as otherwise provided herein, Advisor and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Advisor, the Trust or such persons the Advisor may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
The Trust represents, warrants and agrees that:
A. The Sub-Advisor has been duly appointed by the Trustees of the Trust to provide investment advice to the Portfolio as contemplated hereby;
B. The Trust will deliver to the Sub-Advisor a true and complete copy of its then current prospectus as amended or supplemented from time to time and such other documents or instruments governing the investment of the Portfolio and such other information as is necessary for the Sub-Advisor to carry out its obligations under this Agreement; and
C. The Trust is currently in compliance and shall at all times comply with the requirements imposed upon the Trust by applicable laws and regulations.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Advisor for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Advisor may have under applicable law.
The Advisor agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Advisor agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Advisor or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Advisors Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Advisor within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Advisor: American Skandia Investment Services,
Incorporated
Attention: Thomas Mazzaferro
Chief Operating Officer
One Corporate Drive
Shelton, Connecticut 06484
Sub-Advisor: T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
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Attention: Henry Hopkins , Esq.
14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Advisor and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Advisor, the Trust or any affiliated person of the Advisor or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Advisor or any affiliated person or controlling person of Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Advisor agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Advisors responsibilities as Advisor of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Advisor, any of Advisor's employees or representatives or any of or any person acting on behalf of Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Advisor's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Advisor represents and wan-ants that (i) the appointment of the Sub-Advisor by the Advisor has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
17. Assignment. No assignment of this Agreement shall be made by either party, and this Agreement shall automatically terminate in the event of such assignment. The Sub-Advisor shall notify the Portfolio in writing sufficiently in advance of any proposed change of control, as will enable the Trust to consider whether an assignment will occur, and to take the steps necessary to enter into a new contract with the Sub-Advisor.
18. Amendment. This Agreement may be amended at any time, but only by written agreement between the Advisor and Sub-Advisor, which amendment is subject to the approval of the Trustees and the shareholders of the Trust in the manner required by the Act.
The effective date of this agreement is January 3, 1994
FOR THE ADVISOR: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/Nancy A. Morris
Thomas Mazzaferro Nancy A. Morris
President & Chief Operating Officer
Date: December 22, 1993 Date: December 28, 1993
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Attest: /s/Patricia Randol Attest: /s/Laura Chamey
Patricia Randol Laura Chamey
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SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Investment Manager") and Rowe Price-Fleming International, Inc. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment Manager to act as Investment Manager for the T. Rowe Price International Equity Portfolio (the "Portfolio") under the terms of a management agreement, dated January 3, 1994, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Investment Manager with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Investment Manager and the Trust, their officers, employees and Trustees concerning the business of the Trust. Investment Manager will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Investment Manager will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Investment Manager to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
The Investment Manager represents that it reviewed the Registration Statement of the Trust, including any amendments or supplements thereto and any Proxy Statement relating to the approval of this Agreement, as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the manager or information relating directly or indirectly to the Investment Manager, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Investment Manager further represents and warrants that it is an invest adviser registered under the ICA and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA and subchapters L and M (including, respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of die Internal Revenue Code, applicable to the Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply with (i) other applicable provisions of state or federal law; (ii) the provision of the Declaration of Trust and By-laws of the Trust; (iii) policies and determinations of the Trust and Investment Manager, (iv) the fundamental policies and investment restrictions of the Trust, as set out in the Trust's registration statement under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and Statement of Additional Information of the Trust; and (vi) investment guidelines or other instructions received in writing from Investment Manager. Sub-Advisor shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment Manager from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Investment Manager from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of this agreement;
(d), The resolutions of the Trustees selecting the Investment Manager as Investment Manager to the Trust and approving the form of the Investment Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Investment Manager or the Trust, or which, in the sole opinion of the Investment Manager, it believes such non-public information would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Investment Manager. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager as requested by the Investment Manager and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Investment Manager and legal counsel for the Trust any legal process served upon it on behalf of the Investment Manager or the Trust The Sub-Advisor shall promptly notify the Investment Manager of any changes in any information required to be disclosed in the Trust's Registration Statement
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and pay the Sub-Advisor at the annual rate of: .75 of 1% of' the portion of the net assets of the Portfolio not in excess of $20 million; plus .60 of 1% of the portion of the net assets over $20 million but not in excess of $50 million; and .50 of 1% of the portion in excess of $50 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any expenses of Investment Manager of the Trust. Except as otherwise provided herein, Investment Manager and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Investment Manager, the Trust or such persons the Investment Manager may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
The Investment Manager hereby represents that it has provided to the Sub-Advisor a true, correct and complete copy of the Registration Statement of the Trust as in effect on the date of this Agreement, including any amendments and supplements thereto, and agrees to provide to Sub-Advisor true, correct and complete copies of any amendments and supplements thereto subsequent to the date of this Agreement.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Investment Manager for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Investment Manager or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Investment Manager-. American Skandia Investment Services,
Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor. Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry Hopkins
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14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Investment Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Investment Manager and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Investment Manager, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Investment Manager or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Investment Manager, the Trust or any affiliated person of the Investment Manager or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Investment Manager or any affiliated person or controlling person of Investment Manager deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Investment Managers responsibilities as Investment Manager of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Investment Manager, any of Investment Manager's employees or representatives or any of or any person acting on behalf of Investment Manager, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and wan-ants that (i) the appointment of the Sub-Advisor by the Investment Manager has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Amendment. This Agreement may be amended by mutual written consent of the parties, subject to the provisions of the ICA.
17. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/Nancy A. Morris
Thomas Mazzaferro Nancy A. Morris
President & Chief Operating Officer
Date: April 17, 1996 Date: May 1, 1996
--------------- -----------
Attest: /s/Patricia Randol Attest: /s/Laura Chamey
Patricia Randol Laura Chamey
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insert agreement
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Investment Manager") and Pacific Investment Management Company (the "Sub-Advisor"), a Delaware General Partnership.
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment Manager to act as Investment Manager for the PIMCO Total Return Bond Portfolio (the "Portfolio") under the terms of a management agreement, dated January 3, 1994, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Investment Manager with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Investment Manager and the Trust, their officers, employees and Trustees concerning the business of the Trust. Investment Manager will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Investment Manager will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Investment Manager to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplements thereto, and any Proxy Statement relating to the approval of this Agreement, as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the manager or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date thereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Investment Manager further represents and warrants that it is an invest adviser registered under the ICA and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA and subchapters L and M (including, respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of die Internal Revenue Code, applicable to the Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply with (i) other applicable provisions of state or federal law; (ii) the provision of the Declaration of Trust and By-laws of the Trust; (iii) policies and determinations of the Trust and Investment Manager, (iv) the fundamental policies and investment restrictions of the Trust, as set out in the Trust's registration statement under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and Statement of Additional Information of the Trust; and (vi) investment guidelines or other instructions received in writing from Investment Manager. Sub-Advisor shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment Manager from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Investment Manager from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of this agreement;
(d), The resolutions of the Trustees selecting the Investment Manager as Investment Manager to the Trust and approving the form of the Investment Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Investment Manager or the Trust, or which, in the sole opinion of the Investment Manager, it believes such non-public information would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Investment Manager. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager as requested by the Investment Manager and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Investment Manager and legal counsel for the Trust any legal process served upon it on behalf of the Investment Manager or the Trust The Sub-Advisor shall promptly notify the Investment Manager of any changes in any information required to be disclosed in the Trust's Registration Statement
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and pay the Sub-Advisor at the annual rate of: .65 of 1% of' the portion of the net assets of the Portfolio not in excess of $75 million; plus .60 of 1% of the portion of the net assets over $75 million but not in excess of $150 million; and .55 of 1% of the portion in excess of $150 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any expenses of Investment Manager of the Trust. Except as otherwise provided herein, Investment Manager and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Investment Manager, the Trust or such persons the Investment Manager may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Investment Manager for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Investment Manager or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Investment Manager. American Skandia Investment Services,
Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor. Pacific Investment Management Company
840 Newport Center Drive
Suite 360
Newport Beach, California 92660
Attention: Gordon C. Hally
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14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Investment Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Investment Manager and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Investment Manager, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Investment Manager or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Investment Manager, the Trust or any affiliated person of the Investment Manager or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Investment Manager or any affiliated person or controlling person of Investment Manager deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Investment Managers responsibilities as Investment Manager of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Investment Manager, any of Investment Manager's employees or representatives or any of or any person acting on behalf of Investment Manager, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and wan-ants that (i) the appointment of the Sub-Advisor by the Investment Manager has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/James Muzzy
Thomas Mazzaferro James Muzzy
President & Chief Operating Officer
Date: as of May 1, 1996 Date: May 14, 1996
------------------ ------------
Attest: /s/Mary Ellen O'Leary Attest: /s/Richard M. Weil
Mary Ellen O'Leary Richard M. Weil
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SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Investment Manager") and T. Rowe Price Associates, Inc. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment Manager to act as Investment Manager for the T. Rowe Price Natural Resources Portfolio (the "Portfolio") under the terms of a management agreement, dated May 1, 1995, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Investment Manager with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Investment Manager and the Trust, their officers, employees and Trustees concerning the business of the Trust. Investment Manager will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Investment Manager will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Investment Manager to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA and subchapters L and M (including, respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4) of the Internal Revenue Code, applicable to the Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply with (i) other applicable provisions of state or federal law; (ii) the provision of the Declaration of Trust and By-laws of the Trust; (iii) policies and determinations of the Trust and Investment Manager, (iv) the fundamental policies and investment restrictions of the Trust, as set out in the Trust's registration statement under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and Statement of Additional Information of the Trust; and (vi) investment guidelines or other instructions received in writing from Investment Manager. Sub-Advisor shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment Manager from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Investment Manager from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of this agreement;
(d), The resolutions of the Trustees selecting the Investment Manager as Investment Manager to the Trust and approving the form of the Investment Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Investment Manager or the Trust, or which, in the sole opinion of the Investment Manager, it believes such non-public information would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Investment Manager. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager as requested by the Investment Manager and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Investment Manager and legal counsel for the Trust any legal process served upon it on behalf of the Investment Manager or the Trust The Sub-Advisor shall promptly notify the Investment Manager of any changes in any information required to be disclosed in the Trust's Registration Statement
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and pay the Sub-Advisor at the annual rate of: .60 of 1% of' the portion of the net assets of the Portfolio not in excess of $20 million; plus .50 of 1% of the portion of the net assets in excess of $20 million but not in excess of $50 million. When the net assets exceed $50 million, the fee will be .50 of 1% of all net assets.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any expenses of Investment Manager of the Trust. Except as otherwise provided herein, Investment Manager and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Investment Manager, the Trust or such persons the Investment Manager may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Investment Manager for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Investment Manager or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Investment Manager. American Skandia Investment Services,
Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor. T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins
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14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Investment Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Investment Manager and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Investment Manager, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Investment Manager or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Investment Manager, the Trust or any affiliated person of the Investment Manager or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Investment Manager or any affiliated person or controlling person of Investment Manager deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Investment Managers responsibilities as Investment Manager of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Investment Manager, any of Investment Manager's employees or representatives or any of or any person acting on behalf of Investment Manager, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and wan-ants that (i) the appointment of the Sub-Advisor by the Investment Manager has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Amendment. This Agreement may be amended by mutual written consent of the parties, subject to the provisions of the ICA.
17. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/Nancy A. Morris
Thomas Mazzaferro Nancy A. Morris
President & Chief Operating Officer
Date: April 17, 1996 Date: May 1, 1996
--------------- -----------
Attest: /s/Ivette Aquilino Attest: /s/Dawn M. Miller
Ivette Aquilino Dawn M. Miller
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SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated (the "Investment Manager") and Pacific Investment Management Company (the "Sub-Advisor"), a Delaware General Partnership.
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust organized with one or more series of shares, and is registered as an investment company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment Manager to act as Investment Manager for the PIMCO Limited Maturity Bond Portfolio (the "Portfolio") under the terms of a management agreement, dated May 1, 1995, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have approved the engagement of the Sub-Advisor to provide investment advice and other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services The Sub-Advisor will furnish the Investment Manager with investment advisory services in connection with a continuous investment program for the Portfolio which is to be managed in accordance with the investment objective, investment policies and actions of the Portfolio as set forth in the Prospectus and Statement of Additional Information of the Trust and in accordance with the Trust's Declaration of Trust and By-laws. Officers, directors, and employees of Sub-Advisor will be available to consult with Investment Manager and the Trust, their officers, employees and Trustees concerning the business of the Trust. Investment Manager will promptly furnish Sub-Advisor with any amendments to such documents. Such amendments will not be effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which is in turn subject to the supervision and control of the Trust's Board of Trustees, the Sub-Advisor, will in its discretion determine and select the securities to be purchased for and sold from the Portfolio from time to time and will place orders with and give instructions to brokers, dealers and others for all such transactions and cause such transactions to be executed. The Portfolio will be maintained by a custodian bank (the "Custodian") and the Investment Manager will authorize the Custodian to honor orders and instructions by employees of the Sub-Advisor authorized by the Investment Manager to settle transactions in respect of the Portfolio. No assets may be withdrawn from the Portfolio other than for settlement of transactions on behalf of the Portfolio except upon the written authorization of appropriate officers of the Trust who shall have been certified as such by proper authorities of the Trust prior to the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or the Portfolio, and concerning the individual issuers whose securities are included in the Portfolio or the activities in which they engage, or with respect to securities which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplement thereto, and any Proxy Statement relating to the approval of this Agreement as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the Sub-Advisor or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date hereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Sub-Advisor further represents and warrants that it is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
The Sub-Advisor represents that it reviewed the Registration Statement of the Trust, including any amendments or supplements thereto, and any Proxy Statement relating to the approval of this Agreement, as filed with the Securities and Exchange Commission and represents and warrants that with respect to disclosure about the manager or information relating directly or indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement contains, as of the date thereof, no untrue statement of any material fact and does not omit any statement of material fact which was required to be stated therein or necessary to make the statements contained therein not misleading. The Investment Manager further represents and warrants that it is an invest adviser registered under the ICA and under the laws of all jurisdictions in which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will comply with the requirements of the ICA and subchapters L and M (including, respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4) of the Internal Revenue Code, applicable to the Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply with (i) other applicable provisions of state or federal law; (ii) the provision of the Declaration of Trust and By-laws of the Trust; (iii) policies and determinations of the Trust and Investment Manager, (iv) the fundamental policies and investment restrictions of the Trust, as set out in the Trust's registration statement under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and Statement of Additional Information of the Trust; and (vi) investment guidelines or other instructions received in writing from Investment Manager. Sub-Advisor shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment Manager from engaging other Sub-advisors to provide investment advice and other services in relation to portfolios of the Trust for which Sub-Advisor does not provide such or to prevent Investment Manager from providing such services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof,
(b) The By-laws of the Trust in effect on the date hereof,
(c) The resolutions of the Trustees approving the engagement of the Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of this agreement;
(d), The resolutions of the Trustees selecting the Investment Manager as Investment Manager to the Trust and approving the form of the Investment Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as currently in effect; and
(g) A list of companies the securities of which are not to be bought or sold for the Portfolio because of nonpublic information regarding such companies that is available to Investment Manager or the Trust, or which, in the sole opinion of the Investment Manager, it believes such non-public information would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time with copies, properly. certified or otherwise authenticated of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (f) above will be provided within 30 days of the time such materials became available to the Investment Manager. Such amendments or supplements as to item (g) above will be provided not later than the end of the business day next following the date such amendments or supplements become known to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized to give written and/or oral instructions to Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time with copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. Such amendments or supplements as to items (a) through (d) above will be provided within 30 days of the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish all necessary investment facilities, including salaries of personnel required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions Sub-Advisor is responsible for decisions to buy and sell securities for the Portfolio, broker-dealer selection, and negotiation of its brokerage commission rates. Sub-Advisor shall determine the securities to be purchased or sold by the Portfolio pursuant to its determinations with or through such persons, brokers or dealers, in conformity with the policy with respect to brokerage as set forth in the Trust's Prospectus and Statement of Additional Information, or as the Board of Trustees may determine from time to time. Generally, Sub-Advisors primary consideration in placing Portfolio securities transactions with broker-dealers for execution is to obtain and maintain the availability of best execution at the best net price and in the most effective manner possible. The Sub-Advisor may consider sale of shares of the Portfolio, as well as recommendations of the Investment Manager, subject to the requirements of best net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the following into consideration: the best net price available, the reliability, integrity and financial condition of the broker-dealer the size of and difficulty in executing the order, and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continual basis. Accordingly, the cost of the brokerage commissions to the Portfolio may be greater than that available from other brokers if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies and procedures as the Board of Trustees of the Trust may determine, the Sub-Advisor shall not be deemed to' have acted unlawfully or to have breached any duty solely by reason of its having caused the Portfolio to pay a broker dealer that provides such services to the Sub-Advisor for the Portfolio's use an amount of commission for effecting a 'portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that on, if the Sub-Advisor determines in good faith that such amount of commission was reasonable hi relation to the value of the research services provided by such broker, viewed in terms of either that particular transaction or the Sub-Advisors ongoing responsibilities with respect to the Portfolio. The Sub-Advisor is further authorized to allocate the orders placed by it on behalf of the Portfolio to such broker-dealers who also provide research or statistical material, or other services to the Portfolio or the Sub-Advisor. Such allocation shall be in such amounts and proposals as the Sub-Advisor shall determine and the Sub-Advisor will report on said allocations to the Investment Manager as requested by the Investment Manager and, in any event, at least once each calendar year if no specific request is made, indicating the brokers to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager monthly, quarterly and annual reports concerning transactions and performance of the Portfolio, including information required in the Trust's Registration, in such form as may be mutually agreed, to review the Portfolio and discuss the management of it. The Sub-Advisor shall permit the financial statements, books and with respect to the Portfolio to be inspected and audited by the Trust, the Investment Manager or their agents at all reasonable times during normal business hours. The Sub-Advisor shall immediately notify and forward to both Investment Manager and legal counsel for the Trust any legal process served upon it on behalf of the Investment Manager or the Trust The Sub-Advisor shall promptly notify the Investment Manager of any changes in any information required to be disclosed in the Trust's Registration Statement
7. Compensation of Sub-Advisor. The amount of the compensation to the Sub-Advisor is computed at an annual rate. The fee is payable monthly in arrears, based on the average daily net assets of the Portfolio for each month, at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and pay the Sub-Advisor at the annual rate of: .65 of 1% of' the portion of the net assets of the Portfolio not in excess of $75 million; plus .60 of 1% of the portion of the net assets over $75 million but not in excess of $150 million; and .55 of 1% of the portion in excess of $150 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value of the Portfolio shall be valued as set forth in the then current registration statement of the Trust. If this agreement is terminated, the payment shall be prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners or participants in a joint venture. Sub-Advisor will pay its own owners for the services to be provided pursuant to this Agreement and will not be obligated to pay any expenses of Investment Manager of the Trust. Except as otherwise provided herein, Investment Manager and the Trust will not be obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment It is understood that any information or recommendation supplied by the Sub-Advisor in connection with the performance of its obligations hereunder is to be regarded as confidential and for use only by the Investment Manager, the Trust or such persons the Investment Manager may designate in connection with the Portfolio. It is also understood that any information supplied to Sub-Advisor in connection with the performance of its obligations hereunder, particularly, but not limited to, any list of securities which, on a temporary basis, may not be bought or sold for the Portfolio, is to be regarded as confidential and for use only by the Sub-Advisor in connection with its obligation to provide investment advice and other services to the Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby acknowledges that it is registered as an investment advisor under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
10. Liability, The Sub-Advisor shall use its best efforts and good faith in the performance of its services hereunder. However, so long as the Sub-Advisor has acted in good faith and has used its best efforts, then in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations hereunder, it shall not be liable to the Trust or its shareholders or to the Investment Manager for any act or omission resulting in any loss suffered in any portfolio of the Trust in connection with any service to be provided herein. The Federal laws impose responsibilities under certain circumstances on persons who act in good faith, and therefore, nothing herein shall in any way constitute a waiver of limitation of any rights which the Trust or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable for any failure to recommend the purchase or sale of any security on behalf of the Portfolio on the basis of any information which might, in Sub-Advisor's opinion, constitute a violation of any federal or state laws, rules or regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the Sub-Advisor and any of its partners or employees, and persons affiliated with it or with any such partner or employee may render investment management or advisory services to other investors and institutions, and such investors and institutions may own, purchase or sell, securities or other interests in property the same as or similar to those which are selected for purchase, holding or sale for the Portfolio, and the Sub-Advisor shall be in all free to take action with respect to investments in securities or other interests in property the same as or similar to those selected for purchase, holding or sale for the Portfolio. Purchases and sales of individual securities on behalf of the Portfolio and other portfolios of the Trust or accounts for other investors or institution, will be made on a basis that is equitable to all portfolios of the Trust and other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any obligation to purchase or sell or recommend for purchase or sale, for the Portfolio any security which it, its partners, affiliates or employees may purchase or sell for the Sub-Advisor or such partner's, affiliate's or employee's own accounts or for the account of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and effect for one year from the date hereof, and is renewable annually thereafter by specific approval of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Portfolio. Any such renewal shall be approved by the vote of a majority of the Trustees who are not interested persons under the ICA, cast in person at a meeting called for the purpose of voting on such renewal. This agreement may be terminated without penalty at any time by the Investment Manager or Sub-Advisor upon 60 days written notice, and will automatically terminate in the event of its assignment by either party to this Agreement as defined in the ICA, or (provided Sub-Advisor has received prior written notice thereof) upon termination Of the Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a reasonable time of any change in the personnel of the Sub-Advisor with responsibility for making investment decisions in relation to the Portfolio or who have been audited to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated by this agreement shall be in writing. All such communications shall be addressed to the recipient at the address set forth below, provided that either party may, by notice, designate a different address for such party.
Investment Manager-. American Skandia Investment Services,
Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor. Pacific Investment Management Company
840 Newport Center Drive
Suite 360
Newport Beach, California 92660
Attention: Gordon C. Hally
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14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless Investment Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ("affiliated person') of Investment Manager and each person, if any who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"), controls ("controlling person") Investment Manager, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Investment Manager or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act, the Investment Advisees Act of 1940 ("Advisees Act"), under any other statute, at common law or otherwise arising out of Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the extent of and as a result of the willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made in reliance upon written information furnished to Investment Manager, the Trust or any affiliated person of the Investment Manager or the Trust or upon verbal information confirmed by the Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions according to the standards and requirements of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of Investment Manager or any affiliated person or controlling person of Investment Manager deemed to protect such person against any liability to which any such person would otherwise be subject by reason of willful misconduct bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the 1940 Act ('affiliated person") of Sub-Advisor and each person, if any who, within the meaning Of Section 15 of the Securities Act of 1933 (the ."1933 Act"), controls ("controlling person") Sub-Advisor, against any and all losses, claims, damages, liabilities or litigation (including reasonable legal and other expenses), to which Sub-Advisor or such affiliated person or controlling person may become subject under the 1933 Act, the 1940 Act the Investment Adviser's Act of 1940 ('Advisees Act"), under any other statute, at common law or otherwise, arising out of Investment Managers responsibilities as Investment Manager of the Portfolio (1) to the extent of and as a result of the willful misconduct. bad faith, or gross negligence by Investment Manager, any of Investment Manager's employees or representatives or any of or any person acting on behalf of Investment Manager, or (2) as a result of any untrue statement or alleged untrue statement of a material fact contained in a prospectus or statement of additional information covering the Portfolio or the Trust or any amendment thereof or any supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, if such a statement or omission was made by the Trust other than in reliance upon written information furnished by Sub-Advisor, or any affiliated person of the Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor in writing, provided, however, that in no case is Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person or controlling person of Sub-Advisor deemed to protect such person against any liability to which any such person would otherwise be subject by man of willful misconduct, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and wan-ants that (i) the appointment of the Sub-Advisor by the Investment Manager has been duly authorized and (ii) it has acted and will continue to act in connection with the transactions contemplated hereby, and the transactions contemplated hereby are, in conformity with the Investment Company Act of 1940, the Trusts governing documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to perform the services contemplated to be performed hereunder.
16. Governing Law. This agreement is made under, and shall be governed by and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
/s/Thomas Mazzaferro /s/James Muzzy
Thomas Mazzaferro James Muzzy
President & Chief Operating Officer
Date: Date: May 14, 1996
Attest: /s/Mary Ellen O'Leary Attest: /s/Richard M. Weil
Mary Ellen O'Leary Richard M. Weil
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insert Founders Passport
(to be filed by future amendment)
(to be filed by future amendment)
SALES AGREEMENT
THIS AGREEMENT is made by and between American Skandia Trust ("FUND"), a Massachusetts business trust, and American Skandia Life Assurance Corporation ("SKANDIA"), a life insurance company organized under the laws of the State of Connecticut.
WHEREAS, FUND is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 ("40 Act") as an open-end diversified investment management company; and
WHERAS, FUND is organized as a series fund authorized to issue separate series of shares ("Portfolios"); and
WHEREAS, FUND was organized as a funding vehicle to sell its shares only to variable life insurance separate accounts and variable annuity separate accounts, and that such variable products separate accounts may be of insurance companies not affiliated with SKANDIA or any of SKANDIA's affiliated companies (hereinafter referred to as "shared funding") and the FUND may be the investment vehicle for both variable life and variable annuity contracts (hereinafter referred to as "mixed funding"); and
WBEREAS, SKANDIA has established a separate account to offer variable contracts and may establish others, and is desirous of having certain Portfolios of FUND serve as funding vehicles for some of its variable contracts, and possibly others in the future.
NOW, THEREFORE, and in consideration of the mutual covenants herein contained, it is hereby agreed by and between FUND and SKANDIA as follows:
1. FUND will make available to the separate accounts designated by SKANDIA shares of FUND Portfolios designated by FUND for investment of certain account values of variable contracts supported by the designated separate accounts. FUND will diversify the assets in each portfolio in the manner required for the variable contracts to be treated as such under Section 817(h) of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder.
2. FUND will make the shares of the designated Portfolios available to such separate accounts at net asset value.
3. Orders shall be placed for such shares with the FUND's custodian pursuant to procedures which are then in effect and which may be modified from time to time. FUND will inform SKANDIA of the procedures for placing orders with the FUND's custodian and will undertake to inform SKANDIA of any modifications to such procedures.
4. FUND will provide SKANDIA camera ready copy of the current FUND prospectus and any supplements thereto for printing by SKANDIA. FUND will provide SKANDIA a copy of the statement of additional information for duplication. FUND will provide SKANDIA copies of its proxy material suitable for printing. FUND will provide SKANDIA annual and semi-annual reports and any supplements thereto, in camera-ready form. For printing and delivery of such documents to the beneficial owners of FUND shares, FUND will pay SKANDIA 0.1%, on an annualized basis, of the net asset value of the shares legally owned by any separate accounts of SKANDIA. Such value is to be determined on the last day of each calendar quarter and is payable within 10 days after the end of such calendar quarter. The amount payable quarterly is one quarter of the above-stated percentage.
5. SKANDIA will only (i) convey any information or make any representations concerning FUND or its investment advisor, its shares or operations which are contained in the most recent Registration Statement relating to the FUND and any supplements thereto or (ii) use any materials or advertising which mention the FUND or its investment advisor (including sales literature, brochures, letters, illustrations and other similar material, whether transmitted directly to potential applicants or published in print or audio-visual media), if, in either case, FUND approves such items prior to use.
Neither SKANDIA nor FUND will use the other's name nor any other name, logo, trademark, service mark nor symbol that is now or may hereafter be owned by the other party, a parent or an affiliate or subsidiary thereof, except in the manner and to the extent that the other party may specifically authorize. Upon termination of this Agreement, each party will discontinue the use of such name, logo, trademark, service mark or symbol belonging to the other party, parent, affiliate or subsidiary thereof. Such discontinuance will occur immediately or, if applicable, as soon as permitted under applicable law or regulation.
6. (a) SKANDIA shall be solely responsible for its actions in connection with its use of FUND and its shares and shall indemnify and hold harmless FUND, its officers and directors from any liability for its negligent or wrongful acts or failures to act with respect to SKANDIA's use of FUND or its shares. Notwithstanding the foregoing, SKANDIA will not be liable to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in good faith reliance upon and in conformity with information furnished by FUND specifically for use in the presentation of the Registration Statement relating to the variable contracts.
(b) FUND shall be soley responsible for its actions in connection with its operations and shall indemnify and hold harmless SKANDIA, its officers and directors from any liability for its negligent or wrongful acts or failures to act with respect thereto. Notwithstanding the foregoing, FUND will not be liable to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in good faith reliance upon and in conformity with information furnished by SKANDIA specifically for use in the presentation of the Registration Statement relating to FUND.
7. SKANDIA agrees to inform the Board of Directors of FUND ("BOARD") of the existence of or any potential for any material irreconcilable conflict of interest between the interests of owners of contracts using the separate accounts of SKANDIA which invest in the FUND and/or the interests of owners of contracts using any other separate account of any other insurance company which invests in the FUND.
A majority of the BOARD shall be composed of persons who are not "interested persons" of FUND as defined by the '40 Act. The BOARD shall monitor FUND for the existence of any material irreconcilable conflicts between the interests of the contract owners of all separate accounts investing in the FUND.
Any material irreconcilable conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any portfolio are being managed;
(e) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different life insurance companies utilizing FUND; or
(f) a decision by SKANDIA to disregard the voting instructions of contract owners.
SKANDIA will be responsible for assisting the BOARD in carrying out its responsibilities by providing the BOARD with all information reasonably necessary for the BOARD to consider any issue raised including, inter alia, any potential or existing conflicts between contract owners and information as to a decision by SKANDIA to disregard voting instructions of contract owners.
It is agreed that if it is determined by a majority of the members of the BOARD or a majority of its disinterested Directors that a material irreconcilable conflict exists affecting SKANDIA, SKANDIA shall, at its own expense, take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, which steps may include, but are not limited to:
(i) withdrawing the assets allocable to some or all of the separate accounts of SKANDIA from FUND or any Portfolio and reinvesting such assets in a different investment medium, including another Portfolio of the FUND, if any, or submitting to a vote of all affected contract owners the question of whether segregation of assets should be implemented and, as appropriate, segregating the assets of any particular group (i.e. annuity contract owners, life insurance contract owners or qualified contract owners) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change;
(ii) establishing a new registered management investment company or managed separate account.
If a material irreconcilable conflict arises because of SKANDIA's decisions to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, SKANDIA may be required, at the FUND's election, to withdraw its separate account's investment in FUND. No charge or penalty will be imposed against a separate account as a result of such a withdrawal. SKANDIA agrees that any remedial action taken by it in resolving any material conflicts of interest will be carried out with a view only to the interest of contract owners.
For purposes hereof, a majority of the disinterested members of the BOARD shall determine whether or not any proposed action adequately remedies any material irreconcilable conflict. In no event will FUND be required to establish a new funding medium for any variable contracts. SKANDIA shall not be required by the terms hereof to establish a new funding medium for any variable contracts if an offer to do so has been declined by vote of a majority of adversely affected contract owners. Should FUND or any affiliate of FUND choose to establish a new funding medium or recommend other remedial action as a way to resolve any material irreconcilable conflict, SKANDIA will recommend to its policyowners that they decline an offer to establish a new funding medium or take other remedial action only if it believes it is in the best interest of the policyowners to do so.
FUND will undertake to promptly make known to SKANDIA the BOARD's determination of the existence of a material irreconcilable conflict and its implications.
8. SKANDIA shall provide pass-through voting privileges to all variable contract owners so long as the Securities and Exchange Commission continues to interpret the '40 Act to require such pass-through voting privileges for variable contract owners. SKANDIA shall be responsible for assuring that each of its separate accounts participating in FUND calculates voting privileges in a manner consistent with the `40 Act. It is a condition of the Agreement that SKANDIA will vote shares of FUND, for which it has not received voting instructions as well as shares attributable to SKANDIA, in the same proportion as it votes shares for which it has received instructions.
9. The Agreement shall terminate automatically in the event of its assignment, unless made with the written consent of each party.
10. This Agreement shall continue in full force and effect from its effective date, and may be terminated at any time on sixty (60) days' written notice to the other party hereto, without the payment of any penalty.
11. This Agreement shall be subject to the provisions of the federal securities laws and the rules and regulations thereunder, including any exemptive relief therefrom and the orders of the Securities and Exchange Commission setting forth such relief, and the laws of the State of Connecticut.
FUND will comply with applicable state law concerning permissible investments for separate accounts, provided that SKANDIA will notify the FUND of any changes in such laws when SKANDIA has been made aware of such changes in connection with SKANDIA contracts which utilize FUND.
12. If any provisions of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
13. Any notice required under this Agreement shall be deemed to have been given to SKANDIA if mailed to:
American Skandia Life Assurance Corporation One Corporate Drive Shelton, Connecticut 06484 Attention: Thomas Mazzaferro
and notice is deemed given to the FUND if mailed to:
American Skandia Trust One Corporate Drive Shelton, Connecticut 06484 Attention: Mary Ellen O'Leary
or such other address furnished to the other party pursuant hereto.
14. The waiver by any party of a breach by any other party of any of the provisions of this Agreement shall not operate or be deemed as a waiver of any other provision of this Agreement or of any subsequent breach thereof by any party.
15. This Agreement may be executed in any number of counterparts and by the different parties hereto each of which shall be deemed to be an original and all of which, when so executed and delivered by the parties, taken together, shall constitute one and the same instrument.
16. This Agreement constitutes the entire agreement between the parties hereto and may not be modified except in a written instrument executed by all parties hereto.
17. It is understood by the parties that this Agreement is not to be deemed an exclusive arrangement.
Executed this 26th day of May, 1992.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
ATTEST: /s/Jacqueline Crader
Jacqueline Crader
By: Gordon Boronow
/s/Gordon Boronow
AMERICAN SKANDIA TRUST
ATTEST: Jacqueline Crader
/s/Jacqueline Crader
By: Thomas M. Mazzaferro
/s/Thomas M. Mazzaferro
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CUSTODY AGREEMENT
Custody Agreement, dated between MORGAN STANLEY TRUST COMPANY (the Custodian and American Skandia Trust (the "Customer").
1. The Customer hereby appoints the Custodian as a custodian of Securities (as hereinafter defined) owned or held by the Customer and instructs the Custodian to establish an account identified as belonging to the Customer (the "Account"). The Custodian shall have general responsibility for the safekeeping of such Securities and any and all monies and other property (collectively, the "Property") received by the Custodian or any Subcustodian appointed as described below for the account of the Customer. It is understood that the specific procedures the Custodian will use in carrying out its responsibilities under this Agreement are set forth in the procedures manual attached hereto an Exhibit A (the "Procedures Manual"), as such Procedures Manual may be amended from time to time by written agreement between the Custodian and the Customer. The Customer acknowledges that the Procedures Manual constitutes an integral part of this Agreement.
2. The Customer agrees that the Property held for the Customer's account may be physically held outside the United states.
3. The Property held in the Account may be held in custody and deposit accounts that have been established by the Custodian with one or more domestic banks qualified under the Investment Company Act of 1940, as amended (the "Act"), to act as a custodian, or foreign banks meeting the requirements of rule 17f-5 under the Act or through the facilities of one or more clearing agencies or central securities depositories, permitted by rule 17f-4 under the Act, in each case approved by the Customer's Board of Director's, as listed on Exhibit C hereto (the "Subcustodians"), as such Exhibit may be amended from time to time by written agreement between the Custodian and the Customer. The Custodian may hold Property for all of its customers with a Subcustodian in a single account that is identified as belonging to the Custodian for the benefit of its customers. Any Subcustodian may hold Property in a securities depository and may utilize a clearing agency. The Custodian shall not be liable for any loss resulting from the physical presence of any Property in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, exchange controls or acts of war or terrorism. Except as provided in the previous sentence, the liability of the Custodian for losses incurred by the Customer in respect of Property held by the Custodian for the Customers account shall not be affected by the custodian's use of Subcustodians.
4. With respect to Property held by a Subcustodian pursuant to section 3:
(a) The Custodian will identify on its books as belonging to the Customer any Property held by such Subcustodian for the Custodian's account;
(b) In the event that the Subcustodian holds Property in a securities depository or clearing agency, such Subcustodian will be required by its agreement with the Custodian to identify on its books such Property as being held for the account of the Custodian as a custodian for its customers;
(c) The custodian shall require that Property held by the Subcustodian for the Custodian's account be identified on the Subcustodian's books as separate from any other property held by the Subcustodian and as held solely for the benefit of customers of the Custodian; and
(d) The Custodian will hold Property through a Subcustodian only if (i) such Subcustodian and any securities depository or clearing agency in which such Subcustodian holds Property, or any of their creditors, may not assert any right, charge, security interest, lien, encumbrance or other claim of any kind to such Property except a claim of payment for its safe custody or administration and (ii) beneficial ownership of such Property may be freely transferred without the payment of money or value other than for safe custody or administration.
5. The Custodian shall allow the Customer's accountants reasonable access to the Custodian's records relating to the Property held by the Custodian an such accountants may reasonably require in connection with their examination of the Customer's affairs and/or confirmation of the contents of those records. The Custodian shall also obtain from any Subcustodian (and will require each Subcustodian to obtain from any securities depository or clearing agency in which it deposits Property) an undertaking, to the extent consistent with the laws of the jurisdiction or jurisdictions to which such Subcustodian, securities depository or clearing agency is subject, to permit independent public accountants such reasonable access to the records of such Subcustodian, securities depository or clearing agency or confirmation of the contents thereof as may be reasonably required in connection with the examination of the Customer's affairs or to take such other action as the Custodian in its judgment may deem sufficient to ensure such reasonable access.
6. The Custodian shall provide such reports and other information to the Customer and the Custodian and the Customer may agree from time to time, including but not limited to an identification of entities having possession of Property of the Customer and notification of any transfer to or from each account maintained by a foreign Subcustodian for the Custodian on behalf of the Customer.
7. The Custodian shall make or cause any Subcustodian to make payments from monies being held in the Customer's account, except as provided in Section 9 hereof, only
(a) upon the purchase of Eligible Securities for the account of the Customer and then only upon the delivery of such Eligible Securities;
(b) for payments to be made in connection with the conversion, exchange or surrender of Eligible Securities in the Customer's account;
(c) upon a request of the Customer that the Custodian return monies being held in the Customer's account;
(d) upon termination of this Custody Agreement as hereinafter set forth; and
(e) for any other purpose upon receipt of explicit instructions of the Customer accompanied by evidence reasonably acceptable to the Custodian as to the authorization of such payment.
Except as provided in the last sentence of this Section 7, all payments
pursuant to this Section 7 will be made only upon receipt by the Custodian of
Authorized Instructions (as hereinafter defined) of the Customer which shall
specify the purpose for which the payment is to be made. In the event that it is
not possible to make a payment in accordance with Authorized Instructions of the
Customer, the Custodian shall proceed in accordance with the procedures set
forth in the Procedures Manual. Any payment pursuant to subsection (d) of this
Section 7 will be made in accordance with section 14.
8. Eligible Securities hold for the Customer's account will be transferred,
exchanged or delivered by the Custodian or a Subcustodian, except as provided in
Section 9 hereof, only
(a) upon sale of such Eligible Securities for the account of the Customer and than only upon receipt of payment therefor;
(b) upon exercise of conversion, subscription, purchase or other similar rights represented by such Eligible Securities;
(c) in the case of warrants, rights or similar securities, upon the surrender thereof in the exercise of such warrants, rights or similar securities;
(d) for delivery in connection with any loans of securities made by the Customer, but only against receipt of such collateral as agreed upon from time to time by the Custodian and the Customer;
(e) upon the termination of this Custody Agreement as hereinafter set forth; and
(f) for any other purpose upon receipt of explicit instructions of the
Customer accompanied by evidence reasonably acceptable to the Custodian as to
the authorization of such transfer, exchange or delivery. Except as provided in
the last sentence of this Section 8, all transfers, exchanges or deliveries of
Eligible Securities in the Customer's account pursuant to this Section 8 will be
made only upon receipt by the Custodian of Authorized Instructions of the
Customer which shall specify the purpose for which the transfer, exchange or
delivery is to be made. In the event that it is not possible to transfer
Eligible Securities in accordance with Authorized Instructions of the Customer,
the Custodian shall proceed in accordance with the procedures set forth in the
Procedures Manual. Any transfers or delivery pursuant to subsection (e) of this
Section 8 will be made in accordance with Section 14.
9. In the absence of Authorized Instructions from the Customer to the contrary, the Custodian may, and it may authorize any subcustodian to:
(a) make payments to itself or others for reasonable expenses of handling Property or other similar items relating to its duties under this Agreement, provided that all such payments shall be accounted for to the Customer;
(b) receive and collect all income and principal with respect to Eligible Securities in the Customers account and to credit cash receipts to the Customer's account;
(c) exchange securities when the exchange is purely ministerial (including, without limitations, the exchange of interim receipts or temporary securities for securities in definitive form and the exchange of warrants, or other documents of entitlement to securities, for the securities themselves);
(d) surrender Eligible Securities in the Customer's account at maturity or when called for redemption upon receiving payment therefor;
(e) execute in the Customer's name such ownership and other certificates as may be required to obtain the payment of income form Eligible Securities held in the Customer's account;
(f) pay or cause to be paid, from the Customer's account, any and all taxes and levies in the nature of taxes imposed on Property in the Customer's account by any governmental authority in connection with transactions in such Property;
(g) endorse for collection, in the name of the Customer, checks, drafts and other negotiable instruments; and
(h) in general, attend to all nondiscretionary details in connection with the sale, purchase, transfer and other dealings with the Property held for the Customer's account by the Custodian or by a Subcustodian, except as otherwise directed by the Customer.
10. "Authorized Instructions" of the Customer shall mean instructions received by tested telex or telecopy or by such other means as may be agreed in writing between the Customer and the Custodian. Unless otherwise specified in this Agreement, the Custodian shall be entitled to act, and shall have no liability for acting, upon any instructions, notice, request, consent, certificate or other instrument or paper reasonably believed to be genuine and to have been properly executed by or on behalf of the Customer.
11. Eligible Securities held for the Customer's account which must be hold in registered form may be registered in the name of the Custodian's nominee or, in the case of the Eligible Securities in the custody of an entity other than the Custodian, in the name of such entity's nominee. The Customer agrees to hold any such nominee harmless from any liability as a holder of record of such Eligible Securities. The Custodian may without notice to the Customer cause any such Eligible Securities to cease to be registered in the name of the Customer.
12. The Custodian shall be responsible for the performance of only such duties as are set forth in this Agreement or the Procedures Manual or contained in Authorized Instructions given to the Custodian which are not contrary to the provisions of any relevant law or regulation or of this Agreement or the Procedures Manual. The Custodian shall hold harmless and indemnify the Customer from and against any loss, damage, cost, expense, liability or claim arising out of the Custodian's negligent or willful failure to comply with the terms of this Agreement or arising out of the Custodian's negligence or willful misconduct.
13. The Customer agrees to pay to the Custodian from time to time such compensation for its services pursuant to this agreement and may be mutually agreed upon from time to time and the Custodian's reasonable out-of-pocket or incidental expenses. The Customer hereby agrees to hold the Custodian harmless from any liability or any losses from any liability or any losses from any taxes or other governmental charges, and any expenses related thereto, which may be imposed, or assessed with respect to the customers account or any Property held therein and also agrees to hold the Custodian, any Subcustodians, and their respective nominees harmless from any liability as a record holder of Eligible Securities in the Customer's account. The Custodian is and any Subcustodians are authorized to charge any account of the Customer for such items and the Custodians shall have a lien on any and all Property in the Customer's account for any amount owing to the Custodian for safe custody or administration from time to time under this Agreement.
14. This Agreement may be terminated by the Customer or the Custodian by 60 days written notice to the other, sent by registered mail. If notice of termination is given, the Customer shall, within 15 days following the giving of such notice, deliver to the Custodian a statement in writing specifying the successor custodian or other person to whom the Custodian shall transfer the Property in the Customer's account. In either event the Custodian, subject to the satisfaction of any lien it may have, will transfer such Property to the person so specified. If the Custodian does not receive such statement the Custodian, at its election, may transfer such Property to a bank or trust company established under the laws of the United States or any state thereof to be held and disposed of pursuant to the provisions of this Agreement or may continue to hold such Property until such a statement is delivered to the Custodian. In such event the Custodian shall be entitled to fair compensation for its services during such period an the Custodian remains in possession of any Property and the provisions of this Agreement relating to the duties and obligations of the Custodian shall remain in full force and a effect; provided, however, that the Custodian shall no longer settle any transactions in securities for the Customers account.
15. The Custodian; its agents and employees will maintain the confidentiality of information concerning the Property held in the Customer's Account, including in dealings with affiliates of the Custodian. In the event the Custodian or any Subcustodian is requested or required to disclose any confidential information concerning the Property, the Custodian shall promptly notify the Customer of such request or requirement so that the Customer may seek protective order or waive the Custodian's or such Subcustodian's compliance with this Section 15. In the absence of such a waiver, if the Custodian or such Subcustodian is compelled, in the opinion of its counsel, to disclose any confidential information, the Custodian or such Subcustodian may disclose such information to such persons as, in the opinion of counsel, is so required.
16. Any notice or other communication from the Customer to the Custodian, unless otherwise provided by this Agreement shall be sent by certified or registered mail to Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201, Attention: Vice President, and any notice from the Custodian to the Customer is to be mailed postage prepaid, addressed to the Customer at the address appearing below, or as it may hereafter be changed on the Custodian's records in accordance with notice from the Customer.
17. The Custodian may assign all of its rights and obligations hereunder to any other entity which is qualified to act an custodian under the terms of this Agreement and majority-owned, directly or indirectly, by Morgan Stanley Group Inc., and upon the assumption of the rights and obligations hereunder by such entity, such entity shall succeed to all of the rights and obligations of, and be substituted for, the Custodian hereunder as if such entity had been originally named an custodian herein. The Custodian shall give prompt written notice to the Customer upon the effectiveness of any such assignment.
This Agreement shall bind the successors and assigns of the Customer and the Custodian and shall be governed by the laws of the State of New York.
American Skandia Trust
By: /s/Thomas M. Mazzaferro
Thomas M. Mazzaferro
Title(s)Treasurer
|
Address:
Tower One Corporate Dr.
Shelton, CT 06484
Accepted:
MORGAN STANLEY TRUST COMPANY
By /s/John Roberts John Roberts Authorized Signature |
CUSTODIAN SERVICES AGREEMENT TERMS AND CONDITIONS
This Agreement is made as of May 1, 1992 by and between THE AMERICAN SKANDIA TRUST, a Massachusetts business trust (the "Fund"), and Provident National Bank, a national banking association ("Provident").
The Fund is registered as an open-end investment company under the Investment Company Act of 1940 (the "1940" Act), as amended. The Fund wishes to retain Provident to provide domestic custodian services, and Provident wishes to furnish domestic custodian services, either directly or though an affiliate or affiliates, as more fully described herein.
In consideration of the promises and mutual covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person." The term "Authorized Person" shall mean any officer of the Fund and any other person, who is duly authorized by the Fund's Governing Board, to give Oral and Written Instructions on behalf of the Fund. Such persons are listed in the Certificate attached hereto as the Authorized Persons Appendix as such appendix may be amended in writing by the Fund's Governing Board from time to time.
(b) "Book-Entry System." The term "Book-Entry System" means Federal Reserve Treasury book-entry system for United States and federal agency Securities, its successor or successors, and its nominee or nominees and any book-entry system maintained by an exchange registered with the SEC under the 1934 Act.
(c) "CFTC." The term "CFTC" shall mean the Commodities Futures Trading Commission.
(d) "Governing Board." The term "Governing Board" shall mean the Fund's Board of Directors if the Fund is a corporation or the Fund's Board of Trustees if the Fund is a trust, or, where duly authorized, a competent committee thereof.
(e) "Oral Instructions." The term "Oral Instructions" shall mean oral instructions received by Provident from an Authorized Person or from a person reasonably believed by Provident to be an Authorized Person.
(f) "Property." The term "Property" shall mean:
(i) any and all domestic securities and other investment items which the Fund may from time to time deposit, or cause to be deposited, with Provident or which Provident may from time to time hold for the Fund;
(ii) all income in respect of any of such domestic securities or other investment items;
(iii) all proceeds of the sale of any of such domestic securities or investment items; and
(iv) all proceeds of the sale of domestic securities issued by the Fund, which are received by Provident from time to time, from or on behalf of the Fund.
(g) "Provident." The term "Provident" shall mean Provident National Bank or a subsidiary or affiliate of Provident National Bank.
(h) "SEC." The term "SEC" shall mean the Securities and Exchange Commission.
(i) "Securities and Commodities Laws." The term "Securities and Commodities Laws" shall mean the "1933 Act," the Securities Act of 1933, as amended, the "1934 Act," the Securities Exchange Act of 1934, as amended, and the "CEA," the Commodities Exchange Act, as amended.
(j) "Securities." The term "Securities" shall mean domestic securities.
(k) "Shares." The term "Shares" shall mean the shares of stock of any series or class of the Fund, or, where appropriate, units of beneficial interest in a trust where the Fund is organized as a Trust.
(1) "Written Instructions." The term "Written Instructions" shall mean written instructions signed by two Authorized Persons and received by Provident. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints Provident to provide domestic custodian services, and Provident accepts such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable, will provide Provident with the following:
(a) certified or authenticated copies of the resolutions of the Fund's Governing Board, approving the appointment of Provident or its affiliates to provide services;
(b) a copy of the Fund's most recent effective registration statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if Provident is not providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in respect of the Fund; and
(g) certified or authenticated copies of any and all amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
Provident undertakes to comply with all applicable requirements of the 1933 Act, the 1934 Act, the 1940 Act, and the CEA, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to all duties to be performed by Provident hereunder. Except as specifically set forth herein, Provident assumes no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, Provident shall act only upon Oral and Written Instructions. Provident shall be entitled to rely upon any Oral and Written Instructions it receives from an Authorized Person (or from a person reasonably believed by Provident to be an Authorized Person) pursuant to this Agreement. Provident may assume that any Oral or Written Instructions received hereunder are not in any way inconsistent with the provisions of organizational documents of the Fund or of any vote, resolution or proceeding of the Fund's Governing Board or of the Fund's shareholders.
The Fund agrees to forward to Provident Written Instructions confirming Oral Instructions so that Provident receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by Provident shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions.
The Fund further agrees that Provident shall incur no liability to the Fund in acting upon Oral or Written Instructions provided such instructions reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If Provident is in doubt as to any action it should or should not take, Provident may request directions or advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If Provident shall be in doubt as to any questions of law pertaining to any action it should or should not take, Provident may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's advisor or Provident, at the option of Provident).
(c) Conflicting Advice. In the event of a conflict between directions, advice or Oral or Written Instructions Provident receives from the Fund, and the advice it receives from counsel, Provident shall be entitled to rely upon and follow the advice of counsel.
(d) Protection of Provident. Provident shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral or Written Instructions it receives from the Fund or from counsel and which Provident believes, in good faith, to be consistent with those directions, advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation upon Provident (i) to seek such directions, advice or Oral or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of Provident's properly taking or not taking such action.
7. Records. The books and records pertaining to the Fund, which are in the possession of Provident, shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable Securities laws, rules and regulations. The Fund, or the Fund's authorized representatives, shall have access to such books and records at all times during Provident's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by Provident to the Fund or to an authorized representative of the Fund, at the Fund's expense.
8. Confidentiality. Provident agrees to keep confidential all records of the Fund and information relative to the Fund and its Shareholders (past, present and potential), unless the release of such records or information is otherwise consented to, in writing, by the Fund. The Fund further agrees that, should Provident be required to provide such information or records to duly constituted authorities (who may institute civil or criminal contempt proceedings for failure to comply), Provident shall not be required to seek the Fund's consent prior to disclosing such information; provided that Provident gives the Fund prior written notice of the provision of such information and records.
9. Cooperation with Accountants. Provident shall cooperate with the Fund's independent public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund.
10. Disaster Recovery. Provident shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provision for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, Provident shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions but shall have no liability with respect thereto.
11. Compensation. As compensation for custody services rendered by Provident during the term of this Agreement, the Fund will pay to Provident a fee or fees as may be agreed to in writing from time to time by the Fund and Provident.
12. Indemnification. The Fund agrees to indemnify and hold harmless Provident and its nominees from all taxes, charges, expenses, assessment, claims and liabilities (including, without limitation, liabilities arising under the 1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign Securities and blue sky laws, and amendments thereto, and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action which Provident takes or does not take (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral or Written Instructions. Neither Provident, nor any of its nominees, shall be indemnified against any liability to the Fund or to its shareholders (or any expenses incident to such liability) arising out of Provident's or its nominees' own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement or Provident's own grossly negligent failure to perform its duties under this Agreement.
13. Responsibility Of Provident. Provident shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by Provident, in writing. Provident shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts, within reasonable limits, in performing Services provided for under this Agreement. Provident shall be responsible for its own or its nominees' own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement or Provident's own grossly negligent failure to perform its duties under this Agreement.
Without limiting the generality of the foregoing or of any other provision of this Agreement, Provident, in connection with its duties under this Agreement, shall not be under any duty or obligation to inquire into and shall not be liable for (a) the validity or invalidity or authority or lack thereof of any Oral or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which Provident reasonably believes to be genuine; or (b) delays or errors or loss of data occurring by reason of circumstances beyond Provident's control, including acts of civil or military authority, national emergencies, fire, flood or catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, Provident shall have no liability to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of Provident's performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by Provident.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange for delivery to Provident, all the property it owns, including cash received as a result of the distribution of its Shares, during the period that is set forth in this Agreement. Provident will not be responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. Provident, acting upon Written Instructions, shall open and maintain separate account(s) in the Fund's name using all cash received from or for the account of the Fund, subject to the terms of this Agreement. In addition, upon Written Instructions, Provident shall open separate custodial accounts for each separate series, portfolio or class of the Fund and shall hold in such account(s) all cash received from or for the accounts of the Fund specifically designated to each separate series, portfolio or class.
Provident shall make cash payments from or for the account of the Fund only for:
(i) purchases of Securities in the name of the Fund or Provident or Provident's nominee as provided in sub-paragraph j and for which Provident has received a copy of the broker's or dealer's confirmation or payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund delivered to Provident;
(iii) payment of, subject to Written Instructions, interest, taxes, administration, accounting, distribution, advisory, management fees or similar expenses which are to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions, the Fund's transfer agent, as agent for the shareholders, an amount equal to the amount of dividends and distributions stated in the Written Instructions to be distributed in cash by the transfer agent to shareholders, or, in lieu of paying the Fund's transfer agent, Provident may arrange for the direct payment of cash dividends and distributions to shareholders in accordance with procedures mutually agreed upon from time to time by and among the Fund, Provident and the Fund's transfer agent.
(v) payments, upon receipt Written Instructions in connection with the conversion, exchange or surrender of Securities owned or subscribed to by the Fund and held by or delivered to Provident;
(vi) payments of the amounts of dividends received with respect to Securities sold short;
(vii) payments, if applicable, made to a sub-custodian pursuant to provisions in sub-paragraph c of this Paragraph 14; and
(viii) payments, upon Written Instructions made for other proper Fund purposes.
Provident is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for the account of the Fund.
(c) Receipt of Securities.
(i) Provident shall hold all securities received by it for the account of the Fund in a separate account that physically segregates such securities from those of any other persons, firms or corporations. All such securities shall be held or disposed of only Written Instructions of the Fund pursuant to the terms of this Agreement. Provident shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities or investment, except upon the express terms of this Agreement and upon Written Instructions, accompanied by a certified resolution of the Fund's Governing Board, authorizing the transaction. In no case may any member of the Fund's Board of Directors/Trustees, or any officer, employee or agent of the Fund withdraw any securities.
At Provident's own expense and for it's own convenience, Provident may enter into sub-custodian agreements with other United States banks or trust companies to perform duties described in this sub-paragraph c. Such bank or trust company shall have an aggregate capital, surplus and undivided profits, according to its last published report, of at least one million dollars ($1,000,000), if it is a subsidiary or affiliate of Provident, or at least twenty million dollars ($20,000,000) if such bank or trust company is not a subsidiary or affiliate of Provident. In addition, such bank or trust company must be qualified to act as custodian and agree to comply with the relevant provisions of the 1940 Act and other applicable rules and regulations. Any such arrangement will not be entered into without prior written notice to the Fund.
Provident shall remain responsible for the performance of all of its duties as described in this Agreement and shall hold the Fund and the Money Market Series harmless from its own acts or omissions, under the standards of care provided for herein, or the acts and omissions of any sub-custodian chosen by Provident under the terms of this sub-paragraph c.
(d) Transactions Requiring Instructions. Upon receipt of Oral or Written Instructions and not otherwise, Provident, directly or through the use of the Book-Entry System, shall:
(i) deliver any Securities held for the Fund against the receipt of payment for the sale of such Securities;
(ii) execute and deliver to such persons as may be designated in such Oral or Written Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as owner of any Securities may be exercised;
(iii) deliver any Securities to the issuer thereof, or its agent, when such Securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to Provident;
(iv) deliver any Securities held for the Fund against receipt of other Securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, tender offer, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege;
(v) deliver any Securities held for the Fund to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold under the terms of this Agreement such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets of the Fund and take such other steps as shall be stated in said Oral or Written Instructions to be for the purpose of effectuating a duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund;
(vii) release Securities belonging to the Fund to any bank or trust company for the purpose of a pledge or hypothecation to secure any loan incurred by the Fund; provided, however, that Securities shall be released only upon payment to Provident of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made subject to proper prior authorization, further Securities may be released for that purpose; and repay such loan upon redelivery to it of the Securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing the loan;
(viii) release and deliver Securities owned by the Fund in connection with any repurchase agreement entered into on behalf of the Fund, but only on receipt of payment therefor; and pay out moneys of the Fund in connection with such repurchase agreements, but only upon the delivery of the Securities;
(ix) release and deliver or exchange Securities owned by the Fund in connection with any conversion of such Securities, pursuant to their terms, into other Securities;
(x) release and deliver Securities owned by the fund for the purpose of redeeming in kind shares of the Fund upon delivery thereof to Provident; and
(xi) release and deliver or exchange Securities owned by the Fund for other corporate purposes.
Provident must also receive a certified resolution describing the nature of the corporate purpose and the name and address of the person(s) to whom delivery shall be made when such action is pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to Provident certified resolutions of the Fund's Governing Board approving, authorizing and instructing Provident on a continuous and on-going basis, to deposit in the Book-Entry System all Securities belonging to the Fund eligible for deposit therein and to utilize the Book-Entry System to the extent possible in connection with settlements of purchases and sales of Securities by the Fund, and deliveries and returns of Securities loaned, subject to repurchase agreements or used as collateral in connection with borrowings. Provident shall continue to perform such duties until it receives Written or Oral Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions shall apply:
(i) With respect to Securities of the Fund which are maintained in the Book-Entry system, established pursuant to this sub-paragraph e hereof, the records of Provident shall identify by Book-Entry or otherwise those securities belonging to the Fund. Provident shall furnish the Fund a detailed statement of the Property held for the Fund under this Agreement at least monthly and from time to time and upon written request.
(ii) Securities and any cash of the Fund deposited in the Book-Entry System will at all times be segregated from any assets and cash controlled by Provident in other than a fiduciary or custodian capacity but may be commingled with other assets held in such capacities. Provident and its sub-custodian, if any, will pay out money only upon receipt of Securities and will deliver Securities only upon the receipt of money.
(iii) All books and records maintained by Provident which relate to the Fund's participation in the Book-Entry System will at all times during Provident's regular business hours be open to the inspection of the Fund's duly authorized employees or agents, and the Fund will be furnished with all information in respect of the services rendered to it as it may require.
(iv) Provident will provide the Fund with copies of any report obtained by Provident on the system of internal accounting control of the Book-Entry System promptly after receipt of such a report by Provident.
Provident will also provide the Fund with such reports on its own system of internal control as the Fund may reasonably request from time to time.
(f) Registration of Securities. All Securities held for the Fund which are issued or issuable only in bearer form, except such Securities held in the Book-Entry System, shall be held by Provident in bearer form; all other Securities held for the Fund may be registered in the name of the Fund; Provident; the Book-Entry System; a sub-custodian; or any duly appointed nominee(s) of the Fund, Provident, Book-Entry system or sub-custodian. The Fund reserves the right to instruct Provident as to the method of registration and safekeeping of the Securities of the Fund. The Fund agrees to furnish to Provident appropriate instruments to enable Provident to hold or deliver in proper form for transfer, or to register its registered nominee or in the name of the Book-Entry System, any Securities which it may hold for the account of the Fund and which may from time to time be registered in the name of the Fund. Provident shall hold all such Securities which are not held in the Book-Entry System in a separate account for the Fund in the name of the Fund physically segregated at all times from those of any other person or persons.
(g) Voting and Other Action. Neither Provident nor its nominee shall vote any of the Securities held pursuant to this Agreement by or for the account of the Fund, except in accordance with Written Instructions. Provident, directly or through the use of the Book-Entry System, shall execute in blank and promptly deliver all notice, proxies, and proxy soliciting materials to the registered holder of such Securities. If the registered holder is not the Fund then Written or Oral Instructions must designate the person(s) who owns such Securities.
(h) Transactions Not Requiring Instructions. In the absence of contrary Written Instructions, Provident is authorized to take the following actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund, all income, dividends, distributions, coupons, option premiums, other payments and similar items, included or to be included in the Property, and, in edition, promptly advise the Fund of such receipt and credit such income, as collected, to the Fund's custodian account;
(B) endorse and deposit for collection, in the name of the Fund, checks, drafts, or other orders for the payment of money;
(C) receive and hold for the account of the Fund all Securities received as a distribution on the Fund's portfolio Securities as a result of a stock dividend, share split-up or reorganization, recapitalization, readjustment or other rearrangement or distribution of rights or similar Securities issued with respect to any portfolio Securities belonging to the Fund held by Provident hereunder;
(D) present for payment and collect the amount payable upon all Securities which may mature or be called, redeemed, or retired, or otherwise become payable on the date such Securities become payable; and
(E) take any action which may be necessary and proper in connection with the collection and receipt of such income and other payments and the endorsement for collection of checks, drafts, and other negotiable instruments.
(ii) Miscellaneous Transactions.
(A) Provident is authorized to deliver or cause to be delivered Property against payment or other consideration or written receipt therefor in the following cases:
(1) for examination by a broker or dealer selling for the account of the Fund in accordance with street delivery custom;
(2) for the exchange of interim receipts or temporary Securities for definitive Securities; and
(3) for transfer of Securities into the name of the Fund or Provident or nominee of either, or for exchange of Securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new Securities are to be delivered to Provident.
(B) Unless and until Provident receives Oral or Written Instructions to the contrary, Provident shall:
(1) pay all income items held by it which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Fund;
(2) collect interest and cash dividends received, with notice to the Fund, to the account of the Fund;
(3) hold for the account of the Fund all stock dividends, rights and similar Securities issued with respect to any Securities held by us; and
(4) execute as agent on behalf of the Fund all necessary ownership certificates required by the Internal Revenue Code or the Income Tax Regulations of the United States Treasury Department or under the laws of any State now or hereafter in effect, inserting the Fund's name on such certificate as the owner of the Securities covered thereby, to the extent it may lawfully do so.
(i) Segregated Accounts.
(i) Provident shall upon receipt of Written or Oral Instructions establish and maintain a segregated accounts(s) on its records for and on behalf of the Fund. Such account(s) may be used to transfer cash and Securities, including Securities in the Book-Entry system:
(A) for the purposes of compliance by the Fund with the procedures required by a Securities or option exchange, providing such procedures comply with the 1940 Act and any releases of the SEC relating to the maintenance of segregated accounts by registered investment companies; and
(B) Upon receipt of Written Instructions, for other proper corporate purposes.
(ii) Provident shall arrange for the establishment of IRA custodian accounts for such shareholders holding shares through IRA accounts, in accordance with the Prospectus, the Internal Revenue Code (including regulations), and with such other procedures as are mutually agreed upon from time to time by and among the Fund, Provident and the Fund's transfer agent.
(j) Purchases of Securities. Provident shall settle purchased Securities upon receipt of Oral or Written Instructions from the fund or its investment advisor(s) that specify:
(i) the name of the issuer and the title of the Securities, including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through whom the purchase was made. Provident shall upon receipt of Securities purchased by or for the Fund pay out of the moneys held for the account of the Fund the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Oral or Written Instructions.
(k) Sales of Securities. Provident shall sell Securities upon receipt of Oral Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security, including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued interest, if' any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to whom the sale was made; and
(vii) the location to which the security must be delivered and delivery deadline, if any.
Provident shall deliver the Securities upon receipt of the total amount payable to the Fund upon such sale, provided that the total amount payable is the same as was set forth in the Oral or Written Instructions. Subject to the foregoing, Provident may accept payment in such form as shall be satisfactory to it, and may deliver Securities and arrange for payment in accordance with the customs prevailing among dealers in Securities.
(1) Reports.
(i) Provident shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may reasonably request;
(B) a monthly statement summarizing all transactions and entries for the account of the Fund, listing the portfolio Securities belonging to the fund with the adjusted average cost of each issue and the market value at the end of such month, and stating the cash account of the Fund including disbursement;
(C) the reports to be furnished to the Fund pursuant to Rule 17f-4 (if applicable); and
(D) such other information as may be agreed upon from time to time between the Fund and Provident.
(ii) Provident shall transmit promptly to the Fund any proxy statement, proxy material, notice of a call or conversion or similar communication received by it as custodian of the Property. Provident shall be under no other obligation to inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property, in respect, or which are to become part of the Property (but not the safekeeping thereof upon receipt by Provident) shall be at the sole risk of the Fund. If payment is not received by Provident within a reasonable time after proper demands have been made, Provident shall notify the Fund in writing, including copies of all demand letters, any written responses, memoranda of all oral responses and to telephonic demands thereto, and await instructions from the Fund. Provident shall not be obliged to take legal action for collection unless and until reasonably indemnified to its satisfaction. Provident shall also notify the Fund as soon as reasonably practicable whenever income due on Securities is not collected in due course.
15. Duration and Termination. The Agreement shall continue until termination by either party on sixty (60) days' prior written notice to the other party.
16. Notices. All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. Notice shall be addressed (a) if to Provident at Provident's address, Airport Business Center, International Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, marked for the attention of the Custodian Services Department (or its successor) (b) if to the Fund, at the address of the Fund; or (c) if to neither of the foregoing, at such other address as shall have been notified to the sender of any such Notice or other communication. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given five days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.
18. Assignment. The Agreement shall automatically terminate upon its assignment by Provident, without the prior written consent of the Fund, provided, however, that no such assignment shall release Provident from its obligations under the Agreement.
19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one more separate documents their agreement, if any, with respect to delegated and/or Oral Instructions.
The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and governed by Pennsylvania law. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors.
The parties to this Agreement acknowledge and agree that all liabilities arising, directly or indirectly, under this Agreement, of any and every nature whatsoever, including without limitation, liabilities arising in connection with any agreement of the Fund set forth herein to indemnify any party to this Agreement or any other person, shall be satisfied out of the assets of the Fund and that no Trustee, officer or shareholder of the Fund shall be personally liable for any of the foregoing liabilities. The Fund's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth Massachusetts. Such Declaration of Trust describes the limitations of liability of the Trustees and officers of the Fund as required under the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written.
PROVIDENT NATIONAL BANK
By: /s/Alan Plambeck
Alan Plambeck
Vice President
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THE AMERICAN SKANDIA TRUST
By: /s/Thomas M. Mazzaferro
Thomas M. Mazzaferro
Treasurer
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TRANSFER AGENCY SERVICES AGREEMENT TERMS AND CONDITIONS
This Agreement is made as of May 1, 1992 by and between PROVIDENT FINANCIAL PROCESSING CORPORATION, a Delaware corporation ("PFPC"), and THE AMERICAN SKANDIA TRUST, a Massachusetts business trust ("Fund").
The Fund is registered as an open-end investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to retain PFPC to provide transfer agency services, and PFPC wishes to furnish such services.
In consideration of the promises and mutual covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person." The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix.
(b) "CFTC." The term "CFTC" shall mean the Commodities Futures
Trading Commission. (c) "Governing Board." The term "Governing
Board" shall mean the Fund's Board of
Directors if the Fund is a corporation or the Fund's Board of Trustees if the
Fund is a trust, or, where duly authorized, a competent committee thereof.
(d) "Oral lnstructions." The term "Oral Instructions" shall
mean oral instructions received by PFPC from an Authorized Person or from a
person reasonably believed by PFPC to be an Authorized Person.
(e) "SEC." The term "SEC" shall mean the Securities and
Exchange Commission. (f) "Securities and Commodities Laws."
The term "Securities and Commodities Laws" shall
mean the "1933 Act," the Securities Act of 1933, as amended, the "1934 Act," the
Securities Exchange Act of 1934, as amended, the 1940 Act, and the "CEA," the
Commodities Exchange Act, as amended.
(g) "Shares." The term "Shares" shall mean the shares of stock
of any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(h) "Written Instructions." The term "Written Instructions"
shall mean written instructions signed by two Authorized Persons and received by
PFPC. The instructions may be delivered by hand, mail, tested telegram, cable,
telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PFPC to provide transfer
agency services to the Fund, in accordance with the terms set forth in this
Agreement, PFPC accepts such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PFPC with the following:
(a) Certified or authenticated copies of the
resolutions of the Fund's Governing Board,
approving the appointment of PFPC or its
affiliates to provide services;
(b) A copy of the Fund's most recent effective registration statement;
(c) A copy of the Fund's advisory agreement or agreements;
(d) A copy of the Fund's distribution agreement or agreements;
(e) A copy of the Fund's administration agreement if PFPC is not providing the Fund with such services;
(f) Copies of any shareholder servicing agreements made in respect of the Fund; and
(g) Certified or authenticated copies of any and all amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PFPC undertakes to
comply with all applicable requirements of the 1933 Act, the 1934 Act, the 1940
Act, and the CEA, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PFPC hereunder. Except as specifically set forth herein, PFPC assumes no
responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PFPC
shall act only upon Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund' s Governing Board or of the Fund's shareholders.
The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions so that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. The Fund further agrees that PFPC shall incur no liability to the Fund in acting upon Oral or Written Instructions provided such instructions reasonably appear to have be received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action is should or should not take, PFPC may request directions or advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's advisor or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between directions, advice or Oral or Written Instructions PFPC receives from the Fund, and the advice it receives from counsel, PFPC shall be entitled to rely upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral or Written Instructions it receives from the Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC's properly taking or not taking such action.
7. Records. The books and records pertaining to the Fund, which are in the possession of PFPC, shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The Fund, or the Fund's Authorized Persons, shall have access to such books and records at all times during PFPC's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PFPC agrees to keep confidential all records of the Fund and information relative to the Fund and its shareholders (past, present and potential), unless the release of such records or information is otherwise consented to, in writing, by the Fund. The Fund agrees that such consent shall not be unreasonably withheld. The Fund further agrees that, should PFPC be required to provide such information or records to duly constituted authorities (who may institute civil or criminal contempt proceedings for failure to comply), PFPC shall not be required to seek the Fund's consent prior to disclosing such information.
9. Cooperation with Accountants. PFPC shall cooperate with the Fund's independent public accountants and shall take all reasonable actions in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provision for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions but shall have no liability with respect thereto. is required by the Fund.
11. Compensation. As compensation for services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC.
12. Indemnification. The Fund agrees to indemnify and hold harmless PFPC and its nominees from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the 1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign securities and blue sky laws, and amendments thereto), and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action which PFPC takes or does not take (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral or Written Instructions. Neither PFPC, nor any of its nominees, shall be indemnified against any liability to the Fund or to its shareholders (or any expenses incident to such liability) arising out of PFPC's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement.
13. Responsibility of PFPC. PFPC shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC, in writing. PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement. PFPC shall be responsible for failure to perform its duties under this Agreement arising out of PFPC's willful misfeasance, bad faith, gross negligence or reckless disregard of such duties.
Without limiting the generality of the foregoing or of any other provision of this Agreement, PFPC, in connection with its duties under this Agreement, shall not be under any duty or obligation to inquire into and shall not be liable for (a) the validity or invalidity or authority or lack thereof of any Oral or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PFPC reasonably believes to be genuine; or (b) delays or errors or loss of data occurring by reason of circumstances beyond PFPC's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood or catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PFPC shall have no liability to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC's performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC.
14. Description of Services.
(a) Services Provided on an Ongoing Basis by PFPC to the Fund.
(i) Calculate 12b-1 payments;
(ii) Maintain proper shareholder registrations;
(iii) Review new applications with correspondence to shareholders to complete or correct information;
(iv) Direct payment processing of checks or wires;
(v) Prepare and certify stockholder lists in conjunction with proxy solicitations;
(vi) Countersign securities;
(vii) Direct shareholder confirmation of activity;
(viii) Provide toll-free lines for direct shareholder use, plus customer liaison staff for on-line inquiry response;
(ix) Mail duplicate confirmations to broker-dealers of their clients' activity, whether executed through the broker-dealer or directly with PFPC;
(x) Provide periodic shareholder lists and statistics to the clients;
(xi) Provide detail for underwriter/broker confirmations;
(xii) Periodic mailing of year-end tax and statement information;
(xiii) Timely notification of investment advisor, accounting agent, and custodian of fund activity; and
(xiv) Perform other participating broker-dealer shareholder services as may be agreed upon from time to time.
(b) Services Provided by PFPC Under Oral or Written instructions of the Fund.
(i) Accept and post daily Fund purchases and redemptions;
(ii) Accept, post and perform shareholder transfers and exchanges;
(iii) Pay dividends and other distributions;
(iv) Solicit and tabulate proxies; and
(v) Issue and cancel certificates (when requested in writing by the shareholder).
(c) Purchase of Shares.
PFPC shall issue and credit an account of an investor, in the manner described in the Fund's prospectus, once it receives:
(i) A purchase order;
(ii) Proper information to establish a shareholder account; and
(iii) Confirmation of receipt or crediting of funds for such order to the Fund's custodian.
(d) Redemption of Shares. PFPC shall redeem a Fund's shares only if that function is properly authorized by the certificate of incorporation or resolution of the Fund's Governing Board. Shares shall be redeemed in accordance with the provisions of the Fund's prospectus and each shareholder's individual directions pursuant to the prospectus. Shares shall be redeemed when the shareholder tenders his or her shares and directs the method of redemption pursuant to provisions of the prospectus. If securities are received in proper form, shares shall be redeemed before the funds are provided to PFPC. When the Fund provides PFPC with funds and if redemption proceeds are not wired then all redemption checks shall be drawn to the record-holder unless:
(i) Surrendered certificate is drawn to the order of an assignee or holder and transfer authorization is signed by record-holder; or
(ii) Transfer authorizations are signed by the record-holder when shares are held in book-entry form:
When a shareholder's broker-dealer notifies PFPC of a redemption, and the Fund provides PFPC with funds, PFPC shall prepare and send all redemption checks drawn to the broker-dealer on behalf of the shareholder.
(e) Dividends and Distributions. PFPC must receive a resolution of the Fund's Governing Board authorizing the declaration and payment of dividends and distributions. Upon receipt of the resolution, PFPC shall issue the dividends and distributions in shares, or, upon shareholder election, pay such dividends and distributions in cash, if provided for in the prospectuses of the Fund. Such issuance or payment shall be made after deduction and payment of the required amount of funds to be withheld in accordance with any applicable tax laws or other laws, rules or regulations. The Fund's shareholders shall receive tax forms and other information, or permissible substitute notice, relating to dividends and distributions, paid by the Fund as are required to be filed and mailed by applicable law, rule or regulation.
PFPC shall maintain and file with the IRS and other appropriate taxing authorities reports relating to all dividends above a stipulated amount paid by the Fund to its shareholders as required by tax or other law, rule or regulation.
(f) Shareholder Account Services.
(i) PFPC may arrange, in accordance with the prospectus, for issuance of shares obtained through:
- Any pre-authorized check plan; and
- Direct purchases through broker wire orders, checks and applications.
(ii) PFPC may arrange, in accordance with the prospectus, for a shareholders:
- Exchange of shares for shares of a Fund for which the Fund has exchange privileges;
- Automatic redemption from an account where that shareholder participates in a automatic redemption plan; and/or
- Redemption of shares from an account with a checkwriting privilege.
(g) Communications to Shareholders.
Upon timely written instructions, PFPC shall mail all communications by the Fund to its shareholders, including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of fund shares;
(iii) Monthly or quarterly statements;
(iv) Dividend and distribution notices;
(v) Proxy material; and
(vi) Tax form information.
PFPC will receive and tabulate the proxy cards for the meetings of the Fund's shareholders.
(h) Records.
PFPC shall maintain records of the accounts for each shareholder showing the following information:
(i) Name, address and United States Tax Identification or Social Security number;
(ii) Number and class of shares held and number and class of shares for which certificates, if any, have been issued, including certificate numbers and denominations;
(iii) Historical information regarding the account of each shareholder, including dividends and distributions paid and the date and price for all transactions on a shareholder's account;
(iv) Any stop or restraining order placed against a shareholder's account;
(v) Any correspondence relating to the current maintenance of a shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for the transfer agent to perform any calculations contemplated or required by this Agreement.
(i) Lost or Stolen Certificates.
PFPC shall place a stop notice against any certificate reported to be lost or stolen and comply with all applicable federal regulatory requirements for reporting such loss or alleged misappropriation.
A new certificate shall be registered and issued upon:
(i) Shareholder's pledge of a lost instrument bond or such and other appropriate indemnity bond issued by a surety company approved by PFPC; and
(ii) Completion of a release and indemnification agreement signed by the shareholder to protect PFPC and PFPC.
(j) Shareholder Inspection of Stock Records.
Upon requests from Fund shareholders to inspect stock records, PFPC will notify the Fund and require instructions granting or denying each such request.
Unless PFPC has acted contrary to the Fund's instructions, the Fund agrees to release PFPC from any liability for refusal of permission for a particular shareholder to inspect the Fund's shareholder records.
(k) Withdrawal of Shares and Cancellation of Certificates.
Upon receipt of Written Instructions, PFPC shall cancel outstanding certificates surrendered by the Fund to reduce the total amount of outstanding shares by the number of shares surrendered by the Fund.
15. Duration and Termination. This Agreement shall continue until terminated by either party on sixty (60) days' prior written notice to the other party.
16. Notices. All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. Notices shall be addressed (a) if to PFPC at PFPC's address, 103 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address of the Fund; or (c) if to neither of the foregoing, at such other address as shall have been notified to the sender of any such notice or other communication. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought.
18. Assignment. The Agreement shall automatically terminate upon its assignment by PFPC, without the prior written consent of the Fund, provided, however, that no such assignment shall release the PFPC from its obligations under this Agreement.
19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegation, compensation and/or Oral Instructions.
The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or affect. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware Law. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors.
The parties to this Agreement acknowledge and agree that all liabilities arising, directly or indirectly, under this Agreement of any and every nature whatsoever, including without limitation, liabilities arising in connection with any agreement of the Fund set forth herein to indemnify any party to this Agreement or any other person, shall be satisfied out of the assets of the Fund and that no Trustee, officer or shareholder of the Fund shall be personally liable for any of the foregoing liabilities. The Fund's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes the limitations of liability of the Trustees and officers of the Fund as required under the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written.
PROVIDENT FINANCIAL
PROCESSING CORPORATION
By: /s/Clayton H. Burton
Clayton H. Burton
Title: Vice President
|
THE AMERICAN SKANDIA TRUST
By: /s/Thomas M. Mazzaferro
Thomas M. Mazzaferro
Title: Treasurer
|
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
TERMS AND CONDITIONS
This Agreement is made as of May 1, 1992 by and between AMERICAN SKANDIA TRUST (the "Fund"), a Massachusetts business trust, and PROVIDENT FINANCIAL PROCESSING CORPORATION ("PFPC"), a Delaware corporation which is an indirect wholly-owned subsidiary of PNC Financial Corp.
The Fund is registered as an open-end, diversified investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to retain PFPC to provide administration and accounting services, and PFPC wishes to furnish such services.
In consideration of the promises and mutual covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person." The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix or such appendix as may be amended in writing by the
Fund's Governing Board from time to time. If Provident provides more than one
service hereunder, the Fund's designation of Authorized Persons may vary by
service.
(b) "Book-Entry System." The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an exchange registered with the SEC under the
1934 Act.
(c) "CFTC." The term "CFTC" shall mean the Commodities Futures Trading Commission.
(d) "Governing Board." The term "Governing Board" shall mean the Fund's Board of Directors if the Fund is a corporation or the Fund's Board of Trustees if the Fund is a trust, or, where duly authorized, a competent committee thereof.
(e) "Oral Instructions." The term "Oral Instructions" shall mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person.
(f) "SEC." The term "SEC" shall mean the Securities and Exchange Commission.
(g) "Securities and Commodities Laws." The term the "1933 Act" shall mean the Securities Act of 1933, as amended, the term the "1934 Act" shall mean the Securities Exchange Act of 1934, as amended, and the term the "CEA" shall mean the Commodities Exchange Act, as amended.
(h) "Shares." The terms "Shares" shall mean the shares of stock of any series or class of the Fund, or, where appropriate, units of beneficial interest in a trust where the Fund is organized as a trust.
(i) "Written Instructions." The term "Written Instructions" shall mean written instructions signed by one Authorized Persons and received by PFPC. The instructions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. Appointment.
The Fund hereby appoints PFPC to provide administration and accounting services to the Fund, in accordance with the terms set forth in this Agreement. PFPC accepts such appointment and agrees to furnish such services.
3. Delivery of Documents.
The Fund has provided or, where applicable, will provide PFPC with the following:
(a) certified or authenticated copies of the resolutions of the Fund's Governing Board, approving the appointment of PFPC or its affiliates to provide services;
(b) a copy of the Fund's most recent effective registration statement;
(c) a copy of each investment portfolios (each, a "Portfolio") advisory agreement or agreements;
(d) a copy of the distribution agreement or agreements relating to any class of a Portfolio;
(e) copies of any shareholder servicing agreements made in respect of the Fund; and
(f) certified or authenticated copies of any and all amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
PFPC undertakes to comply with all applicable requirements of the 1933 Act, the 1934, the 1940 Act, and the CEA, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to all duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund.
5. Instructions.
Unless otherwise provided in this Agreement, PFPC shall act only upon Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written Instructions it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund's Governing Board or of the Fund's shareholders.
The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) so that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. The Fund further agrees that PFPC shall incur no liability to the Fund in acting upon Oral or Written Instructions provided such instructions reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any questions of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's advisor or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between directions, advice or Oral or Written Instructions Provident receives from the Fund, and the advice it receives from counsel, PFPC shall be entitled to rely upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral or Written Instructions it receives from the Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice and Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC's properly taking or not taking such action.
7. Records.
The books and records pertaining to the Fund, which are in the possession of PFPC shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The Fund, or the Fund's Authorized Persons, shall have access to such books and records at all times during PFPC's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person of the Fund, at the Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of account; (b) records of the Fund's securities transaction; (c) all other books and records required to maintain pursuant to Rule 3la-1 of the 1940 Act in connection with the services and as specifically set forth in Appendix A hereto.
8. Confidentiality.
PFPC agrees to keep confidential all records of the Fund and information relative to the Fund and its shareholders (past, present and potential), unless the release of such records or information is otherwise consented to, in writing, by the Fund. The Fund agrees that such consent shall not be unreasonably withheld. The Fund further agrees that, should PFPC be required to provide such information or records to duly constituted authorities (who may institute civil or criminal contempt proceedings for failure to comply), PFPC shall not be required to seek the fund's consent prior to disclosing such information.
9. Liaison with Accountants.
PFPC shall act as liaison with the Fund's independent public accountants and shall provide account analyses, fiscal year summaries, and other audit-related schedules. PFPC shall take all reasonable action in the performance of its obligations under this Agreement to assure that the necessary information is made available to such accountants for the expression of their opinion, as such may be required by the Fund from time to time.
10. Disaster Recovery.
PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provision of emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions but shall have no liability with respect thereto unless such failure result from PFPC's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement.
11. Compensation.
As compensation for services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed to in writing by the Fund and PFPC.
12. Indemnification.
The Fund, on behalf of the Portfolio, agrees to indemnify and hold harmless PFPC and its nominees from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the 1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign securities and blue sky laws, and amendments thereto), and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action which PFPC takes or does not take (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral or Written Instructions. Neither PFPC, nor any of its nominees, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement. Any amounts payable by the Fund hereunder shall be satisfied only against the Portfolio's assets and not against the assets of any other investment portfolio of the Fund.
13. Responsibility of PFPC.
PFPC shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC, in writing. PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement. PFPC shall be responsible for failure to perform its duties under this Agreement arising out of PFPC's willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement. Notwithstanding the foregoing, PFPC shall not be responsible for losses beyond its control, provided that PFPC has acted in accordance with the standard of care set forth above; and provided further that PFPC shall only be responsible for that portion of losses or damages suffered by the Fund that are attributable to PFPC having not acted in accordance with the standard of care stated herein.
Without limiting the generality of the foregoing or of any other provision of this Agreement, PFPC, in connection with its duties under this Agreement, shall not be liable for (a) the validity or invalidity or authority or lack thereof of any Oral or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PFPC reasonably believes to be genuine; or (b) delays or errors or loss of data occurring by reason of circumstances beyond PFPC's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood or catastrophe, acts of insurrection, war, riots or failure of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PFPC shall have no liability to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC's performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC.
14. Description of Administration and Accounting Services.
(a) Services on a Continuing Basis. PFPC will perform the following accounting functions:
(i) Journalize the Portfolio's investment, capital share and income and expense activities;
(ii) Verify investment buy/sell trade tickets and transmit trades to the Fund's domestic custodian for proper settlement;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Portfolio with the custodian, and prepare the beginning cash balance available for investment purposes;
(vi) Update the cash availability throughout the day as required;
(vii) Post to and prepare the Portfolio's Statement of Assets and Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory and custody fees);
(ix) Monitor the expense accruals and notify Fund management of any proposed adjustments;
(x) Control all disbursements from the Portfolio and authorize such disbursements upon Written Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine the Portfolio's net income;
(xiii) Obtain security market quotes from independent pricing services approved by the Fund, or if such quotes are unavailable, then obtain such prices from the management of the Fund, and in either case calculate the market value of the Fund's Investments;
(xiv) Transmit or mail a copy of the daily portfolio valuation to the Advisor;
(xv) Compute the net asset value of the Portfolio;
(xvi) As appropriate, compute the yields, total return, expense ratios, portfolio turnover rate, and, if required, portfolio average dollar-weighted maturity; and
(xvii) Prepare a monthly financial statement, which will include the following items:
Schedule of Investments Statement of Assets and Liabilities Statement of Operations Statement of Changes in Net Assets Cash Statement Schedule of Capital Gains and Losses.
15. Description of Administration Services.
(a) Services on a Continuing Basis. PFPC will provide the following administration functions:
(i) Prepare quarterly broker security transactions summaries;
(ii) Supply various normal and customary Portfolio and Fund statistical data as requested on an ongoing basis;
(iii) Prepare monthly security transaction listings;
(iv) Prepare for execution and file the Fund's Federal and state tax returns;
(v) Prepare and file the Fund's Semi-Annual Reports with the SEC on Form N-SAR;
(vi) Prepare and file with the SEC the Fund's annual, semi-annual, and quarterly Shareholder reports; or
(vii) Assist with the preparation of registration statements and other filings relating to the registration of Shares;
(viii) Monitor the Fund's status as a regulated investment company under Sub-chapter M of the Internal Revenue Code of 1986, as amended;
(ix) Coordinate contractual relationships and communications between the Fund and its contractual service providers;
(x) Monitor the Fund's compliance with the amounts and conditions of each such state qualification; and
(xi) Maintain the Fund's fidelity bond as required by the 1940 Act and obtain a directors and officers liability policy.
(xii) Monitor each Portfolio of the Fund for compliance with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended, and the rules thereunder.
(xiii) Provide such information and reports to the Adviser as shall be mutually agreed upon by PFPC and the Adviser to assist the Adviser in monitoring the Fund for compliance with the terms of its Declaration of Trust, By-Laws and resolutions, and any amendments thereto, and with any representations made to regulatory authorities, and any amendments thereto, and in monitoring each Portfolio for compliance with the investment restrictions and policies set out in the most recent prospectus and Statement of Additional Information as filed with the Securities and Exchange Commission, and any amendments thereto.
16. Duration and Termination.
The Agreement shall continue until termination by either party on sixty
(60) days' prior written notice to the other party.
17. Notices.
All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. Notices shall be addressed (a) if to PFPC at PFPC's address, 103 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address of the Fund; or (c) if to neither of the foregoing, at such other address as shall have been notified to the sender of any such Notice or other communication.
18. Amendments.
This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought.
19. Assignment.
The Agreement shall automatically terminate upon its assignment by PFPC, without the prior written consent of the Fund, provided, however, that no such assignment shall release the PFPC from its obligations under this Agreement.
20. Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
21. Further Actions.
Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
22. Miscellaneous.
This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated and/or Oral Instructions.
The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding and shall inure to the benefit of the parties hereto and their respective successors.
The parties to this Agreement acknowledge and agree that all liabilities arising, directly or indirectly, under this Agreement, of any and every nature whatsoever, including without limitation, liabilities arising in connection with any agreement of the Fund set forth herein to indemnify any party to this Agreement or any other person, shall be satisfied out of the assets of the Fund and that no Trustee, officer or shareholder of the Fund shall be personally liable for any of the foregoing liabilities. The Fund's Declaration of Trust, as amended from time to time, is on file in the Office of the Secretary of State of the Commonwealth of Massachusetts. Such Declaration of Trust describes the limitations of liability of the Trustees and officers of the Fund as required under the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below on the day and year first above written.
PROVIDENT FINANCIAL PROCESSING
CORPORATION
By: /s/Stephen Wynn
Stephen Wynn
Title: Senior Vice President
|
THE AMERICAN SKANDIA TRUST
By: /s/Thomas M. Mazzaferro
Thomas M. Mazzaferro
Title: Treasurer
|
WRITER'S DIRECT DIAL NUMBER
(212) 408-6900
March 2, 1998
American Skandia Trust
One Corporate Drive
Shelton, Connecticut 06484
Re: American Skandia Trust Form N-1A Post-Effective Amendment No. 25 to the Registration Statement under the Securities Act of 1933 Amendment No. 27 to the Registration Statement under the Investment Company Act of 1940 Securities Act Registration No: 33-24962 Investment Company Act No: 811-5186 Our File No. 74874-00-102
Dear Mesdames and Messrs.:
You have requested us, as counsel to American Skandia Trust (the "Company"), to furnish you with this opinion in connection with the above-referenced registration statement (the "Registration Statement") filed by the Company under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended (the "1940 Act").
We have made such examination of the statutes, authorities, and records of the Company and other documents as in our judgment are necessary to form a basis for opinions hereinafter expressed. In our examination, we have assumed the genuineness of all signatures on, and authenticity of, and the conformity to original documents of all copies submitted to us. As to various questions of fact material to our opinion, we have relied upon statements and certificates of officers and representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the Company is a Massachusetts business trust organized with one or more series of shares and is registered as an open-end management investment company under the 1940 Act, and that the shares, when issued and sold in accordance with the laws of applicable jurisdictions, and with the terms of the Prospectus and Statement of Additional Information included as part of the Registration Statement, will be valid, legally issued, fully paid, and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the Registration Statement on Form N-1A under the 1933 Act and the 1940 Act, and to the reference to our name under the heading "Legal Counsel and Independent Accountants" included in the Registration Statement.
Very truly yours,
/s/ Werner & Kennedy Werner & Kennedy |
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
American Skandia Trust:
We consent to the use in Post-Effective Amendment No. 25 to Registration Statement No. 33-24962 of our report dated February 10, 1998 appearing in the Statement of Additional Information which is a part of such Registration Statement, and to the reference to us under the caption "Financial Highlight s" appearing in the Prospectus, which also is a part of such Registration Statement.
/s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Princeton, New Jersey March 2, 1998 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 01 |
| NAME: AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 374598014 |
| INVESTMENTS AT VALUE | 410800604 |
| RECEIVABLES | 5455831 |
| ASSETS OTHER | 883228 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 417139663 |
| PAYABLE FOR SECURITIES | 2598328 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 2271554 |
| TOTAL LIABILITIES | 4869882 |
| SENIOR EQUITY | 19365 |
| PAID IN CAPITAL COMMON | 325541362 |
| SHARES COMMON STOCK | 19364593 |
| SHARES COMMON PRIOR | 18009792 |
| ACCUMULATED NII CURRENT | 4057882 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 48420115 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 34231058 |
| NET ASSETS | 412269781 |
| DIVIDEND INCOME | 7022255 |
| INTEREST INCOME | 864180 |
| OTHER INCOME | 0 |
| EXPENSES NET | (4488759) |
| NET INVESTMENT INCOME | 3397676 |
| REALIZED GAINS CURRENT | 49254446 |
| APPREC INCREASE CURRENT | 10077221 |
| NET CHANGE FROM OPS | 62729343 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (5412669) |
| DISTRIBUTIONS OF GAINS | (17442978) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 6182934 |
| NUMBER OF SHARES REDEEMED | (6056931) |
| SHARES REINVESTED | 1228798 |
| NET CHANGE IN ASSETS | 66058400 |
| ACCUMULATED NII PRIOR | 614732 |
| ACCUMULATED GAINS PRIOR | 20839374 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 3428762 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 4488759 |
| AVERAGE NET ASSETS | 390148474 |
| PER SHARE NAV BEGIN | 19.22 |
| PER SHARE NII | .36 |
| PER SHARE GAIN APPREC | 2.96 |
| PER SHARE DIVIDEND | (.30) |
| PER SHARE DISTRIBUTIONS | (.95) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 21.29 |
| EXPENSE RATIO | 1.15 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 02 |
| NAME: LORD ABBETT GROWTH & INCOME PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 785601952 |
| INVESTMENTS AT VALUE | 938104626 |
| RECEIVABLES | 4104051 |
| ASSETS OTHER | 9180 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 942217857 |
| PAYABLE FOR SECURITIES | 4723499 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 508481 |
| TOTAL LIABILITIES | 5231980 |
| SENIOR EQUITY | 45650 |
| PAID IN CAPITAL COMMON | 722396046 |
| SHARES COMMON STOCK | 45650188 |
| SHARES COMMON PRIOR | 30896209 |
| ACCUMULATED NII CURRENT | 11540613 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 50500894 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 152502674 |
| NET ASSETS | 936985877 |
| DIVIDEND INCOME | 15331659 |
| INTEREST INCOME | 2966679 |
| OTHER INCOME | 0 |
| EXPENSES NET | (6757726) |
| NET INVESTMENT INCOME | 11540612 |
| REALIZED GAINS CURRENT | 50708485 |
| APPREC INCREASE CURRENT | 81537205 |
| NET CHANGE FROM OPS | 143786302 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (7379212) |
| DISTRIBUTIONS OF GAINS | (13266936) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 22447410 |
| NUMBER OF SHARES REDEEMED | (8878629) |
| SHARES REINVESTED | 1185198 |
| NET CHANGE IN ASSETS | 406488428 |
| ACCUMULATED NII PRIOR | 7379277 |
| ACCUMULATED GAINS PRIOR | 13059346 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 5424483 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 6757726 |
| AVERAGE NET ASSETS | 723264346 |
| PER SHARE NAV BEGIN | 17.17 |
| PER SHARE NII | .24 |
| PER SHARE GAIN APPREC | 3.76 |
| PER SHARE DIVIDEND | (.23) |
| PER SHARE DISTRIBUTIONS | (.41) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 20.53 |
| EXPENSE RATIO | .93 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 03 |
| NAME: JAN CAP GROWTH PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 1143979075 |
| INVESTMENTS AT VALUE | 1524174376 |
| RECEIVABLES | 17577581 |
| ASSETS OTHER | 426261 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 1542178218 |
| PAYABLE FOR SECURITIES | 29672808 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 903653 |
| TOTAL LIABILITIES | 30576461 |
| SENIOR EQUITY | 65302 |
| PAID IN CAPITAL COMMON | 1043665299 |
| SHARES COMMON STOCK | 65302393 |
| SHARES COMMON PRIOR | 47495389 |
| ACCUMULATED NII CURRENT | 2999651 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 84601015 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 380270490 |
| NET ASSETS | 1511601757 |
| DIVIDEND INCOME | 10730283 |
| INTEREST INCOME | 5797028 |
| OTHER INCOME | 0 |
| EXPENSES NET | (13527660) |
| NET INVESTMENT INCOME | 2999651 |
| REALIZED GAINS CURRENT | 84850924 |
| APPREC INCREASE CURRENT | 199523827 |
| NET CHANGE FROM OPS | 287374402 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (2523889) |
| DISTRIBUTIONS OF GAINS | (42072383) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 40825435 |
| NUMBER OF SHARES REDEEMED | (25329119) |
| SHARES REINVESTED | 2310688 |
| NET CHANGE IN ASSETS | 619277300 |
| ACCUMULATED NII PRIOR | 2251842 |
| ACCUMULATED GAINS PRIOR | 42085982 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 11423236 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 13566439 |
| AVERAGE NET ASSETS | 1269248546 |
| PER SHARE NAV BEGIN | 18.79 |
| PER SHARE NII | .06 |
| PER SHARE GAIN APPREC | 5.16 |
| PER SHARE DIVIDEND | (.05) |
| PER SHARE DISTRIBUTIONS | (.81) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 23.15 |
| EXPENSE RATIO | 1.07 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 04 |
| NAME: AST MONEY MARKET PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 760024840 |
| INVESTMENTS AT VALUE | 760024840 |
| RECEIVABLES | 3485599 |
| ASSETS OTHER | 6280 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 763516719 |
| PAYABLE FOR SECURITIES | 0 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 3628604 |
| TOTAL LIABILITIES | 3628604 |
| SENIOR EQUITY | 759826 |
| PAID IN CAPITAL COMMON | 759067209 |
| SHARES COMMON STOCK | 759826180 |
| SHARES COMMON PRIOR | 549389604 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 61080 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 0 |
| NET ASSETS | 759888115 |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 37009139 |
| OTHER INCOME | 0 |
| EXPENSES NET | (3919752) |
| NET INVESTMENT INCOME | 33089387 |
| REALIZED GAINS CURRENT | 61080 |
| APPREC INCREASE CURRENT | 0 |
| NET CHANGE FROM OPS | 33150467 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (33089387) |
| DISTRIBUTIONS OF GAINS | (79981) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 2492065247 |
| NUMBER OF SHARES REDEEMED | (2313616557) |
| SHARES REINVESTED | 31987886 |
| NET CHANGE IN ASSETS | 210418530 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 79981 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 2941160 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 4180580 |
| AVERAGE NET ASSETS | 653497240 |
| PER SHARE NAV BEGIN | 1.00 |
| PER SHARE NII | .05 |
| PER SHARE GAIN APPREC | 0 |
| PER SHARE DIVIDEND | (.05) |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 1.00 |
| EXPENSE RATIO | .60 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 05 |
| NAME: FEDERATED UTILITY INCOME PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 174897090 |
| INVESTMENTS AT VALUE | 200825471 |
| RECEIVABLES | 1496536 |
| ASSETS OTHER | 1471 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 202323478 |
| PAYABLE FOR SECURITIES | 1066195 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 114111 |
| TOTAL LIABILITIES | 1180306 |
| SENIOR EQUITY | 13278 |
| PAID IN CAPITAL COMMON | 154620351 |
| SHARES COMMON STOCK | 13278191 |
| SHARES COMMON PRIOR | 9595918 |
| ACCUMULATED NII CURRENT | 4517214 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 16064181 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 25928148 |
| NET ASSETS | 201143172 |
| DIVIDEND INCOME | 5222210 |
| INTEREST INCOME | 511933 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1216929) |
| NET INVESTMENT INCOME | 4517214 |
| REALIZED GAINS CURRENT | 16140305 |
| APPREC INCREASE CURRENT | 13828724 |
| NET CHANGE FROM OPS | 34486243 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (3604472) |
| DISTRIBUTIONS OF GAINS | (5147987) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 6689462 |
| NUMBER OF SHARES REDEEMED | (3718193) |
| SHARES REINVESTED | 711004 |
| NET CHANGE IN ASSETS | 78005082 |
| ACCUMULATED NII PRIOR | 3533005 |
| ACCUMULATED GAINS PRIOR | 5143330 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 886649 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1216929 |
| AVERAGE NET ASSETS | 135274822 |
| PER SHARE NAV BEGIN | 12.83 |
| PER SHARE NII | .32 |
| PER SHARE GAIN APPREC | 2.87 |
| PER SHARE DIVIDEND | (.36) |
| PER SHARE DISTRIBUTIONS | (.51) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 15.15 |
| EXPENSE RATIO | .90 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 06 |
| NAME: AST PUTNAM BALANCED ASSET PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 329163916 |
| INVESTMENTS AT VALUE | 359223570 |
| RECEIVABLES | 7137818 |
| ASSETS OTHER | 1197502 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 367558890 |
| PAYABLE FOR SECURITIES | 7394500 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 9968016 |
| TOTAL LIABILITIES | 9968016 |
| SENIOR EQUITY | 26225 |
| PAID IN CAPITAL COMMON | 296980854 |
| SHARES COMMON STOCK | 26225511 |
| SHARES COMMON PRIOR | 21721789 |
| ACCUMULATED NII CURRENT | 8976829 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 21947930 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 29659036 |
| NET ASSETS | 357590874 |
| DIVIDEND INCOME | 3741793 |
| INTEREST INCOME | 8540216 |
| OTHER INCOME | 0 |
| EXPENSES NET | (3305180) |
| NET INVESTMENT INCOME | 8976829 |
| REALIZED GAINS CURRENT | 22004325 |
| APPREC INCREASE CURRENT | 21962619 |
| NET CHANGE FROM OPS | 52943773 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (6614687) |
| DISTRIBUTIONS OF GAINS | (30342461) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 3258656 |
| NUMBER OF SHARES REDEEMED | (1850173) |
| SHARES REINVESTED | 3095239 |
| NET CHANGE IN ASSETS | 71111469 |
| ACCUMULATED NII PRIOR | 7009637 |
| ACCUMULATED GAINS PRIOR | 29891115 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 2387734 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 3305180 |
| AVERAGE NET ASSETS | 319921322 |
| PER SHARE NAV BEGIN | 13.19 |
| PER SHARE NII | .33 |
| PER SHARE GAIN APPREC | 1.85 |
| PER SHARE DIVIDEND | (.31) |
| PER SHARE DISTRIBUTIONS | (1.42) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 13.64 |
| EXPENSE RATIO | 1.03 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 07 |
| NAME: FEDERATED HIGH YIELD PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 410027539 |
| INVESTMENTS AT VALUE | 429823445 |
| RECEIVABLES | 7350540 |
| ASSETS OTHER | 314457 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 437488442 |
| PAYABLE FOR SECURITIES | 0 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 3068760 |
| TOTAL LIABILITIES | 3068760 |
| SENIOR EQUITY | 33139 |
| PAID IN CAPITAL COMMON | 385482780 |
| SHARES COMMON STOCK | 33139115 |
| SHARES COMMON PRIOR | 16918463 |
| ACCUMULATED NII CURRENT | 27616442 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 1491415 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 19795906 |
| NET ASSETS | 434419682 |
| DIVIDEND INCOME | 586768 |
| INTEREST INCOME | 30106368 |
| OTHER INCOME | 0 |
| EXPENSES NET | (3076694) |
| NET INVESTMENT INCOME | 27616442 |
| REALIZED GAINS CURRENT | 1491415 |
| APPREC INCREASE CURRENT | 10886706 |
| NET CHANGE FROM OPS | 39994563 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (10610205) |
| DISTRIBUTIONS OF GAINS | (1263439) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 21771326 |
| NUMBER OF SHARES REDEEMED | (6550139) |
| SHARES REINVESTED | 999465 |
| NET CHANGE IN ASSETS | 229158106 |
| ACCUMULATED NII PRIOR | 10604064 |
| ACCUMULATED GAINS PRIOR | 1269579 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 2345042 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 3076694 |
| AVERAGE NET ASSETS | 312672255 |
| PER SHARE NAV BEGIN | 12.13 |
| PER SHARE NII | .75 |
| PER SHARE GAIN APPREC | .83 |
| PER SHARE DIVIDEND | (.54) |
| PER SHARE DISTRIBUTIONS | (.06) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 13.11 |
| EXPENSE RATIO | .98 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 00 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 09 |
| NAME: T ROWE PRICE ASSET ALLOCATION PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 181276100 |
| INVESTMENTS AT VALUE | 214199031 |
| RECEIVABLES | 1643448 |
| ASSETS OTHER | 100495 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 215942974 |
| PAYABLE FOR SECURITIES | 795879 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 2867558 |
| TOTAL LIABILITIES | 2867558 |
| SENIOR EQUITY | 14081 |
| PAID IN CAPITAL COMMON | 174348842 |
| SHARES COMMON STOCK | 14081614 |
| SHARES COMMON PRIOR | 9051150 |
| ACCUMULATED NII CURRENT | 4904195 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 887127 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 32921171 |
| NET ASSETS | 213075416 |
| DIVIDEND INCOME | 1628899 |
| INTEREST INCOME | 5153091 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1877795) |
| NET INVESTMENT INCOME | 4904195 |
| REALIZED GAINS CURRENT | 889357 |
| APPREC INCREASE CURRENT | 21215349 |
| NET CHANGE FROM OPS | 27008901 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | (2584972) |
| DISTRIBUTIONS OTHER | (2402537) |
| NUMBER OF SHARES SOLD | 5223597 |
| NUMBER OF SHARES REDEEMED | (570403) |
| SHARES REINVESTED | 377270 |
| NET CHANGE IN ASSETS | 92926342 |
| ACCUMULATED NII PRIOR | 2540283 |
| ACCUMULATED GAINS PRIOR | 2418168 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 1413730 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1877795 |
| AVERAGE NET ASSETS | 166321165 |
| PER SHARE NAV BEGIN | 13.27 |
| PER SHARE NII | .33 |
| PER SHARE GAIN APPREC | 2.03 |
| PER SHARE DIVIDEND | (.26) |
| PER SHARE DISTRIBUTIONS | (.24) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 15.13 |
| EXPENSE RATIO | 1.13 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 10 |
| NAME: PIMCO TOTAL RETURN BOND PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 750855319 |
| INVESTMENTS AT VALUE | 756344688 |
| RECEIVABLES | 67860593 |
| ASSETS OTHER | 5674 |
| OTHER ITEMS ASSETS | 188250 |
| TOTAL ASSETS | 824399205 |
| PAYABLE FOR SECURITIES | 223173744 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 29125593 |
| TOTAL LIABILITIES | 252299337 |
| SENIOR EQUITY | 48801 |
| PAID IN CAPITAL COMMON | 526126626 |
| SHARES COMMON STOCK | 48801283 |
| SHARES COMMON PRIOR | 32405263 |
| ACCUMULATED NII CURRENT | 25494355 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 12124946 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 8305140 |
| NET ASSETS | 572099868 |
| DIVIDEND INCOME | 826 |
| INTEREST INCOME | 29452051 |
| OTHER INCOME | 0 |
| EXPENSES NET | (3958522) |
| NET INVESTMENT INCOME | 25494355 |
| REALIZED GAINS CURRENT | 16378205 |
| APPREC INCREASE CURRENT | 3628020 |
| NET CHANGE FROM OPS | 45500580 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (15321193) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 21381919 |
| NUMBER OF SHARES REDEEMED | (6415115) |
| SHARES REINVESTED | 1429216 |
| NET CHANGE IN ASSETS | 212089907 |
| ACCUMULATED NII PRIOR | 15541106 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 2979876 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 3958522 |
| AVERAGE NET ASSETS | 458442523 |
| PER SHARE NAV BEGIN | 11.11 |
| PER SHARE NII | .48 |
| PER SHARE GAIN APPREC | .58 |
| PER SHARE DIVIDEND | (.45) |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 11.72 |
| EXPENSE RATIO | .86 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 11 |
| NAME: INVESCO EQUITY INCOME PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 517926229 |
| INVESTMENTS AT VALUE | 612686895 |
| RECEIVABLES | 5644500 |
| ASSETS OTHER | 2195125 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 620526520 |
| PAYABLE FOR SECURITIES | 18080737 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 340949 |
| TOTAL LIABILITIES | 18421686 |
| SENIOR EQUITY | 36469 |
| PAID IN CAPITAL COMMON | 464641552 |
| SHARES COMMON STOCK | 36467948 |
| SHARES COMMON PRIOR | 24922968 |
| ACCUMULATED NII CURRENT | 12069407 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 30596740 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 94760666 |
| NET ASSETS | 602104834 |
| DIVIDEND INCOME | 7015038 |
| INTEREST INCOME | 9581711 |
| OTHER INCOME | 0 |
| EXPENSES NET | (4527342) |
| NET INVESTMENT INCOME | 12069407 |
| REALIZED GAINS CURRENT | 30596740 |
| APPREC INCREASE CURRENT | 52553230 |
| NET CHANGE FROM OPS | 95219377 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (7140973) |
| DISTRIBUTIONS OF GAINS | (9950272) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 21366952 |
| NUMBER OF SHARES REDEEMED | (11048910) |
| SHARES REINVESTED | 1226938 |
| NET CHANGE IN ASSETS | 253424857 |
| ACCUMULATED NII PRIOR | 7080154 |
| ACCUMULATED GAINS PRIOR | 10011090 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 3565372 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 4527342 |
| AVERAGE NET ASSETS | 475382907 |
| PER SHARE NAV BEGIN | 13.99 |
| PER SHARE NII | .31 |
| PER SHARE GAIN APPREC | 2.84 |
| PER SHARE DIVIDEND | (.26) |
| PER SHARE DISTRIBUTIONS | (.37) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 16.51 |
| EXPENSE RATIO | .95 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 12 |
| NAME: FOUNDERS CAPITAL APPRECIATION PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 236618952 |
| INVESTMENTS AT VALUE | 278903631 |
| RECEIVABLES | 6177489 |
| ASSETS OTHER | 3760 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 285084880 |
| PAYABLE FOR SECURITIES | 6612897 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 213829 |
| TOTAL LIABILITIES | 6826726 |
| SENIOR EQUITY | 15621 |
| PAID IN CAPITAL COMMON | 223152730 |
| SHARES COMMON STOCK | 15620817 |
| SHARES COMMON PRIOR | 13102173 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 12805191 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 42284613 |
| NET ASSETS | 278258155 |
| DIVIDEND INCOME | 616091 |
| INTEREST INCOME | 1389904 |
| OTHER INCOME | 0 |
| EXPENSES NET | (2783162) |
| NET INVESTMENT INCOME | (777167) |
| REALIZED GAINS CURRENT | 13327272 |
| APPREC INCREASE CURRENT | 4902722 |
| NET CHANGE FROM OPS | 17452827 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 9415947 |
| NUMBER OF SHARES REDEEMED | (6897303) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 58189872 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | (667624) |
| OVERDIST NET GAINS PRIOR | (385452) |
| GROSS ADVISORY FEES | 2219824 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 2783162 |
| AVERAGE NET ASSETS | 246647071 |
| PER SHARE NAV BEGIN | 16.80 |
| PER SHARE NII | (.05) |
| PER SHARE GAIN APPREC | 1.06 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 17.81 |
| EXPENSE RATIO | 1.13 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 13 |
| NAME: T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 395941263 |
| INVESTMENTS AT VALUE | 438892076 |
| RECEIVABLES | 4181054 |
| ASSETS OTHER | 21737996 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 464811126 |
| PAYABLE FOR SECURITIES | 0 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 355206 |
| TOTAL LIABILITIES | 355206 |
| SENIOR EQUITY | 38415 |
| PAID IN CAPITAL COMMON | 410440964 |
| SHARES COMMON STOCK | 38415037 |
| SHARES COMMON PRIOR | 33340385 |
| ACCUMULATED NII CURRENT | 3314746 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 7740566 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 42921229 |
| NET ASSETS | 464455920 |
| DIVIDEND INCOME | 8084823 |
| INTEREST INCOME | 881440 |
| OTHER INCOME | 0 |
| EXPENSES NET | (5846018) |
| NET INVESTMENT INCOME | 3120245 |
| REALIZED GAINS CURRENT | 8902961 |
| APPREC INCREASE CURRENT | (3620189) |
| NET CHANGE FROM OPS | 8403017 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (2359904) |
| DISTRIBUTIONS OF GAINS | (2682146) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 24349704 |
| NUMBER OF SHARES REDEEMED | (19694524) |
| SHARES REINVESTED | 419472 |
| NET CHANGE IN ASSETS | 61896833 |
| ACCUMULATED NII PRIOR | 2382615 |
| ACCUMULATED GAINS PRIOR | 1221437 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 4640262 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 5846018 |
| AVERAGE NET ASSETS | 464026274 |
| PER SHARE NAV BEGIN | 12.07 |
| PER SHARE NII | .09 |
| PER SHARE GAIN APPREC | .08 |
| PER SHARE DIVIDEND | (.07) |
| PER SHARE DISTRIBUTIONS | (.08) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 12.09 |
| EXPENSE RATIO | 1.26 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 15 |
| NAME: AST T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 129329785 |
| INVESTMENTS AT VALUE | 126726567 |
| RECEIVABLES | 3884230 |
| ASSETS OTHER | 5294012 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 135904809 |
| PAYABLE FOR SECURITIES | 1310862 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 4186416 |
| TOTAL LIABILITIES | 5497278 |
| SENIOR EQUITY | 12902 |
| PAID IN CAPITAL COMMON | 131692961 |
| SHARES COMMON STOCK | 12901728 |
| SHARES COMMON PRIOR | 9014823 |
| ACCUMULATED NII CURRENT | 5567709 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | (4256258) |
| ACCUM APPREC OR DEPREC | (2609783) |
| NET ASSETS | 130407531 |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 6876035 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1308326) |
| NET INVESTMENT INCOME | 5567709 |
| REALIZED GAINS CURRENT | (4844723) |
| APPREC INCREASE CURRENT | (3924944) |
| NET CHANGE FROM OPS | (3201958) |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (1562750) |
| DISTRIBUTIONS OF GAINS | (2503463) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 5633976 |
| NUMBER OF SHARES REDEEMED | (2152072) |
| SHARES REINVESTED | 405001 |
| NET CHANGE IN ASSETS | 32172751 |
| ACCUMULATED NII PRIOR | 4688069 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | (33395) |
| GROSS ADVISORY FEES | 941760 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1308326 |
| AVERAGE NET ASSETS | 117719881 |
| PER SHARE NAV BEGIN | 10.90 |
| PER SHARE NII | .20 |
| PER SHARE GAIN APPREC | (.57) |
| PER SHARE DIVIDEND | (.16) |
| PER SHARE DISTRIBUTIONS | (.26) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 10.11 |
| EXPENSE RATIO | 1.11 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 16 |
| NAME: AST BERGER CAPITAL GROWTH PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 182294703 |
| INVESTMENTS AT VALUE | 186175030 |
| RECEIVABLES | 953427 |
| ASSETS OTHER | 2381 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 187130839 |
| PAYABLE FOR SECURITIES | 1950591 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 130436 |
| TOTAL LIABILITIES | 2081027 |
| SENIOR EQUITY | 11141 |
| PAID IN CAPITAL COMMON | 147564270 |
| SHARES COMMON STOCK | 11141192 |
| SHARES COMMON PRIOR | 9468525 |
| ACCUMULATED NII CURRENT | 122075 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 33471999 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 3880327 |
| NET ASSETS | 185049812 |
| DIVIDEND INCOME | 891258 |
| INTEREST INCOME | 893769 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1662951) |
| NET INVESTMENT INCOME | 122076 |
| REALIZED GAINS CURRENT | 33535718 |
| APPREC INCREASE CURRENT | (11415396) |
| NET CHANGE FROM OPS | 22242398 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (222789) |
| DISTRIBUTIONS OF GAINS | (1346881) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 13595285 |
| NUMBER OF SHARES REDEEMED | (12032079) |
| SHARES REINVESTED | 109461 |
| NET CHANGE IN ASSETS | 48802958 |
| ACCUMULATED NII PRIOR | 222788 |
| ACCUMULATED GAINS PRIOR | 1283162 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 1259790 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1662951 |
| AVERAGE NET ASSETS | 167972094 |
| PER SHARE NAV BEGIN | 14.39 |
| PER SHARE NII | .01 |
| PER SHARE GAIN APPREC | 2.36 |
| PER SHARE DIVIDEND | (.02) |
| PER SHARE DISTRIBUTIONS | (.13) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 16.61 |
| EXPENSE RATIO | .99 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 17 |
| NAME: AST FOUNDERS PASSPORT PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 106746038 |
| INVESTMENTS AT VALUE | 117969799 |
| RECEIVABLES | 505025 |
| ASSETS OTHER | 377806 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 118852630 |
| PAYABLE FOR SECURITIES | 752450 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 162451 |
| TOTAL LIABILITIES | 914901 |
| SENIOR EQUITY | 10016 |
| PAID IN CAPITAL COMMON | 109630819 |
| SHARES COMMON STOCK | 10015802 |
| SHARES COMMON PRIOR | 10113262 |
| ACCUMULATED NII CURRENT | 547066 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | (3465557) |
| ACCUM APPREC OR DEPREC | 11215385 |
| NET ASSETS | 117937729 |
| DIVIDEND INCOME | 1186804 |
| INTEREST INCOME | 1052891 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1692629) |
| NET INVESTMENT INCOME | 547066 |
| REALIZED GAINS CURRENT | (3436974) |
| APPREC INCREASE CURRENT | 5942924 |
| NET CHANGE FROM OPS | 3053016 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (804777) |
| DISTRIBUTIONS OF GAINS | (128519) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 6246264 |
| NUMBER OF SHARES REDEEMED | (6421955) |
| SHARES REINVESTED | 78231 |
| NET CHANGE IN ASSETS | 295027 |
| ACCUMULATED NII PRIOR | 916882 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | (12168) |
| GROSS ADVISORY FEES | 1257908 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1692629 |
| AVERAGE NET ASSETS | 125790727 |
| PER SHARE NAV BEGIN | 11.63 |
| PER SHARE NII | .03 |
| PER SHARE GAIN APPREC | .21 |
| PER SHARE DIVIDEND | (.08) |
| PER SHARE DISTRIBUTIONS | (.01) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 11.78 |
| EXPENSE RATIO | 1.35 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 18 |
| NAME: AST T. ROWE PRICE NATURAL RESOURCES PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 108890604 |
| INVESTMENTS AT VALUE | 111593139 |
| RECEIVABLES | 457901 |
| ASSETS OTHER | 1475 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 112052515 |
| PAYABLE FOR SECURITIES | 0 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 98456 |
| TOTAL LIABILITIES | 98456 |
| SENIOR EQUITY | 7683 |
| PAID IN CAPITAL COMMON | 101941631 |
| SHARES COMMON STOCK | 7683288 |
| SHARES COMMON PRIOR | 6117312 |
| ACCUMULATED NII CURRENT | 1072403 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 6229725 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 2702617 |
| NET ASSETS | 111954059 |
| DIVIDEND INCOME | 1792424 |
| INTEREST INCOME | 552214 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1272235) |
| NET INVESTMENT INCOME | 1072403 |
| REALIZED GAINS CURRENT | 6262556 |
| APPREC INCREASE CURRENT | (5032447) |
| NET CHANGE FROM OPS | 2302512 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (416661) |
| DISTRIBUTIONS OF GAINS | (2072878) |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 4198069 |
| NUMBER OF SHARES REDEEMED | (2803904) |
| SHARES REINVESTED | 171811 |
| NET CHANGE IN ASSETS | 23420048 |
| ACCUMULATED NII PRIOR | 423790 |
| ACCUMULATED GAINS PRIOR | 2032917 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 986496 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1272235 |
| AVERAGE NET ASSETS | 109610642 |
| PER SHARE NAV BEGIN | 14.47 |
| PER SHARE NII | .14 |
| PER SHARE GAIN APPREC | .35 |
| PER SHARE DIVIDEND | (.07) |
| PER SHARE DISTRIBUTIONS | (.32) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 14.57 |
| EXPENSE RATIO | 1.16 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 19 |
| NAME: AST PIMCO LIMITED MATURITY BOND PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 340132000 |
| INVESTMENTS AT VALUE | 342243310 |
| RECEIVABLES | 3846428 |
| ASSETS OTHER | 3082 |
| OTHER ITEMS ASSETS | 30344 |
| TOTAL ASSETS | 346123164 |
| PAYABLE FOR SECURITIES | 49437579 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 8043138 |
| TOTAL LIABILITIES | 57480717 |
| SENIOR EQUITY | 26190 |
| PAID IN CAPITAL COMMON | 272565014 |
| SHARES COMMON STOCK | 26189474 |
| SHARES COMMON PRIOR | 19333126 |
| ACCUMULATED NII CURRENT | 14490628 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | (1027136) |
| ACCUM APPREC OR DEPREC | 2587751 |
| NET ASSETS | 288642447 |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 16719343 |
| OTHER INCOME | 0 |
| EXPENSES NET | (2228715) |
| NET INVESTMENT INCOME | 14490628 |
| REALIZED GAINS CURRENT | 426749 |
| APPREC INCREASE CURRENT | 3612138 |
| NET CHANGE FROM OPS | 18529515 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (10857326) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 13311531 |
| NUMBER OF SHARES REDEEMED | (7504200) |
| SHARES REINVESTED | 1049017 |
| NET CHANGE IN ASSETS | 79629439 |
| ACCUMULATED NII PRIOR | 10853680 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | (1450239) |
| GROSS ADVISORY FEES | 1649461 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 2228715 |
| AVERAGE NET ASSETS | 253763159 |
| PER SHARE NAV BEGIN | 10.81 |
| PER SHARE NII | .55 |
| PER SHARE GAIN APPREC | .22 |
| PER SHARE DIVIDEND | (.56) |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 11.02 |
| EXPENSE RATIO | .88 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 20 |
| NAME: AST ROBERTSON STEPHENS VALUE+ GROWTH PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 225335634 |
| INVESTMENTS AT VALUE | 233854525 |
| RECEIVABLES | 9262750 |
| ASSETS OTHER | 150688 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 243267963 |
| PAYABLE FOR SECURITIES | 6657427 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 962837 |
| TOTAL LIABILITIES | 7620264 |
| SENIOR EQUITY | 18666 |
| PAID IN CAPITAL COMMON | 231811900 |
| SHARES COMMON STOCK | 18665796 |
| SHARES COMMON PRIOR | 4438884 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | 4701758 |
| ACCUM APPREC OR DEPREC | 8518891 |
| NET ASSETS | 235647699 |
| DIVIDEND INCOME | 638727 |
| INTEREST INCOME | 323515 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1852194) |
| NET INVESTMENT INCOME | (889952) |
| REALIZED GAINS CURRENT | (4644942) |
| APPREC INCREASE CURRENT | 5704358 |
| NET CHANGE FROM OPS | 169464 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 20522725 |
| NUMBER OF SHARES REDEEMED | (6295813) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 186857803 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | (66486) |
| OVERDIST NET GAINS PRIOR | (56816) |
| GROSS ADVISORY FEES | 1501894 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1852194 |
| AVERAGE NET ASSETS | 150189374 |
| PER SHARE NAV BEGIN | 10.99 |
| PER SHARE NII | (.05) |
| PER SHARE GAIN APPREC | 1.68 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 12.62 |
| EXPENSE RATIO | 1.23 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 21 |
| NAME: AST JANUS OVERSEAS GROWTH PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 241668012 |
| INVESTMENTS AT VALUE | 255441610 |
| RECEIVABLES | 2599799 |
| ASSETS OTHER | 2179007 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 260220416 |
| PAYABLE FOR SECURITIES | 4029151 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 486141 |
| TOTAL LIABILITIES | 4515292 |
| SENIOR EQUITY | 21542 |
| PAID IN CAPITAL COMMON | 243382989 |
| SHARES COMMON STOCK | 21541695 |
| SHARES COMMON PRIOR | 0 |
| ACCUMULATED NII CURRENT | 451854 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | (1786507) |
| ACCUM APPREC OR DEPREC | 13635246 |
| NET ASSETS | 255705124 |
| DIVIDEND INCOME | 991020 |
| INTEREST INCOME | 1162161 |
| OTHER INCOME | 0 |
| EXPENSES NET | 1701327 |
| NET INVESTMENT INCOME | 451854 |
| REALIZED GAINS CURRENT | (1786507) |
| APPREC INCREASE CURRENT | 13635246 |
| NET CHANGE FROM OPS | 12300593 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 25961925 |
| NUMBER OF SHARES REDEEMED | (4420230) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 255705124 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 1260797 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 1701327 |
| AVERAGE NET ASSETS | 126079666 |
| PER SHARE NAV BEGIN | 10.00 |
| PER SHARE NII | .02 |
| PER SHARE GAIN APPREC | 1.85 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 11.87 |
| EXPENSE RATIO | 1.35 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 22 |
| NAME: AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 110853776 |
| INVESTMENTS AT VALUE | 116496334 |
| RECEIVABLES | 3312583 |
| ASSETS OTHER | 1436 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 119810353 |
| PAYABLE FOR SECURITIES | 2267123 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 104914 |
| TOTAL LIABILITIES | 2372037 |
| SENIOR EQUITY | 9605 |
| PAID IN CAPITAL COMMON | 109237899 |
| SHARES COMMON STOCK | 9605139 |
| SHARES COMMON PRIOR | 0 |
| ACCUMULATED NII CURRENT | 685682 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 1862572 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 5642558 |
| NET ASSETS | 117438316 |
| DIVIDEND INCOME | 1156630 |
| INTEREST INCOME | 211542 |
| OTHER INCOME | 0 |
| EXPENSES NET | (682490) |
| NET INVESTMENT INCOME | 685682 |
| REALIZED GAINS CURRENT | 1862572 |
| APPREC INCREASE CURRENT | 5642558 |
| NET CHANGE FROM OPS | 8190812 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 10692583 |
| NUMBER OF SHARES REDEEMED | (1087444) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 117438316 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 416420 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 682490 |
| AVERAGE NET ASSETS | 55522715 |
| PER SHARE NAV BEGIN | 10.00 |
| PER SHARE NII | .07 |
| PER SHARE GAIN APPREC | 2.16 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 12.23 |
| EXPENSE RATIO | 1.23 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 23 |
| NAME: AST 20TH CENTURY STRATEGIC BALANCED PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 28418789 |
| INVESTMENTS AT VALUE | 30249963 |
| RECEIVABLES | 162216 |
| ASSETS OTHER | 10018 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 30422197 |
| PAYABLE FOR SECURITIES | 733199 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 741884 |
| TOTAL LIABILITIES | 1475083 |
| SENIOR EQUITY | 2552 |
| PAID IN CAPITAL COMMON | 27247907 |
| SHARES COMMON STOCK | 2551795 |
| SHARES COMMON PRIOR | 0 |
| ACCUMULATED NII CURRENT | 273328 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | (407125) |
| ACCUM APPREC OR DEPREC | 1830452 |
| NET ASSETS | 28947114 |
| DIVIDEND INCOME | 52959 |
| INTEREST INCOME | 390305 |
| OTHER INCOME | 0 |
| EXPENSES NET | (169936) |
| NET INVESTMENT INCOME | 273328 |
| REALIZED GAINS CURRENT | (407125) |
| APPREC INCREASE CURRENT | 1830452 |
| NET CHANGE FROM OPS | 1696655 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 2753924 |
| NUMBER OF SHARES REDEEMED | (202139) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 28947114 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 115602 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 183518 |
| AVERAGE NET ASSETS | 13600143 |
| PER SHARE NAV BEGIN | 10.00 |
| PER SHARE NII | .11 |
| PER SHARE GAIN APPREC | 1.23 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 11.34 |
| EXPENSE RATIO | 1.25 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 24 |
| NAME: AST 20TH CENTURY INTERNATIONAL GROWTH PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 32701742 |
| INVESTMENTS AT VALUE | 34072232 |
| RECEIVABLES | 1549791 |
| ASSETS OTHER | 295 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 35622318 |
| PAYABLE FOR SECURITIES | 2395441 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 102355 |
| TOTAL LIABILITIES | 2497796 |
| SENIOR EQUITY | 2875 |
| PAID IN CAPITAL COMMON | 32230119 |
| SHARES COMMON STOCK | 2875045 |
| SHARES COMMON PRIOR | 0 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | (92042) |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | (481105) |
| ACCUM APPREC OR DEPREC | 1464675 |
| NET ASSETS | 33124522 |
| DIVIDEND INCOME | 121197 |
| INTEREST INCOME | 62956 |
| OTHER INCOME | 0 |
| EXPENSES NET | (276195) |
| NET INVESTMENT INCOME | (92042) |
| REALIZED GAINS CURRENT | (481105) |
| APPREC INCREASE CURRENT | 1464675 |
| NET CHANGE FROM OPS | 891528 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 4257961 |
| NUMBER OF SHARES REDEEMED | (1382916) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 33124522 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 157826 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 276195 |
| AVERAGE NET ASSETS | 15782584 |
| PER SHARE NAV BEGIN | 10.00 |
| PER SHARE NII | (.03) |
| PER SHARE GAIN APPREC | 1.55 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 11.52 |
| EXPENSE RATIO | 1.75 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 25 |
| NAME: AST T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 195135288 |
| INVESTMENTS AT VALUE | 211943797 |
| RECEIVABLES | 1157592 |
| ASSETS OTHER | 1511 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 213102900 |
| PAYABLE FOR SECURITIES | 13069668 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 137712 |
| TOTAL LIABILITIES | 13207380 |
| SENIOR EQUITY | 15520 |
| PAID IN CAPITAL COMMON | 181099987 |
| SHARES COMMON STOCK | 15519861 |
| SHARES COMMON PRIOR | 0 |
| ACCUMULATED NII CURRENT | 948853 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 1022651 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 16808509 |
| NET ASSETS | 199895520 |
| DIVIDEND INCOME | 1364362 |
| INTEREST INCOME | 504184 |
| OTHER INCOME | 0 |
| EXPENSES NET | (419693) |
| NET INVESTMENT INCOME | 948853 |
| REALIZED GAINS CURRENT | 1022651 |
| APPREC INCREASE CURRENT | 16808509 |
| NET CHANGE FROM OPS | 18780013 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 17898218 |
| NUMBER OF SHARES REDEEMED | (2378357) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 199895520 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 713039 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 919693 |
| AVERAGE NET ASSETS | 79225786 |
| PER SHARE NAV BEGIN | 10.00 |
| PER SHARE NII | .06 |
| PER SHARE GAIN APPREC | 2.82 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 12.88 |
| EXPENSE RATIO | 1.16 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000814679 |
| NAME: AMERICAN SKANDIA TRUST |
| SERIES: |
| NUMBER: 26 |
| NAME: AST MARSICO CAPITAL GROWTH PORTFOLIO |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 12225289 |
| INVESTMENTS AT VALUE | 12247504 |
| RECEIVABLES | 341977 |
| ASSETS OTHER | 0 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 12589481 |
| PAYABLE FOR SECURITIES | 5288436 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 1741 |
| TOTAL LIABILITIES | 5290177 |
| SENIOR EQUITY | 727 |
| PAID IN CAPITAL COMMON | 7270063 |
| SHARES COMMON STOCK | 727411 |
| SHARES COMMON PRIOR | 0 |
| ACCUMULATED NII CURRENT | 6299 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 22215 |
| NET ASSETS | 7299304 |
| DIVIDEND INCOME | 384 |
| INTEREST INCOME | 7656 |
| OTHER INCOME | 0 |
| EXPENSES NET | (1742) |
| NET INVESTMENT INCOME | 6299 |
| REALIZED GAINS CURRENT | 0 |
| APPREC INCREASE CURRENT | 22215 |
| NET CHANGE FROM OPS | 28514 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 966417 |
| NUMBER OF SHARES REDEEMED | (239006) |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 7299304 |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 1568 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 6299 |
| AVERAGE NET ASSETS | 7901172 |
| PER SHARE NAV BEGIN | 10.00 |
| PER SHARE NII | .01 |
| PER SHARE GAIN APPREC | .02 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 10.03 |
| EXPENSE RATIO | 1.00 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |