As filed with the SEC on April 29, 2005

Registration No. 2-80896

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-1A

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933     o

Pre-Effective Amendment No.     o

Post-Effective Amendment No. 51     ý

 

and

 

REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940     o

Amendment No. 54     ý

(Check appropriate box or boxes)

 

 

THE PRUDENTIAL SERIES FUND, INC.

(Exact Name of Registrant)

 

GATEWAY CENTER THREE

100 MULBERRY STREET

NEWARK, NEW JERSEY 07102

(800) 778-2255

(Address and telephone number of principal executive offices)

 

Jonathan D. Shain, Secretary

The Prudential Series Fund, Inc.

Gateway Center Three

100 Mulberry Street

Newark, New Jersey 07102

(Name and Address of Agent for Service)

 

 

Copy to:

 

Christopher E. Palmer, Esq.

Goodwin Procter LLP

901 New York Avenue, N.W.

Washington, D.C. 20001

 

 

Approximate date of proposed public offering:     As soon as practicable after the effective date of the Registration Statement.

It is proposed that this filing will become effective (check appropriate box):

 

o      immediately upon filing pursuant to paragraph (b)

o                 on May 1, 2005 pursuant to paragraph (b)

o                  60 days after filing pursuant to paragraph (a)(1)

o                  on              pursuant to paragraph (a)(1)

o                  75 days after filing pursuant to paragraph (a)(2)

o                  on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

o                  this post-effective amendment designates a new effective date for a previously filed post-effective amendment.

 

 

PROSPECTUS

May 1, 2005

 

THE PRUDENTIAL SERIES FUND, INC.

 

The Prudential Series Fund, Inc. (the “Fund”) is an investment company made up of the following 33 separate portfolios (“Portfolios”):

 

Conservative Balanced Portfolio		SP AllianceBernstein Large Cap Growth Portfolio
Diversified Bond Portfolio		SP Davis Value Portfolio
Diversified Conservative Growth Portfolio		SP Goldman Sachs Small Cap Value Portfolio
Equity Portfolio		SP Large Cap Value Portfolio
Flexible Managed Portfolio		SP LSV International Value Portfolio
Global Portfolio		SP Mid Cap Growth Portfolio
Government Income Portfolio		SP PIMCO High Yield Portfolio
High Yield Bond Portfolio		SP PIMCO Total Return Portfolio
Jennison Portfolio		SP Prudential U.S. Emerging Growth Portfolio
Jennison 20/20 Focus Portfolio		SP Small Cap Growth Portfolio
Money Market Portfolio		SP Strategic Partners Focused Growth Portfolio
Natural Resources Portfolio		SP William Blair International Growth Portfolio
Small Capitalization Stock Portfolio		SP Aggressive Growth Asset Allocation Portfolio
Stock Index Portfolio		SP Balanced Asset Allocation Portfolio
Value Portfolio		SP Conservative Asset Allocation Portfolio
Zero Coupon Bond Portfolio 2005		SP Growth Asset Allocation Portfolio
SP AIM Core Equity Portfolio

 

 

 

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The Fund is an investment vehicle for life insurance companies (“Participating Insurance Companies”) writing variable annuity contracts and variable life insurance policies.  Shares of the Fund may also be sold directly to certain tax-deferred retirement plans.  Each variable annuity contract and variable life insurance policy involves fees and expenses not described in this Prospectus.  Please read the Prospectus for the variable annuity contract or variable life insurance policy for information regarding the contract or policy, including its fees and expenses.

 

The Fund received an order from the Securities and Exchange Commission permitting its Investment Manager, subject to approval by its Board of Directors, to change subadvisers without shareholder approval.  For more information, please see this Prospectus under “How the Fund is Managed.”

 

Table of Contents

 

INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES OF THE PORTFOLIOS	1
PRINCIPAL RISKS	13
EVALUATING PERFORMANCE	16
FEES AND EXPENSES OF INVESTING IN THE PORTFOLIOS	49
MORE DETAILED INFORMATION ON HOW THE PORTFOLIOS INVEST	53
Investment Objectives and Policies
Conservative Balanced Portfolio
Diversified Bond Portfolio
Diversified Conservative Growth Portfolio
Equity Portfolio
Flexible Managed Portfolio
Global Portfolio
Government Income Portfolio
High Yield Bond Portfolio
Jennison Portfolio
Jennison 20/20 Focus Portfolio
Money Market Portfolio
Natural Resources Portfolio
Small Capitalization Stock Portfolio
Stock Index Portfolio
Value Portfolio
Zero Coupon Bond Portfolio 2005
SP AIM Core Equity Portfolio
SP AllianceBernstein Large Cap Growth Portfolio(1)
SP Davis Value Portfolio
SP Goldman Sachs Small Cap Value Portfolio
SP Large Cap Value Portfolio
SP LSV International Value Portfolio(2)
SP Mid Cap Growth Portfolio
SP PIMCO High Yield Portfolio
SP PIMCO Total Return Portfolio
SP Prudential U.S. Emerging Growth Portfolio
SP Small Cap Growth Portfolio(3)
SP Strategic Partners Focused Growth Portfolio
SP William Blair International Growth Portfolio
SP Asset Allocation Portfolios
SP Aggressive Growth Asset Allocation Portfolio
SP Balanced Asset Allocation Portfolio
SP Conservative Asset Allocation Portfolio
SP Growth Asset Allocation Portfolio
MORE DETAILED INFORMATION ABOUT OTHER INVESTMENTS AND STRATEGIES USED BY THE PORTFOLIOS	85
American Depositary Receipts
Asset-Backed Securities
Collateralized Debt Obligations
Convertible Debt and Convertible Preferred Stock
Credit Default Swaps
Credit-Linked Securities
Derivatives
Dollar Rolls

 

(1) Formerly Alliance Large Cap Growth Portfolio

(2) Formerly SP Deutsche International Equity Portfolio

(3) Formerly SP State Street Research Small Cap Growth Portfolio

 

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Equity Swaps
Event-Linked Bonds
Forward Foreign Currency Exchange Contracts
Futures Contracts
Interest Rate Swaps
Joint Repurchase Account
Loans and Assignments
Mortgage-Related Securities
Options
Real Estate Investment Trusts
Repurchase Agreements
Reverse Repurchase Agreements
Short Sales
Short Sales Against-the-Box
Swap Options
Swaps
Total Return Swaps
When-Issued and Delayed Delivery Securities
HOW THE FUND IS MANAGED	88
Board of Directors
Investment Adviser
Investment Subadvisers
Portfolio Managers
HOW TO BUY AND SELL SHARES OF THE FUND	104
Frequent Purchases and Redemptions of Fund Shares
Net Asset Value
Distributor
OTHER INFORMATION	106
Federal Income Taxes
Monitoring for Possible Conflicts
Disclosure of Portfolio Holdings
FINANCIAL HIGHLIGHTS	107

 

(For more information—see back cover)

 

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This prospectus provides information about The Prudential Series Fund, Inc. (the Fund), which consists of 36 separate portfolios (each, a Portfolio).

 

The Fund offers two classes of shares in each Portfolio: Class I and Class II. Class I shares are sold only to separate accounts of The Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey  (collectively, Prudential) as investment options under variable life insurance and variable annuity contracts (the Contracts). (A separate account keeps the assets supporting certain insurance contracts separate from the general assets and liabilities of the insurance company.) Class II shares are offered only to separate accounts of non-Prudential insurance companies for the same types of Contracts. Not every Portfolio is available under every Contract . The prospectus for each Contract lists the Portfolios currently available through that Contract.

 

This section highlights key information about each Portfolio. Additional information follows this summary and is also provided in the Fund’s Statement of Additional Information (SAI).

 

INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES OF THE PORTFOLIOS

 

The following summarizes the investment objectives, principal strategies and principal risks for each of the Portfolios. A Portfolio may have a similar name or an investment objective and investment policies closely resembling those of a mutual fund managed by the same investment adviser that is sold directly to individual investors. Despite such similarities, there can be no assurance that the investment performance of any Portfolio will resemble that of its retail fund counterpart.

 

We describe each of the terms listed as principal risks in the section entitled “Principal Risks” which follows this section. While we make every effort to achieve the investment objective for each Portfolio, we can’t guarantee success and it is possible that you could lose money.

 

Conservative Balanced Portfolio

 

Investment Objective: total investment return consistent with a conservatively managed diversified portfolio.

 

We invest in a mix of equity securities, debt obligations and money market instruments. Up to 30% of the Portfolio’s total assets may be invested in foreign securities. We may invest a portion of the Portfolio’s assets in high-yield/high-risk debt securities, which are riskier than high-grade securities. This Portfolio may be appropriate for an investor who wants diversification with a relatively lower risk of loss than that associated with the Flexible Managed Portfolio (see below). While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        prepayment risk

 

Diversified Bond Portfolio

 

Investment Objective: high level of income over a longer term while providing reasonable safety of capital.

 

We look for investments that we think will provide a high level of current income, but which are not expected to involve a substantial risk of loss of capital through default. We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in high-grade debt obligations and high-quality money market investments. We may purchase securities that are issued outside the U.S. by foreign or U.S. issuers. In addition, we may invest a portion of the Portfolio’s assets in high-yield/high-risk debt securities, which are riskier than high-grade securities. We may invest up to 20% of the Portfolio’s total assets in debt securities issued outside the U.S. by U.S. or foreign issuers whether or not such securities are denominated in the U.S. dollar. These securities are included in the limits described above for debt obligations that may or may not

 

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be investment grade. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        prepayment risk

 

Diversified Conservative Growth Portfolio

 

Investment Objective: current income and a reasonable level of capital appreciation.

 

We invest in a diversified portfolio of debt and equity securities. Up to 35% of the Portfolio’s total assets may be invested in high-yield/high-risk debt securities, which are riskier than high-grade securities. The Portfolio may invest in foreign securities, including debt obligations of issuers in emerging markets. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        prepayment risk

 

Equity Portfolio

 

Investment Objective: long-term growth of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in common stock of major established companies as well as smaller companies that we believe offer attractive prospects of appreciation. The Portfolio may invest up to 30% of its total assets in foreign securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

Flexible Managed Portfolio

 

Investment Objective: high total return consistent with an aggressively managed diversified portfolio.

 

We invest in a mix of equity securities, debt obligations and money market instruments. The Portfolio may invest in foreign securities. A portion of the debt portion of the Portfolio may be invested in high-yield/high-risk debt securities, which are riskier than

 

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high-grade securities. This Portfolio may be appropriate for an investor who wants diversification and is willing to accept a relatively high level of loss in an effort to achieve greater appreciation. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        prepayment risk

 

Global Portfolio

 

Investment Objective: long-term growth of capital.

 

We invest primarily in common stocks (and their equivalents) of foreign and U.S. companies. Generally, we invest in at least three countries, including the U.S., but we may invest up to 35% of the Portfolio’s assets in companies located in any one country other than the U.S. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

Government Income Portfolio

 

Investment Objective: a high level of income over the long term consistent with the preservation of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in U.S. Government securities, including intermediate and long-term U.S. Treasury securities and debt obligations issued by agencies or instrumentalities established by the U.S. Government, mortgage-related securities and collateralized mortgage obligations. The Portfolio may invest up to 20% of investable assets in other securities, including corporate debt securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        mortgage risk

•                        prepayment risk

 

An investment in the Government Income Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

 

High Yield Bond Portfolio

 

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Investment Objective: a high total return.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in high-yield/high-risk debt securities. Such securities have speculative characteristics and are riskier than high-grade securities. The Portfolio may invest up to 20% of its total assets in foreign debt obligations. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        prepayment risk

 

Jennison Portfolio

 

Investment Objective: long-term growth of capital.

 

We invest primarily in equity securities of major, established corporations that we believe offer above-average growth prospects. The Portfolio may invest up to 30% of its total assets in foreign securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

Jennison 20/20 Focus Portfolio

 

Investment Objective: long-term growth of capital.

 

We invest primarily in up to 40 equity securities of U.S. companies that are selected by the Portfolio’s two portfolio managers (up to 20 by each) as having strong capital appreciation potential. One manager uses a “value” approach, which means he or she attempts to identify strong companies selling at a discount from their perceived true value. There is a risk that “value” stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. The other manager uses a “growth” approach, which means he or she seeks companies that exhibit higher-than-average earnings growth. “Growth” stocks usually involve a higher level of risk than “value” stocks, because growth stocks tend to attract more attention and speculative investment than value stocks. Up to 20% of the Portfolio’s total assets may be invested in foreign securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

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Money Market Portfolio

 

Investment Objective: maximum current income consistent with the stability of capital and the maintenance of liquidity.

 

We invest in high-quality short-term money market instruments issued by the U.S. Government or its agencies, as well as by corporations and banks, both domestic and foreign. The Portfolio will invest only in instruments that mature in thirteen months or less, and which are denominated in U.S. dollars. While we make every effort to achieve our objective, we can’t guarantee success.

 

Principal Risks:

•                        credit risk

•                        interest rate risk

•                        management risk

 

An investment in the Money Market Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although the Portfolio seeks to maintain a net asset value of $10 per share, it is possible to lose money by investing in the Portfolio.

 

Natural Resources Portfolio

 

Investment Objective: long-term growth of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in common stocks and convertible securities of natural resource companies and securities that are related to the market value of some natural resource. The Portfolio is non-diversified. As a non-diversified Portfolio, the Natural Resources Portfolio may hold larger positions in single issuers than a diversified Portfolio. As a result, the Portfolio’s performance may be tied more closely to the success or failure of a smaller group of portfolio holdings. There are additional risks associated with the Portfolio’s investment in the securities of natural resource companies. The market value of these securities may be affected by numerous factors, including events occurring in nature, inflationary pressures, and international politics. Up to 30% of the Portfolio’s total assets may be invested in foreign securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        industry/sector risk

•                        interest rate risk

•                        leveraging risk

•                        management risk

•                        market risk

 

Small Capitalization Stock Portfolio

 

Investment Objective: long-term growth of capital.

 

We invest primarily in equity securities of publicly-traded companies with small market capitalizations. With the price and yield performance of the Standard & Poor’s Small Capitalization 600 Stock Index (the S&P SmallCap 600 Index) as our benchmark, we normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in all or a representative sample of the stocks in the S&P SmallCap 600 Index. The market capitalization of the companies that make up the S&P SmallCap 600 Index may change from time to time. As of February 28, 2005 the S&P SmallCap 600 Index stocks had market capitalizations of between $300 million and $1 billion.

 

The Portfolio is not “managed” in the traditional sense of using market and economic analyses to select stocks. Rather, the portfolio manager purchases stocks to duplicate the stocks and their weighting in the S&P SmallCap 600 Index. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

 

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•                        leveraging risk

•                        market risk

 

Stock Index Portfolio

 

Investment Objective: investment results that generally correspond to the performance of publicly-traded common stocks.

 

With the price and yield performance of the Standard & Poor’s 500 Composite Stock Price Index (S&P 500 Index) as our benchmark, we normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in S&P 500 stocks. The S&P 500 Index represents more than 70% of the total market value of all publicly-traded common stocks and is widely viewed as representative of publicly-traded common stocks as a whole. The Portfolio is not “managed” in the traditional sense of using market and economic analyses to select stocks. Rather, the portfolio manager purchases stocks in proportion to their weighting in the S&P 500 Index. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        market risk

 

Value Portfolio

 

Investment Objective: capital appreciation.

 

We invest primarily in common stocks that we believe are undervalued — those stocks that are trading below their underlying asset value, cash generating ability and overall earnings and earnings growth. We normally invest at least 65% of the Portfolio’s total assets in the common stock of companies that we believe will provide investment returns above those of the Russell 1000 Value Index and, over the long term, the Standard & Poor’s 500 Composite Stock Price Index (S&P 500 Index). Most of our investments will be securities of large capitalization companies. The Portfolio may invest up to 25% of its total assets in real estate investment trusts (REITs) and up to 30% of its total assets in foreign securities. There is a risk that “value” stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        credit risk

•                        foreign investment risk

•                        interest rate risk

•                        leveraging risk

•                        management risk

•                        market risk

 

Zero Coupon Bond Portfolio 2005

 

Investment Objective: highest predictable compound investment for a specific period of time, consistent with safety of invested capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in debt obligations of the United States Treasury and corporations that have been issued without interest coupons or have been stripped of their interest coupons, or have interest coupons that have been stripped from the debt obligations. On the Portfolio’s liquidation date, the Portfolio will redeem all investments. Please refer to your Contract prospectus for information on your reallocation options and the Portfolio to which your investment will be transferred if you do not provide other instructions. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        credit risk

•                        interest rate risk

•                        management risk

•                        market risk

 

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Note:  The Zero Coupon Bond Portfolio 2005 will liquidate as of November 15, 2005. On the liquidation date, all of the securities held by the Portfolio will be sold and all outstanding shares of the Portfolio will be redeemed.  Please consult your contract prospectus for information on reallocation options and the Portfolio to which your investment will be transferred if you do not provide other instructions.

 

SP AIM Core Equity Portfolio

 

Investment Objective: growth of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in equity securities, including convertible securities of established companies that have long-term above-average growth in earnings and growth companies that the portfolio managers believe have the potential for above-average growth in earnings. In complying with this 80% requirement, the Portfolio’s investments may include synthetic instruments. Synthetic instruments are investments that have economic characteristics similar to the Portfolio’s direct investments and may include warrants, futures, options, exchange-traded funds and American Depositary Receipts (ADRs). The portfolio manager considers whether to sell a particular security when they believe the security no longer has that potential or the capacity to generate income. The Portfolio may invest up to 20% of its total assets in foreign securities. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        interest rate risk

•                        liquidity risk

•                        leveraging risk

•                        management risk

•                        market risk

 

SP AllianceBernstein Large Cap Growth Portfolio  (formerly, SP Alliance Large Cap Growth Portfolio)

 

Investment Objective: long term growth of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in stocks of companies considered to have large capitalizations (i.e., similar to companies included in the S&P 500 Index). Up to 15% of the Portfolio’s total assets may be invested in foreign securities. Unlike most equity funds, the Portfolio focuses on a relatively small number of intensively researched companies. From a research universe of more than 500 companies, Alliance Capital Management L.P. (AllianceBernstein) selects the Portfolio’s investments from those companies that have strong management, superior industry positions, excellent balance sheets, and superior earnings growth prospects. “Alliance”, “Alliance Capital”, “AllianceBernstein” and their logos are registered marks of Alliance Capital Management L.P. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

SP Davis Value Portfolio

 

Investment Objective: growth of capital.

 

We invest primarily in common stock of U.S. companies with market capitalizations of at least $5 billion. The portfolio managers use the investment philosophy of Davis Advisors to perform extensive research to buy companies with expanding earnings at value prices and hold them for the long-term. They look for companies with sustainable growth rates selling at modest price-earnings multiples that they hope will expand as other investors recognize the company’s true worth. The portfolio managers believe

 

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that if you combine a sustainable growth rate with a gradually expanding multiple, these rates compound and can generate returns that could exceed average returns earned by investing in large capitalization domestic stocks. They consider selling a company if the company no longer exhibits the characteristics that they believe foster sustainable long-term growth, minimize risk and enhance the potential for superior long-term returns. There is a risk that “value” stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        foreign company risk

•                        leveraging risk

•                        management risk

•                        market risk

 

SP Goldman Sachs Small Cap Value Portfolio

 

Investment Objective: long-term growth of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in small capitalization companies.  The 80% requirement applies at the time the Portfolio invests its assets.  The Portfolio generally defines small capitalization stocks as stocks of companies with a capitalization of $4 billion or less.  The Portfolio may invest up to 25% of its assets in foreign securities.  While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        portfolio turnover risk

•                        smaller company risk

 

SP Large Cap Value Portfolio

 

Investment Objective: long-term growth of capital.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in common stocks and securities convertible into common stock of companies.  The Portfolio generally defines large capitalization companies as those with a total market capitalization of $5 billion or more (measured at the time of purchase).  While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

•                        portfolio turnover risk

•                        style risk

 

SP LSV International Value Portfolio  (formerly, SP Deutsche International Equity Portfolio)

 

Investment Objective: long-term capital appreciation.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus borrowings made for investment purposes) in the stocks and other equity securities of companies in developed countries outside the United States that are represented

 

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in the MSCI EAFE Index.  While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.  This Portfolio is advised by LSV Asset Management (LSV).

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

SP Mid Cap Growth Portfolio

 

Investment Objective: long-term growth of capital.

 

We invest, under normal market conditions, at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities. These securities typically are of medium market capitalizations, which Calamos Advisors LLC (Calamos) believes have above-average growth potential. Medium market capitalization companies are defined by the Portfolio as companies with market capitalizations equaling or exceeding $250 million but not exceeding the top of the Russell Midcap ^™ Growth Index range at the time of the Portfolio’s investment. This Index is a widely recognized, unmanaged index of mid cap common stock prices. Companies whose market capitalizations fall below $250 million or exceed the top of the Russell Midcap ^™ Growth Index range after purchase continue to be considered medium-capitalization companies for purposes of the Portfolio’s 80% investment policy. The Portfolio’s investments may include securities listed on a securities exchange or traded in the over-the-counter markets. Calamos uses a bottom-up and top-down analysis in managing the Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management’s abilities), as well as top-down approach of diversification by industry and company and paying attention to macro-level investment themes. The Portfolio may invest in foreign securities (including emerging markets securities). The Portfolio is expected to engage in active and frequent trading to achieve its principal investment strategies. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

•                        portfolio turnover risk

 

SP PIMCO High Yield Portfolio

 

Investment Objective: maximum total return, consistent with preservation of capital and prudent investment management.

 

We invest under normal circumstances at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in a diversified portfolio of high yield/high risk securities rated below investment grade but rated at least CCC by Moody’s Investor Service, Inc. (Moody’s) or Standard & Poor’s Ratings Group (S&P), or, if unrated, determined by Pacific Investment Management Company (PIMCO) to be of comparable quality, subject to a maximum of 5% of total Portfolio assets invested in securities rated CCC. The remainder of the Portfolio’s assets may be invested in investment grade fixed income instruments. The duration of the Portfolio normally varies within a two- to six-year time frame based on PIMCO’s forecast for interest rates. The Portfolio may invest without limit in U.S. dollar-denominated securities of foreign issuers. The Portfolio may invest up to 15% of its assets in non-U.S.-denominated securities. The Portfolio normally will hedge at least 75% of its exposure to foreign curency to reduce the risk of loss due to fluctuations in currency exchange rates. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

 

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•                        interest rate risk

•                        leveraging risk

•                        liquidity risk

•                        management risk

•                        market risk

•                        prepayment risk

 

SP PIMCO Total Return Portfolio

 

Investment Objective: maximum total return, consistent with preservation of capital and prudent investment management.

 

We invest under normal circumstances at least 65% of its assets in a diversified portfolio of fixed income instruments of varying maturities. The portfolio duration of this Portfolio normally varies within a three- to six-year time frame based on PIMCO’s forecast for interest rates. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        credit risk

•                        derivatives risk

•                        foreign investment risk

•                        high yield risk

•                        interest rate risk

•                        leveraging risk

•                        management risk

•                        market risk

•                        prepayment risk

 

SP Prudential U.S. Emerging Growth Portfolio

 

Investment Objective: long-term capital appreciation.

 

We invest under normal circumstances at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in equity securities of small and medium-sized U.S. companies that Jennison Associates LLC believes have the potential for above-average growth. The Portfolio also may use derivatives for hedging or to improve the Portfolio’s returns. The Portfolio may actively and frequently trade its portfolio securities. High portfolio turnover results in higher transaction costs and can affect the Portfolio’s performance. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

•                        portfolio turnover risk

 

SP Small Cap Growth Portfolio   (formerly, SP State Street Research Small Cap Growth Portfolio)

 

Investment Objective: long-term capital growth.

 

We normally invest at least 80% of the Portfolio’s investable assets (net assets plus any borrowings made for investment purposes) in common stocks of Small Capitalization companies.  The fund considers a company to be a Small Capitalization company if it has a market capitalization, at the time of purchase, no larger than the largest capitalized company included in the Russell 2000 Index during the most recent 11-month period (based on month-end data) plus the most recent data during the current month.  We are primarily looking for companies in the developing stages of their life cycles, which are currently priced below our estimation of their potential, have earnings which may be expected to grow faster than the U.S. economy in general, and/or offer the potential for accelerated earnings growth due to rapid growth of sales, new products, management changes, and/or structural changes in the economy.  Investments in small, developing companies carry greater risk than investments in larger, more established companies.

 

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While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.  This Portfolio is advised by Neuberger Berman Asst Management and Eagle Asset Management.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

•                        smaller company risk

 

SP Strategic Partners Focused Growth Portfolio

 

Investment Objective: long-term growth of capital.

 

We normally invest at least 65% of the Portfolio’s total assets in equity-related securities of U.S. companies that the adviser believes to have strong capital appreciation potential. The Portfolio’s strategy is to combine the efforts of two investment advisers and to invest in the favorite stock selection ideas of three portfolio managers (two of whom invest as a team). Each investment adviser to the Portfolio utilizes a growth style to select approximately 20 securities. The portfolio managers build a portfolio with stocks in which they have the highest confidence and may invest more than 5% of the Portfolio’s assets in any one issuer. The Portfolio is nondiversified, meaning it can invest a relatively high percentage of its assets in a small number of issuers. Investing in a nondiversified portfolio, particularly a portfolio investing in approximately 40 equity-related securities, involves greater risk than investing in a diversified portfolio because a loss resulting from the decline in the value of one security may represent a greater portion of the total assets of a nondiversified portfolio. The Portfolio may actively and frequently trade its portfolio securities. While we make every effort to achieve our objective, we cannot guarantee success and it is possible that you could lose money. This Portfolio is advised by Jennison Associates LLC and Alliance Capital Management L.P.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

•                        portfolio turnover risk

 

SP William Blair International Growth Portfolio

 

Investment Objective: long-term growth of capital.

 

We invest primarily in equity-related securities of foreign issuers. This means the Portfolio looks for investments that William Blair & Company thinks will increase in value over a period of years. The Portfolio invests primarily in the common stock of large and medium-sized foreign companies. Under normal circumstances, the Portfolio invests at least 65% of its total assets in common stock of foreign companies operating or based in at least five different countries. The Portfolio looks primarily for stocks of companies whose earnings are growing at a faster rate than other companies. These companies typically have characteristics such as above average growth in earnings and cash flow, improving profitability, strong balance sheets, management strength and strong market share for its products. The Portfolio also tries to buy such stocks at attractive prices in relation to their growth prospects. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.  This Portfolio is advised by William Blair & Company LLC.

 

Principal Risks:

•                        company risk

•                        derivatives risk

•                        foreign investment risk

•                        leveraging risk

•                        management risk

•                        market risk

 

SP Aggressive Growth Asset Allocation Portfolio

 

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Investment Objective: capital appreciation by investing in domestic equity Portfolios and international equity Portfolios.

 

Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

The SP Aggressive Growth Asset Allocation Portfolio currently invests in shares of the following Fund Portfolios:

 

•                a domestic equity component (approximately 72% of the Portfolio), invested in shares of:

Jennison Portfolio		(32% of Portfolio)
SP Large Cap Value Portfolio		(35% of Portfolio)
SP Small Cap Growth Portfolio		(3% of Portfolio)
SP Goldman Sachs Small Cap Value Portfolio		(2% of Portfolio)

 

•                an international equity component (approximately 28% of the Portfolio), invested in shares of:

SP LSV International Value Portfolio		(14%of Portfolio)
SP William Blair International Growth Portfolio		(14%of Portfolio)

 

For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus.

 

SP Balanced Asset Allocation Portfolio

 

Investment Objective: to provide a balance between current income and growth of capital by investing in domestic equity Portfolios, fixed income Portfolios, and international equity Portfolios.

 

Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

The SP Balanced Asset Allocation Portfolio currently invests in shares of the following Portfolios:

 

•                a domestic equity component (approximately 45% of the Portfolio), invested in shares of:

Jennison Portfolio		(20% of Portfolio)
SP Large Cap Value Portfolio		(22% of Portfolio)
SP Small Cap Growth Portfolio		(1.5% of Portfolio)
SP Goldman Sachs Small Cap Value Portfolio		(1.5% of Portfolio)

 

•                a fixed income component (approximately 37% of the Portfolio), invested in shares of:

SP PIMCO Total Return Portfolio		(30% of Portfolio)
SP PIMCO High Yield Portfolio		(3% of Portfolio)
Money Market Portfolio		(4% of Portfolio)

 

•                an international equity component (approximately 18% of the Portfolio), invested in shares of:

SP LSV International Value Portfolio		(9% of Portfolio)
SP William Blair International Growth Portfolio		(9% of Portfolio)

 

For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus.

 

SP Conservative Asset Allocation Portfolio

 

Investment Objective: to provide current income with low to moderate capital appreciation by investing in domestic equity Portfolios, fixed income Portfolios, and international equity Portfolios.

 

Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

The SP Conservative Asset Allocation Portfolio currently invests in shares of the following Portfolios:

 

•                        a domestic equity component (approximately 31% of the Portfolio), invested in shares of:

Jennison Portfolio		(13% of Portfolio)
SP Large Cap Value Portfolio		(16% of Portfolio)

 

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SP Small Cap Growth Portfolio		(1% of Portfolio)
SP Goldman Sachs Small Cap Value Portfolio		(1% of Portfolio)

 

•                a fixed income component (approximately 57% of the Portfolio), invested in shares of:

SP PIMCO Total Return Portfolio		(47% of Portfolio)
SP PIMCO High Yield Portfolio		(3% of Portfolio)
Money Market Portfolio		(7% of Portfolio)

 

•                an international equity component (approximately 12% of the Portfolio), invested in shares of:

SP LSV International Value Portfolio		(6% of Portfolio)
SP William Blair International Growth Portfolio		(6% of Portfolio)

 

For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus.

 

SP Growth Asset Allocation Portfolio

 

Investment Objective: provide long-term growth of capital with consideration also given to current income, by investing in domestic equity Portfolios, fixed income Portfolios, and international equity Portfolios.

 

Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can’t guarantee success and it is possible that you could lose money.

 

The Growth Asset Allocation Portfolio currently invests in shares of the following Portfolios:

 

•                a domestic equity component (approximately 59% of the Portfolio), invested in shares of:

Jennison Portfolio		(26% of Portfolio)
SP Large Cap Value Portfolio		(29% of Portfolio)
SP Small Cap Growth Portfolio		(2.5% of Portfolio)
SP Goldman Sachs Small Cap Value Portfolio		(1.5% of Portfolio)

 

•                a fixed income component (approximately 18% of the Portfolio), invested in shares of:

SP PIMCO High Yield Portfolio		(3% of Portfolio)
SP PIMCO Total Return Portfolio		(15% of Portfolio)

 

•                an international equity component (approximately 23% of the Portfolio), invested in shares of:

SP LSV International Value Portfolio		(11.5% of Portfolio)
SP William Blair International Growth Portfolio		(11.5% of Portfolio)

 

For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus.

 

PRINCIPAL RISKS

 

Although we try to invest wisely, all investments involve risk. Like any mutual fund, an investment in a Portfolio could lose value, and you could lose money. The following summarizes the principal risks of investing in the Portfolios.

 

Company risk.     The price of the stock of a particular company can vary based on a variety of factors, such as the company’s financial performance, changes in management and product trends, and the potential for takeover and acquisition. This is especially true with respect to equity securities of smaller companies, whose prices may go up and down more than equity securities of larger, more established companies. Also, since equity securities of smaller companies may not be traded as often as equity securities of larger, more established companies, it may be difficult or impossible for a Portfolio to sell securities at a desirable price. Foreign securities have additional risks, including exchange rate changes, political and economic upheaval, the relative lack of information about these companies, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards.

 

Credit risk.     Debt obligations are generally subject to the risk that the issuer may be unable to make principal and interest payments when they are due. There is also the risk that the securities could lose value because of a loss of confidence in the ability of the borrower to pay back debt. Non-investment grade debt — also known as “high-yield bonds” and “junk bonds” — have a higher risk of default and tend to be less liquid than higher-rated securities.

 

Derivatives risk.     Derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, interest rate or index. The Portfolios typically use derivatives as a substitute for taking a position in the underlying asset and/or

 

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as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. A Portfolio may also use derivatives for leverage, in which case their use would involve leveraging risk. A Portfolio’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks described elsewhere, such as liquidity risk, interest rate risk, market risk, credit risk and management risk. They also involve the risk of mis-pricing or improper valuation and the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. A Portfolio investing in a derivative instrument could lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances.

 

Foreign investment risk.     Investing in foreign securities generally involves more risk than investing in securities of U.S. issuers. Foreign investment risk includes the specific risks described below:

 

Currency risk.     Changes in currency exchange rates may affect the value of foreign securities held by a Portfolio and the amount of income available for distribution. If a foreign currency grows weaker relative to the U.S. dollar, the value of securities denominated in that foreign currency generally decreases in terms of U.S. dollars. If a Portfolio does not correctly anticipate changes in exchange rates, its share price could decline as a result. In addition, certain hedging activities may cause the Portfolio to lose money and could reduce the amount of income available for distribution.

 

Emerging market risk.     To the extent that a Portfolio invests in emerging markets to enhance overall returns, it may face higher political, information, and stock market risks. In addition, profound social changes and business practices that depart from norms in developed countries’ economies have sometimes hindered the orderly growth of emerging economies and their stock markets in the past. High levels of debt may make emerging economies heavily reliant on foreign capital and vulnerable to capital flight.

 

Foreign market risk.     Foreign markets, especially those in developing countries, tend to be more volatile than U.S. markets and are generally not subject to regulatory requirements comparable to those in the U.S. Because of differences in accounting standards and custody and settlement practices, investing in foreign securities generally involves more risk than investing in securities of U.S. issuers.

 

Information risk.     Financial reporting standards for companies based in foreign markets usually differ from those in the United States. Since the “numbers” themselves sometimes mean different things, the sub-advisers devote much of their research effort to understanding and assessing the impact of these differences upon a company’s financial conditions and prospects.

 

Liquidity risk.     Stocks that trade less can be more difficult or more costly to buy, or to sell, than more liquid or active stocks. This liquidity risk is a factor of the trading volume of a particular stock, as well as the size and liquidity of the entire local market. On the whole, foreign exchanges are smaller and less liquid than the U.S. market. This can make buying and selling certain shares more difficult and costly. Relatively small transactions in some instances can have a disproportionately large effect on the price and supply of shares. In certain situations, it may become virtually impossible to sell a stock in an orderly fashion at a price that approaches an estimate of its value.

 

Political developments.     Political developments may adversely affect the value of a Portfolio’s foreign securities.

 

Political risk.     Some foreign governments have limited the outflow of profits to investors abroad, extended diplomatic disputes to include trade and financial relations, and imposed high taxes on corporate profits.

 

Regulatory risk .    Some foreign governments regulate their exchanges less stringently, and the rights of shareholders may not be as firmly established.

 

Growth stock risk.   Investors often expect growth companies to increase their earnings at a certain rate.  If these expectations are not met, investors can punish the stocks inordinately, even if earnings do increase.  In addition, growth stocks typically lack the dividend yield that can cushion stock prices in market downturns.

 

High yield risk.     Portfolios that invest in high yield securities and unrated securities of similar credit quality (commonly known as “junk bonds”) may be subject to greater levels of interest rate, credit and liquidity risk than Portfolios that do not invest in such securities. High yield securities are considered predominantly speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for high yield securities and reduce a Portfolio’s ability to sell its high yield securities (liquidity risk).

 

Industry/sector risk.     Portfolios that invest in a single market sector or industry can accumulate larger positions in single issuers or an industry sector. As a result, the Portfolio’s performance may be tied more directly to the success or failure of a smaller group of portfolio holdings.

 

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Interest rate risk.     Fixed income securities are subject to the risk that the securities could lose value because of interest rate changes. For example, bonds tend to decrease in value if interest rates rise. Debt obligations with longer maturities sometimes offer higher yields, but are subject to greater price shifts as a result of interest rate changes than debt obligations with shorter maturities.

 

Initial public offering (IPO) risk.   The prices of securities purchased in initial public offerings (IPOs) can be very volatile.  The effect of IPOs on the performance of a Portfolio depends on a variety of factors, including the number of IPOs the Portfolio invests in relative to the size of the Portfolio and whether and to what extent a security purchased in an IPO appreciates or depreciates in value.  As a Portfolio’s asset base increases, IPOs often have a diminished effect on a Portfolio’s performance.

 

Leveraging risk.     Certain transactions may give rise to a form of leverage. Such transactions may include, among others, reverse repurchase agreements, loans of portfolio securities, and the use of when-issued, delayed delivery or forward commitment contracts. The use of derivatives may also create leveraging risks. To mitigate leveraging risk, a sub-adviser can segregate liquid assets or otherwise cover the transactions that may give rise to such risk. The use of leverage may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a Portfolio to be more volatile than if the Portfolio had not been leveraged. This is because leveraging tends to exaggerate the effect of any increase or decrease in the value of a Portfolio’s securities.

 

Liquidity risk.     Liquidity risk exists when particular investments are difficult to purchase or sell. A Portfolio’s investments in illiquid securities may reduce the returns of the Portfolio because it may be unable to sell the illiquid securities at an advantageous time or price. Portfolios with principal investment strategies that involve foreign securities, derivatives or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk.

 

Management risk.     Actively managed investment portfolios are subject to management risk. Each sub-adviser will apply investment techniques and risk analyses in making investment decisions for the Portfolios, but there can be no guarantee that these will produce the desired results.

 

Market risk.     Common stocks are subject to market risk stemming from factors independent of any particular security. Investment markets fluctuate. All markets go through cycles and market risk involves being on the wrong side of a cycle. Factors affecting market risk include political events, broad economic and social changes, and the mood of the investing public. You can see market risk in action during large drops in the stock market. If investor sentiment turns gloomy, the price of all stocks may decline. It may not matter that a particular company has great profits and its stock is selling at a relatively low price. If the overall market is dropping, the values of all stocks are likely to drop. Generally, the stock prices of large companies are more stable than the stock prices of smaller companies, but this is not always the case. Smaller companies often offer a smaller range of products and services than large companies. They may also have limited financial resources and may lack management depth. As a result, stocks issued by smaller companies may fluctuate in value more than the stocks of larger, more established companies.

 

Mortgage risk.     A Portfolio that purchases mortgage related securities is subject to certain additional risks. Rising interest rates tend to extend the duration of mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, a Portfolio that holds mortgage-related securities may exhibit additional volatility. This is known as extension risk. In addition, mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of a Portfolio because the Portfolio will have to reinvest that money at the lower prevailing interest rates.

 

Portfolio turnover risk.     A Portfolio’s investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and taxable capital gain distributions to a Portfolio’s shareholders.

 

Prepayment risk.     A Portfolio that purchases mortgage-related securities or asset-backed securities is subject to additional risks. The underlying mortgages or assets may be prepaid, partially or completely, generally during periods of falling interest rates, which could adversely affect yield to maturity and could require the Portfolio to reinvest in lower yielding securities.

 

Short sale risk.  A Portfolio that enters into short sales, which involves selling a security it does not own in anticipation that the security’s price will decline, expose the Portfolio to the risk that it will be required to buy the security sold short (also known as “covering” the short position) at a time when the security has appreciated in value, thus resulting in a loss to the Portfolio.

 

Smaller company risk.   The shares of smaller companies tend to trade less frequently than those of larger, more established companies, which can have an adverse effect on the pricing of these securities and on a Portfolio’s ability to sell these securities.  In the case of small cap technology companies, the risks associated with technology companies (see technology company risk below) are magnified.

 

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