SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ----
Post-Effective Amendment No. 54
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 54
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(Check appropriate box or boxes.)
TOUCHSTONE STRATEGIC TRUST FILE NOS. 811-3651 and 2-80859
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(Exact name of Registrant as Specified in Charter)
221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202
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(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code (513) 362-8000
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Jill T. McGruder, 221 East Fourth Street, Cincinnati, OH 45202
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
(check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on August 1, 2004 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on August 1, 2004 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
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If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Growth Fund Touchstone Emerging Growth Fund Touchstone Small Cap Growth Fund Touchstone Large Cap Growth Fund Touchstone Emerging Growth Fund Touchstone Micro Cap Growth Fund Touchstone Large Cap Growth Fund Touchstone Emerging Growth Fund Touchstone Emerging Growth Fund Touchstone Small Cap Growth Fund Touchstone Large Cap Growth Fund Touchstone Emerging Growth Fund Touchstone Micro Cap Growth Fund Touchstone Large Cap Growth Fund Touchstone Emerging
TOUCHSTONE
INVESTMENTS
Touchstone Large Cap Growth Fund
Touchstone Emerging Growth Fund
Touchstone Small Cap Growth Fund
Touchstone Micro Cap Growth Fund
Research o Design o Select o Monitor
The Securities and Exchange Commission has not approved the Funds' shares as
an investment or determined whether this Prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
Multiple Classes of Shares are Offered by this Prospectus
AUGUST 1, 2004
PROSPECTUS
TOUCHSTONE INVESTMENTS
Touchstone Large Cap Growth Fund
Touchstone Emerging Growth Fund
Touchstone Small Cap Growth Fund
Touchstone Micro Cap Growth Fund
Each Fund is a series of Touchstone Strategic Trust (the Trust), a group of equity mutual funds. The Trust is part of the Touchstone Funds that also includes Touchstone Investment Trust, a group of taxable bond and money market mutual funds, Touchstone Tax-Free Trust, a group of tax-free bond and money market mutual funds and Touchstone Variable Series Trust, a group of variable series funds. Each Touchstone Fund has a different investment goal and risk level. For further information about the Touchstone Funds, contact Touchstone at 1.800.543.0407.
LARGE CAP GROWTH FUND
The Fund is non-diversified and may invest up to 10% of its total assets in the securities of one company. The Fund may also invest up to 25% of its total assets in the securities of one industry. The Fund's investments may include companies in the technology sector.
The Fund is designed to achieve the highest possible returns while minimizing risk. The sub-advisor's selection process focuses on fast growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. These may include companies in the technology sector. The sub-advisor uses an objective, "bottom-up," quantitative screening process designed to identify and select inefficiently priced growth stocks with superior returns compared to their risk characteristics. The sub-advisor mainly buys stocks of companies that it believes are poised to rise in price. The investment process focuses on "growth" variables including, but not limited to, earnings growth, reinvestment rate and operating margin expansion.
The sub-advisor attempts to uncover stocks with strong return potential and acceptable risk characteristics. The sub-advisor uses its proprietary computer model to calculate and analyze a "reward/risk ratio." The reward/risk ratio is designed to identify stocks with above average market returns and risk levels that are reasonable for higher return rates. The sub-advisor then applies two or more sets of criteria to identify the most attractive stocks. Examples of these criteria include earnings growth, profit margins, reasonable price/earnings ratios based on expected future earnings, and various other fundamental criteria. Stocks with the best combination of growth ratios are blended into the Fund's portfolio.
Every quarter the sub-advisor evaluates its tests and re-weights their influence on the computer models as necessary. This allows the sub-advisor to continuously monitor which factors appear to be currently in favor in the financial markets. If a security does not meet the criteria of the sub-advisor's reward/risk ratio and there are other available securities that do, the sub-advisor will probably sell the security that does not meet its criteria.
o If the stock market as a whole goes down
o Because large cap companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer
tastes, and also may not be able to attain the high growth rate of
successful smaller companies, especially during extended periods of
economic expansion.
o If the market continually values the stocks in the Fund's portfolio
lower than the sub-advisor believes they should be valued
o If the quantitative analysis of companies in the stock screening
process is not accurate
o If the companies in which the Fund invests do not grow as rapidly or
increase in value as expected
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
o Because growth oriented funds may underperform when value investing
is in favor
o Because a non-diversified fund may hold a significant percentage of
its assets in the securities of one company, it may be more
sensitive to market changes than a diversified fund
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
LARGE CAP GROWTH FUND -- CLASS A TOTAL RETURNS*
YEAR TOTAL RETURN
1998 41.17% Best Quarter:
4th Quarter 1999 +40.00%
1999 63.03%
Worst Quarter:
2000 -7.66% 1st Quarter 2001 -27.98%
2001 -23.47%
2002 -26.70%
2003 35.60%
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The year-to-date return for the Fund's Class A shares as of June 30, 2004 is 9.07%.
*Effective October 6, 2003, substantially all of the assets of the Navellier Large Cap Growth Portfolio, a series of The Navellier Millennium Funds, and the Navellier Large Cap Growth Portfolio, a series of The Navellier Performance Funds, were transferred into the Touchstone Large Cap Growth Fund for which shareholders of the Navellier Millennium Large Cap Growth Portfolio and the Navellier Performance Large Cap Growth Portfolio received shares of the Touchstone Large Cap Growth Fund. The performance and accounting history of the Navellier Performance Large Cap Growth Portfolio have been assumed by the Touchstone Large Cap Growth Fund and are reflected in the bar chart above and performance table below. On October 6, 2003, the Fund replaced its sub-advisor, Fort Washington Investment Advisors, Inc., with Navellier Management, Inc. Thereafter, Navellier & Associates, Inc. assumed the sub-advisory duties of its sister company, Navellier Management, Inc.
The table compares the Fund's average annual total returns to those of the Russell 1000 Growth Index. The table shows the effect of the applicable sales charge. The returns shown in the table are for Class A shares only. There is no performance information for Class B and Class C shares since they have not operated for a full calendar year. The returns for other classes of shares offered by the Fund will differ from the Class A returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
SINCE
CLASS
1 YEAR 5 YEARS STARTED(1)
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LARGE CAP GROWTH FUND CLASS A
Return Before Taxes 27.84% 1.54% 7.68%
Return After Taxes on Distributions(2) 27.84% 1.52% 7.66%
Return After Taxes on Distributions and Sale of Fund Shares 18.10% 1.31% 6.68%
Russell 1000 Growth Index(3) 29.75% -5.11% 1.57%
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(1) Class A shares began operations on December 19, 1997.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
(3) The Russell 1000 Growth Index is an unmanaged index that measures the
performance of those Russell 1000 securities with higher price-to-book
ratios and higher forecasted growth values. (The Russell 1000 securities
offer investors access to the extensive large cap segment of the U.S.
equity universe representing approximately 92% of the U.S. market.) The
Index reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 5.00%(2) 1.00%(3)
Wire Redemption Fee Up to $15 Up to $15 Up to $15
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ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
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Management Fees 0.75% 0.75% 0.75%
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0.49% 2.67% 1.32%
Total Annual Fund Operating Expenses 1.49% 4.42% 3.07%
Fee Waiver and/or Expense Reimbursement(4) 0.19% 2.17% 0.82%
Net Expenses 1.30% 2.25% 2.25%
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* Purchases of $1 million or more do not pay a front-end sales charge, but
may pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) You will pay a 5.00% contingent deferred sales charge if shares are
redeemed within 1 year of their purchase. The contingent deferred sales
charge will be incrementally reduced over time. After the 6th year, there
is no contingent deferred sales charge. The contingent deferred sales
charge may be waived under certain circumstances described in this
Prospectus.
(3) The 1.00% contingent deferred sales charge is waived if shares are held
for 1 year or longer or under other circumstances described in this
Prospectus.
(4) Pursuant to a written contract between Touchstone Advisors and the Trust,
Touchstone Advisors has agreed to waive a portion of its advisory fee
and/or reimburse certain Fund expenses in order to limit Net Expenses to
1.30% for Class A shares and 2.25% for Class B and Class C shares.
Touchstone Advisors has agreed to maintain these expense limitations
through at least October 6, 2005.
EXAMPLE. The following example should help you compare the cost of investing in the Large Cap Growth Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except that contractual fee waivers are reflected only for the length of the contractual limit, i.e., the first year in the example. The example also reflects changes in the 10 year operating expenses of Class B shares since Class B shares convert to Class A shares after 8 years. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Class A Shares Class B Shares Class C Shares Class B Shares
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1 Year $ 700 $ 628 $ 228 $ 228
3 Years(1) $1,001 $1,342 $ 871 $1,142
5 Years(1) $1,324 $2,166 $1,539 $2,066
10 Years(1) $2,237 $3,8032 $3,326 $3,803(2)
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(1) The examples for the 3, 5 and 10 year periods are calculated using the
Total Annual Fund Operating Expenses before the limits agreed to under the
written contract with Touchstone Advisors for periods after year 1.
(2) Based on conversion to Class A shares after 8 years.
EMERGING GROWTH FUND
The Fund invests primarily (at least 65% of its assets) in emerging growth companies. Emerging growth companies can include companies that have earnings that the portfolio managers believe may grow faster than the U.S. economy in general due to new products, management changes at the company or economic shocks such as high inflation or sudden increases or decreases in interest rates. Emerging growth companies can also include companies that the portfolio managers believe are undervalued, including companies with unrecognized asset values or undervalued growth, and companies undergoing a turnaround. The Fund will invest primarily in common stocks of mid cap emerging growth companies. A mid cap company has a market capitalization between $1.5 and $10 billion. The Fund may also invest in companies in the technology sector.
The Fund is sub-advised by two separate management teams, a growth style team and a value style team, that use different style methodologies when evaluating which stocks to buy or sell in their portfolio. In selecting securities for the Fund, both portfolio management teams evaluate companies by using fundamental analysis of the company's financial statements, interviews with management, analysis of the company's operations and product development and consideration of the company's industry category.
The growth style management team will sell a security if the predetermined sell price is achieved, if it is concluded that the original case for investment is no longer valid or if more attractive alternative investments are available. The value style management team will sell a security if it is believed to be fairly valued, if the Fund's holding in a security becomes larger than a predetermined percentage of the Fund's portfolio or if the goals for a security cannot be achieved according to its evaluation process.
o If the stock market as a whole goes down
o Because securities of emerging growth companies may have limited
markets or financial resources and may have more frequent and larger
price changes than securities of more established companies
o Because securities of mid cap companies may be more thinly traded
and may have more frequent and larger price changes than securities
of large cap companies
o If the companies in which the Fund invests do not grow as rapidly or
increase in value as expected
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
o If the methodologies used by the sub-advisors to select stocks do
not identify attractive investments
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
The bar chart and table below give some indication of the risks of investing in the Emerging Growth Fund. The bar chart shows the Fund's Class A performance from year to year. The bar chart does not reflect any sales charges, which would reduce your return. The returns for other classes of shares offered by the Fund will be lower than the Class A returns shown in the bar chart since the other classes have higher 12b-1 distribution fees.
EMERGING GROWTH FUND -- CLASS A TOTAL RETURNS
YEAR TOTAL RETURN
1995 22.56% Best Quarter:
4th Quarter 1999 +26.84%
1996 10.56%
Worst Quarter:
1997 32.20% 3rd Quarter 2002 -21.03%
1998 2.65%
1999 45.85%
2000 25.92%
2001 7.06%
2002 -23.51%
2003 43.35%
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The year-to-date return for the Fund's Class A shares as of June 30, 2004 is 6.38%.
The table compares the Fund's average annual total returns to those of the Russell 2500 Index and the Russell Mid Cap Index. On July 1, 2004, the Fund changed its primary benchmark from the Russell 2500 Index to the Russell Mid Cap Index because the Russell Mid Cap Index more accurately reflects the Fund's portfolio composition. The table shows the effect of the applicable sales charge. The after-tax returns shown in the table are for Class A shares only. The after-tax returns for other classes of shares offered by the Fund will differ from the Class A after-tax returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
SINCE
CLASS
1 YEAR 5 YEARS STARTED(1)
========================================================================================================
EMERGING GROWTH FUND CLASS A
Return Before Taxes 35.12% 15.23% 15.66%
Return After Taxes on Distributions(2) 35.12% 12.71% 12.99%
Return After Taxes on Distributions and Sale of Fund Shares 22.83% 11.71% 12.21%
Russell Mid Cap Index(3) 40.06% 7.23% 13.17%
Russell 2500 Index(4) 45.51% 9.40% 12.60%
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EMERGING GROWTH FUND CLASS B
Return Before Taxes 41.88% N/A 5.48%
Russell Mid Cap Index(3) 40.06% N/A 4.78%
Russell 2500 Index(4) 45.51% N/A 7.67%
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EMERGING GROWTH FUND CLASS C
Return Before Taxes 45.81% 15.82% 15.48%
Russell Mid Cap Index(3) 40.06% 7.23% 13.17%
Russell 2500 Index(4) 45.51% 9.40% 12.60%
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(1) Class A shares began operations on October 3, 1994, Class B shares began
operations on May 1, 2001 and Class C shares began operations on January
1, 1999. The Class C performance was calculated using the historical
performance of the Class C predecessor, which was another mutual fund that
began operations on October 3, 1994.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
(3) The Russell Mid Cap Index measures the performance of the smallest 800
securities in the Russell 1000 Index, as ranked by total market
capitalization. (The Russell 1000 Index measures the performance of the
1,000 largest securities in the Russell 3000 Index. The Russell 3000 Index
measures the performance of the 3,000 largest U.S. securities, as
determined by total market capitalization, which represents approximately
98% of the investible U.S. equity market.) The Index reflects no
deductions for fees, expenses or taxes.
(4) The Russell 2500 Index measures the performance of the 2,500 smallest
companies in the Russell 3000 Index, which represents approximately 17% of
the total market capitalization of the Russell 3000 Index. The Index
reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
======================================================================================================
Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 5.00%(2) 1.00%(3)
Wire Redemption Fee Up to $15 Up to $15 Up to $15
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
========================================================================================================
Management Fees 0.80% 0.80% 0.80%
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0.52% 0.62% 0.54%
Total Annual Fund Operating Expenses 1.57% 2.42% 2.34%
Fee Waiver and/or Expense Reimbursement(4) 0.08% 0.18% 0.10%
Net Expenses 1.49% 2.24% 2.24%
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* Purchases of $1 million or more do not pay a front-end sales charge, but may
pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) You will pay a 5.00% contingent deferred sales charge if shares are redeemed
within 1 year of their purchase. The contingent deferred sales charge will
be incrementally reduced over time. After the 6th year, there is no
contingent deferred sales charge. The contingent deferred sales charge may
be waived under certain circumstances described in this Prospectus.
(3) The 1.00% contingent deferred sales charge is waived if shares are held for
1 year or longer or under other circumstances described in this Prospectus.
(4) Touchstone Advisors has contractually agreed to waive a portion of its
advisory fee and/or reimburse certain Fund expenses in order to limit Net
Expenses to 1.50% or below for Class A shares and 2.25% or below for Class B
and Class C shares (the Sponsor Agreement). The Sponsor Agreement will
remain in place until at least March 31, 2005.
EXAMPLE. The following example should help you compare the cost of investing in the Emerging Growth Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except that contractual fee waivers are reflected only for the length of the contractual limit, i.e., the first year in the example. The example also reflects changes in the 10 year operating expenses of Class B shares since Class B shares convert to Class A shares after 8 years. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
ASSUMING
ASSUMING REDEMPTION AT END OF PERIOD NO REDEMPTION
==========================================================================================================
Class A Shares Class B Shares Class C Shares Class B Shares
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1 Year $ 718 $ 627 $ 227 $ 227
3 Years(1) $ 1,035 $ 937 $ 721 $ 737
5 Years(1) $ 1,374 $1,374 $ 1,241 $1,274
10 Years(1) $ 2,329 $2,532(2) $ 2,668 $2,532(2)
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(1) The examples for the 3, 5 and 10 year periods are calculated using the Total
Annual Fund Operating Expenses before the limits agreed to under the Sponsor
Agreement with Touchstone Advisors for periods after year 1.
(2) Based on conversion to Class A shares after 8 years.
SMALL CAP GROWTH FUND
Under normal circumstances, the Fund will invest at least 80% of its assets in common stocks of small cap companies. Shareholders will be provided with at least 60 days' prior notice of any change in this policy. A small cap company has a market capitalization of less than $1.5 billion. The Fund will seek to maintain a weighted average market capitalization that falls within the range of the Russell 2000 Index.
The Fund is sub-advised by two separate management teams, a small cap team and a micro cap team. The Fund sub-advisors employ a growth-oriented approach to equity investment management and seek to invest in high quality, reasonably priced companies believed to have above average earnings growth prospects. The Fund's investments may include securities in the technology sector.
The small cap management team will sell a security when it reaches its growth rate calculated on a price-to-earnings basis. The micro cap management team will continually evaluate for sale securities of companies it believes are overvalued, have lost earnings momentum, or are in industries no longer expected to perform well. Any position that has declined 15-20% from its cost or recent high will be evaluated as a potential sale candidate by both management teams.
o If the stock market as a whole goes down
o If the sub-advisors' investment approach does not accurately identify
attractive investments
o If the companies in which the Fund invests do not grow as rapidly or
increase in value as expected
o Because securities of small cap companies may be more thinly traded
and may have more frequent and larger price changes than securities
of large cap companies
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
o Because growth oriented funds may underperform when value investing
is in favor
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
The bar chart and table below give some indication of the risks of investing in the Small Cap Growth Fund. The bar chart shows the Fund's Class A performance during its first calendar year of operations. The bar chart does not reflect any sales charges, which would reduce your return. The return for Class B and Class C shares offered by the Fund will be lower than the Class A returns shown in the bar chart since the other classes have higher 12b-1 distribution fees. The return for Class I shares of the Fund, offered in a separate prospectus, will differ from the Class A returns shown below, depending on the expenses of that class.
SMALL CAP GROWTH FUND - CLASS A TOTAL RETURN
2003 55.33% Best Quarter: 2nd Quarter 2003 +27.30% Worst Quarter: 1st Quarter 2003 - 3.83% |
The year-to-date return of the Fund's Class A shares as of June 30, 2004 is 2.92%.
The table compares the Fund's average annual total returns to those of the Russell 2000 Growth Index. The table shows the effect of the applicable sales charge. The after-tax returns shown in the table are for Class A shares only. The after-tax returns for other classes of shares offered by the Fund will differ from the Class A after-tax returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
SINCE
1 YEAR FUND STARTED(1)
================================================================================
SMALL CAP GROWTH FUND CLASS A
Return Before Taxes 46.41% 39.55%
Return After Taxes on Distributions(2) 45.25% 38.62%
Return After Taxes on Distributions and
Sale of Fund Shares 30.20% 33.25%
Russell 2000 Growth Index(3) 48.54% 45.40%
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SMALL CAP GROWTH FUND CLASS B
Return Before Taxes 50.40% 42.66%
Russell 2000 Growth Index(3) 48.54% 45.40%
--------------------------------------------------------------------------------
SMALL CAP GROWTH FUND CLASS C
Return Before Taxes 54.55% 45.78%
Russell 2000 Growth Index(3) 48.54% 45.40%
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(1) The Fund began operations on October 21, 2002.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
(3) The Russell 2000 Growth Index is an unmanaged capitalization weighted price
only index which is comprised of the 2,000 smallest growth stocks in the
Russell 3000 Index. (The Russell 3000 Index measures the performance of the
3,000 largest U.S. companies based on total market capitalization, which
represents approximately 98% of the investable U.S. equity market.) The
Index reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
=====================================================================================================
Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 5.00%(2) 1.00%(3)
Wire Redemption Fee Up to $15 Up to $15 Up to $15
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
=====================================================================================================
Management Fees 1.25% 1.25% 1.25%
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0.64% 1.10% 0.83%
Total Annual Fund Operating Expenses 2.14% 3.35% 3.08%
Fee Waiver and/or Expense Reimbursement(4) 0.25% 0.72% 0.45%
Net Expenses 1.89% 2.63% 2.63%
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* Purchases of $1 million or more do not pay a front-end sales charge, but
may pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) You will pay a 5.00% contingent deferred sales charge if shares are
redeemed within 1 year of their purchase. The contingent deferred sales
charge will be incrementally reduced over time. After the 6th year, there
is no contingent deferred sales charge. The contingent deferred sales
charge may be waived under certain circumstances described in this
Prospectus.
(3) The 1.00% contingent deferred sales charge is waived if shares are held
for 1 year or longer or under other circumstances described in this
Prospectus.
(4) Touchstone Advisors has contractually agreed to waive a portion of its
advisory fee and/or reimburse certain Fund expenses in order to limit Net
Expenses to 1.95% or below for Class A shares and 2.70% or below for Class
B and Class C shares (the Sponsor Agreement). The Sponsor Agreement will
remain in place until at least March 31, 2005.
EXAMPLE. The following example should help you compare the cost of investing in the Small Cap Growth Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except that contractual fee waivers are reflected only for the length of the contractual limit, i.e., the first year in the example. The example also reflects changes in the 10 year operating expenses of Class B shares since Class B shares convert to Class A shares after 8 years. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
ASSUMING
ASSUMING REDEMPTION AT END OF PERIOD NO REDEMPTION
======================================================================================================
Class A Shares Class B Shares Class C Shares Class B Shares
------------------------------------------------------------------------------------------------------
1 Year $ 756 $ 666 $ 266 $ 266
3 Years(1) $ 1,184 $ 1,163 $ 909 $ 963
5 Years(1) $ 1,637 $ 1,784 $ 1,577 $ 1,684
10 Years(1) $ 2,887 $ 3,315(2) $ 3,361 $ 3,315(2)
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(1) The examples for the 3, 5 and 10 year periods are calculated using the
Total Annual Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement with Touchstone Advisors for periods after year 1.
(2) Based on conversion to Class A shares after 8 years.
MICRO CAP GROWTH FUND
Under normal circumstances, the Fund will invest at least 80% of its assets in the common stocks of U.S. companies whose total market capitalization at the time of investment is generally between $30 million and $300 million, referred to as micro cap companies, and which, in the opinion of the sub-advisor, have superior earnings growth characteristics. Shareholders will be provided with at least 60 days' prior notice of any change in this policy. The Fund's investments may include companies in the technology sector.
The sub-advisor's unique equity selection process seeks to identify fast growing companies that are undervalued. The sub-advisor screens the universe of companies, using five quantitative factors:
1) earnings growth
2) earnings strength - those companies that are expected to have the
greatest increase in next year's earnings
3) earnings revision
4) price/earnings to growth ratio; and
5) cash flow to price
The sub-advisor then focuses on what it believes are the most promising industries and seeks to identify profitable companies with capable management teams, above average reinvestment rates, strong industry positions and productive research and development efforts.
Stocks are ranked according to the above criteria to identify approximately 100 to 190 micro cap companies that the sub-advisor believes offer the best growth prospects and are selling at attractive prices. The highest ranking stocks in the most promising industries are then subjected to additional fundamental and technical research. Generally, the sub-advisor attempts to identify profitable micro cap companies with capable management teams, above average reinvestment rates, strong industry positions and productive research and development efforts. To ensure a well diversified portfolio, commitments to any one issue or industry are generally limited to 5% and 15%, respectively, of the Fund's total assets. The sub-advisor's investment committee reviews investment alternatives and implements portfolio changes as attractive investment opportunities become available. The closing prices of portfolio issues are reviewed daily. Any position that has declined 15% from its cost or from its recent high is re-examined as a potential sale candidate. Additionally, securities of companies which in the sub-advisor's opinion are overvalued or have lost earnings momentum, or are in industries no longer expected to perform well, are continually evaluated for sale.
o If the stock market as a whole goes down
o If the sub-advisor's selection process does not accurately identify
attractive investments
o If the market continually values the stocks in the Fund's portfolio
lower than the sub-advisor believes they should be valued
o If the companies in which the Fund invests do not grow as rapidly or
increase in value as expected
o Because securities of micro cap companies may be more thinly traded
and may have more frequent and larger price changes than securities
of larger companies
o Because the Fund may invest in the technology sector, which at times
may be subject to greater market fluctuation than other sectors
o Because growth oriented funds may underperform when value investing
is in favor
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
======================================================================================================
Class A Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 1.00%(2)
Wire Redemption Fee Up to $15 Up to $15
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
======================================================================================================
Management Fees 1.25% 1.25%
Distribution (12b-1) Fees 0.25% 1.00%
Other Expenses(3) 0.74% 1.10%
Total Annual Fund Operating Expenses 2.24% 3.35%
Fee Waiver and/or Expense Reimbursement(4) 0.29% 0.65%
Net Expenses 1.95% 2.70%
------------------------------------------------------------------------------------------------------
|
* Purchases of $1 million or more do not pay a front-end sales charge, but
may pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) The 1.00% contingent deferred sales charge is waived if shares are held
for 1 year or longer or under other circumstances described in this
Prospectus.
(3) Other expenses are based on estimated amounts for the current fiscal year.
(4) Touchstone Advisors has contractually agreed to waive a portion of its
advisory fee and/or reimburse certain Fund expenses in order to limit Net
Expenses to 1.95% for Class A shares and 2.70% for Class C shares (the
Sponsor Agreement). The Sponsor Agreement will remain in place until at
least March 31, 2006.
EXAMPLE. The following example should help you compare the cost of investing in the Micro Cap Growth Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except that contractual fee waivers are reflected only for the length of the contractual limit, i.e., the first year in the example. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
-------------------------------------------------------------------
1 Year $ 762 $ 273
3 Years(1) $ 1,209 $ 970
|
(1) The examples for the 3 year period are calculated using the Total Annual Fund Operating Expenses before the limits agreed to under the Sponsor Agreement with Touchstone Advisors for periods after year 1.
INVESTMENT STRATEGIES AND RISKS
Each Fund may depart from its investment strategies by taking temporary defensive positions in response to adverse market, economic, political or other conditions, including conditions when a sub-advisor is unable to identify attractive investment opportunities. A Fund's temporary investments may include debt securities, money market funds or cash equivalents. During these times, a Fund may not achieve its investment goal.
DO THE FUNDS HAVE OTHER INVESTMENT STRATEGIES, IN ADDITION TO THEIR PRINCIPAL
EMERGING GROWTH FUND. The Emerging Growth Fund may also invest in:
o Securities of large cap and small cap companies
o Securities of foreign companies (up to 20% of total assets)
o American depository receipts (ADRs), American depository shares and
other depository receipts (up to 20% of total assets)
o Securities of companies in emerging market countries (up to 10% of
total assets)
o Securities designed to replicate an index, an industry or a sector of
the economy
o Cash equivalents
o Initial public offerings
SMALL CAP GROWTH FUND AND MICRO CAP GROWTH FUND. The Small Cap Growth Fund and
the Micro Cap Growth Fund may also invest in:
o Initial public offerings
o Securities of emerging growth companies
o Securities of foreign companies
o American depository receipts (ADRs), American depository shares
(ADSs) and other depository receipts
o Securities of companies in emerging market countries
o Cash equivalents
o They are organized under the laws of a foreign country
o They maintain their principal place of business in a foreign country
o The principal trading market for their securities is located in a foreign
country
o They derive at least 50% of their revenues or profits from operations in
foreign countries
o They have at least 50% of their assets located in foreign countries
AMERICAN DEPOSITORY RECEIPTS (ADRS), AMERICAN DEPOSITORY SHARES (ADSS) AND OTHER DEPOSITORY RECEIPTS. ADRs and ADSs are securities that represent an ownership interest in a foreign security. They are generally issued by a U.S. bank to U.S. buyers as a substitute for direct ownership of a foreign security and are traded on U.S. exchanges.
"MICRO CAP," "SMALL CAP," "MID CAP" AND "LARGE CAP" COMPANIES. Generally
companies are categorized as follows:
o A micro cap company has a market capitalization of between $30 and
$300 million.
o A small cap company has a market capitalization of less than $1.5
billion.
o A mid cap company has a market capitalization of between $1.5 billion
and $10 billion.
o A large cap company has a market capitalization of more than $10
billion.
UNDERVALUED STOCKS. A stock is considered undervalued if the sub-advisor believes it should be trading at a higher price than it is at the time of purchase. Factors considered may include:
o Price relative to earnings
o Price relative to cash flow
o Price relative to financial strength
EMERGING GROWTH COMPANIES include:
o Companies that the sub-advisor believes may have earnings that grow
faster than the U.S. economy in general due to new products,
management changes at the company or economic shocks such as high
inflation or sudden increases or decreases in interest rates
o Companies that the sub-advisor believes have unrecognized asset
values, undervalued growth or emerging growth
o Companies undergoing a turnaround
EMERGING MARKET COUNTRIES are countries other than Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. When a Fund invests in securities of a company in an emerging market country, it invests in securities issued by a company that meet one or more of the following criteria:
o It is organized under the laws of an emerging market country.
o It maintains its principal place of business in an emerging market
country.
o The principal trading market for its securities is located in an
emerging market country.
o It derives at least 50% of its revenues or profits from operations
within emerging market countries.
o It has at least 50% of its assets located in emerging market
countries.
INVESTMENT GRADE DEBT SECURITIES are generally rated BBB or better by Standard & Poor's Rating Service and Fitch Ratings or Baa or better by Moody's Investors Service, Inc.
THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS ARE LISTED BELOW:
MARKET RISK. A fund that invests in common stocks is subject to stock market risk. Stock prices in general may decline over short or even extended periods, regardless of the success or failure of a particular company's operations. Stock markets tend to run in cycles, with periods when stock prices generally go up and periods when they generally go down. In addition, stocks fall into four broad market capitalization categories - large cap, mid cap, small cap and micro cap. Investing primarily in one category carries the risk that due to market conditions, that category may be out of favor. For example, if valuations of large cap companies appear to be greatly out of proportion to the valuations of smaller cap companies, investors may migrate to the stocks of smaller sized companies, causing a fund that invests in these companies to increase in value more rapidly than a fund that invests in larger, fully-valued companies. The price of stocks tends to go up and down more than the price of bonds.
o Micro Cap Companies. Micro cap companies may not be well-known to
the investing public, may not have significant institutional
ownership and may have cyclical, static or only moderate growth
prospects. Micro cap companies may have greater risk and volatility
than large companies and may lack the management depth of larger,
mature issuers. Micro cap companies may have relatively small
revenues and limited product lines, markets, or financial resources,
and their securities may trade less frequently and in more limited
volume than those of larger, more mature companies. In addition,
micro cap companies may be developing or marketing new products or
services for which markets are not yet established and may never
become established. As a result, the prices of their securities may
fluctuate more than those of larger issuers.
o Small Cap Companies. Small cap stock risk is the risk that stocks of
smaller companies may be subject to more abrupt or erratic market
movements than stocks of larger, more established companies. Small
companies may have limited product lines or financial resources, or
may be dependent upon a small or inexperienced management group. In
addition, small cap stocks typically are traded in lower volume, and
their issuers typically are subject to greater degrees of changes in
their earnings and prospects.
o Mid Cap Companies. Mid cap stock risk is the risk that stocks of
mid-sized companies may be subject to more abrupt or erratic market
movements than stocks of larger, more established companies.
Mid-sized companies may have limited product lines or financial
resources, and may be dependent upon a particular niche of the
market.
o Large Cap Companies. Large cap stock risk is the risk that stocks
of larger companies may underperform relative to those of small and
mid-sized companies. Larger, more established companies may be unable
to respond quickly to new competitive challenges, such as changes in
technology and consumer tastes. Many larger companies may not be able
to attain the high growth rate of successful smaller companies,
especially during extended periods of economic expansion.
o Emerging Growth Companies. Investment in emerging growth companies
is subject to enhanced risks because these companies generally have
limited product lines, markets or financial resources and often
exhibit a lack of management depth. These securities can be difficult
to sell and are usually more volatile than securities of larger, more
established companies.
o Initial Public Offerings (IPOs). IPO risk is the risk that the
market value of IPO shares will fluctuate considerably due to factors
such as the absence of a prior public market, unseasoned trading, the
small number of shares available for trading and limited information
about the issuer. The purchase of IPO shares may involve high
transaction costs. IPO shares are subject to market risk and
liquidity risk (i.e., the potential that a Fund may be unable to
dispose of the IPO shares promptly or at a reasonable price). When a
Fund's asset base is small, a significant portion of its performance
could be attributable to investments in IPOs, because such
investments would have a magnified impact on the Fund. As a Fund's
assets grow, the effect of investments in IPOs on the Fund's
performance probably will decline, which could reduce performance.
o Technology Securities. The value of technology securities may
fluctuate dramatically and technology securities may be subject to
greater than average financial and market risk. Investments in the
high technology sector include the risk that certain products may be
subject to competitive pressures and aggressive pricing and may
become obsolete and the risk that new products will not meet
expectations or even reach the market.
NON-DIVERSIFICATION RISK. If a Fund is non-diversified, it may invest a significant percentage of its assets in the securities of a single company. Because the Fund's holdings may be concentrated in a single company, the Fund may be more sensitive to any single economic, business, political or regulatory occurrence than a diversified fund.
INVESTMENT STYLE RISK. Different investment styles tend to shift in and out of favor depending upon market and economic conditions as well as investor sentiment. A Fund may outperform or underperform other funds that employ a different investment style. Examples of different investment styles include growth and value investing. Growth stocks may be more volatile than other stocks because they are more sensitive to investor perceptions of the issuing company's growth of earnings potential. Also, since growth companies usually invest a high portion of earnings in their business, growth stocks may lack the dividends of some value stocks that can cushion stock prices in a falling market. Growth oriented funds may underperform when value investing is in favor. Value stocks are those that are undervalued in comparison to their peers due to adverse business developments or other factors. Value investing carries the risk that the market will not recognize a security's inherent value for a long time, or that a stock judged to be undervalued may actually be appropriately priced or overvalued. Value oriented funds may underperform when growth investing is in favor.
OTHER RISKS OF INVESTING IN THE FUNDS ARE LISTED BELOW:
FOREIGN RISK. Investing in foreign securities poses unique risks such as fluctuation in currency exchange rates, market illiquidity, price volatility, high trading costs, difficulties in settlement, regulations on stock exchanges, limits on foreign ownership, less stringent accounting, reporting and disclosure requirements, and other considerations. Diplomatic, political or economic developments, including nationalization or appropriation, could affect investments in foreign securities. In the past, equity and debt instruments of foreign markets have had more frequent and larger price changes than those of U.S. markets.
o Emerging Market Countries. Investments in a country that is still relatively underdeveloped involves exposure to economic structures that are generally less diverse and mature than in the U.S. and to political and legal systems that may be less stable. In the past, markets of developing countries have had more frequent and larger price changes than those of developed countries. Economic or political changes may cause larger price changes in these securities than in other foreign securities.
DEBT SECURITY RISK. A Fund that invests in debt securities is subject to the risk that the market value of the debt securities will decline because of rising interest rates. The price of debt securities is generally linked to the prevailing market interest rates. In general, when interest rates rise, the price of debt securities falls, and when interest rates fall, the price of debt securities rises. The price volatility of a debt security also depends on its maturity. Generally, the longer the maturity of a debt security, the greater its sensitivity to changes in interest rates. To compensate investors for this higher risk, debt securities with longer maturities generally offer higher yields than debt securities with shorter maturities.
The debt securities in a Fund's portfolio are subject to credit risk. Credit risk is the possibility that an issuer will fail to make timely payments of interest or principal, when due. Securities rated in the lowest category of investment grade securities have some risky characteristics and changes in economic conditions are more likely to cause issuers of these securities to be unable to make payments.
THE FUNDS' MANAGEMENT
Touchstone Advisors is responsible for selecting each Fund's sub-advisor, subject to approval by the Board of Trustees. Touchstone Advisors selects a sub-advisor that has shown good investment performance in its areas of expertise. Touchstone Advisors considers various factors in evaluating the Funds' sub-advisor, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over 5 years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength
o Quality of service
Touchstone Advisors will also continually monitor the performance of the Funds' sub-advisor through various analyses and through in-person, telephone and written consultations with the sub-advisor. Touchstone Advisors discusses its expectations for performance with the sub-advisor. Touchstone Advisors provides written evaluations and recommendations to the Board of Trustees, including whether or not a sub-advisor's contract should be renewed, modified or terminated.
Touchstone Advisors has been registered as an investment advisor under the Investment Advisers Act of 1940, as amended, since 1994. As of December 31, 2003, Touchstone Advisors had approximately $2.6 billion in assets under management.
The Trust and Touchstone Advisors have applied for, and the Securities and Exchange Commission has granted, an exemptive order that permits the Trust or Touchstone Advisors, under certain conditions, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. The Funds must still obtain shareholder approval of any sub-advisory agreement with a sub-advisor affiliated with the Trust or Touchstone Advisors other than by reason of serving as a sub-advisor to one or more Touchstone Funds. Shareholders of a Fund will be notified of any changes in its sub-advisor.
Two or more sub-advisors may manage a Fund, with each managing a portion of the Fund's assets. If a Fund has more than one sub-advisor, Touchstone Advisors allocates how much of a Fund's assets are managed by each sub-advisor. Touchstone Advisors may change these allocations from time to time, often based upon the results of its evaluations of the Fund sub-advisors.
Touchstone Advisors is also responsible for running all of the operations of the Funds, except for those that are subcontracted to the sub-advisor, custodian, transfer and accounting agent and administrator. Each Fund pays Touchstone Advisors a fee for its services. Out of this fee Touchstone Advisors pays the Fund sub-advisor a fee for its services. The fee paid to Touchstone Advisors by each Fund (except the Micro Cap Growth Fund) during its most recent fiscal year
and the fee to be paid by the Micro Cap Growth Fund during its current fiscal year is shown in the table below:
-------------------------------------------------------------------------------- Large Cap Growth Fund 0.75% of average daily net assets Emerging Growth Fund 0.80% of average daily net assets Small Cap Growth Fund 1.25% of average daily net assets Micro Cap Growth Fund 1.25% of average daily net assets -------------------------------------------------------------------------------- |
Navellier has been registered as an investment advisor since 1987 and provides investment advisory services to individuals, institutions and mutual funds. Navellier has managed the Fund since 2004 and its sister company, Navellier Management, Inc., managed the Fund from its inception until 2004.
Louis G. Navellier and Shawn C. Price are primarily responsible for managing the Fund and have managed the Fund since its inception. Mr. Navellier has been the President and Chief Executive Officer of Navellier since 1998 and Mr. Price has been a Portfolio Manger for Navellier since 1991.
TCW has been registered as an investment advisor since 1987 and provides investment advisory services to individual and institutional clients. TCW has managed the Fund since May 2001.
Nicholas F. Galluccio and Susan I. Suvall have primary responsibility for the daily management of the Fund's assets allocated to TCW. Mr. Galluccio is a Group Managing Director of TCW and has been with the firm since 1982. Ms. Suvall is a Managing Director of TCW and has been with the firm since 1985.
WESTFIELD CAPITAL MANAGEMENT COMPANY, LLC (WESTFIELD)
One Financial Center, Boston, MA 02111
Westfield has been registered as an investment advisor since 1989 and provides investment advisory services to individual and institutional clients. Westfield has managed the Fund since its inception.
Westfield uses a team approach to investment management. William A. Muggia, President and Chief Investment Officer of Westfield, has primary responsibility for the daily management of the Fund's assets allocated to Westfield. Mr. Muggia has been with Westfield since 1994 and has managed the Fund since 1999.
LONGWOOD INVESTMENT ADVISORS, INC. (LONGWOOD)
1275 Drummers Lane, Wayne, PA 19087
Longwood has been registered as an investment advisor since 1995 and provides investment advisory services to individual and institutional clients.
Robert Davidson has managed the portion of the Small Cap Growth Fund's investments allocated to Longwood since the Fund's inception. Mr. Davidson, Chief Investment Officer of Longwood, founded Longwood in 1993 and has over 23 years of investment experience.
BJURMAN, BARRY & ASSOCIATES (BJURMAN)
10100 Santa Monica Boulevard, Suite 1200, Los Angeles, CA 90067
Bjurman has been registered as an investment advisor since 1970 and provides investment advisory services to individuals, institutions, pension plans and mutual funds.
The Investment Policy Committee of Bjurman has managed the portion of the Fund's investments allocated to Bjurman since the Fund's inception. O. Thomas Barry III, CFA, CIC, is the lead manager of the Committee and Co-Manager of the Fund. Mr. Barry, Chief Investment Officer and Senior Executive Vice President of Bjurman, joined the firm in 1978 and has over 30 years of investment experience. Stephen W. Shipman, CFA, is a member of the Committee and Co-Manager of the Fund. Mr. Shipman, Director of Research and Executive Vice President of Bjurman, joined Bjurman in 1993 and has over 17 years of investment experience.
Investment decisions for the Fund are made by the Investment Policy Committee of Bjurman. O. Thomas Barry III, CFA, CIC, is the lead manager of the Committee and Co-Manager of the Fund. Mr. Barry, Chief Investment Officer and Senior Executive Vice President of Bjurman, joined the firm in 1978 and has over 30 years of investment experience. Stephen W. Shipman, CFA, is a member of the Committee and Co-Manager of the Fund. Mr. Shipman, Director of Research and Executive Vice President of Bjurman, joined Bjurman in 1993 and has over 17 years of investment experience.
The fee paid by Touchstone Advisors to each Fund sub-advisor (except the Micro Cap Growth Fund) during the most recent fiscal year and the fee to be paid to the Micro Cap Growth Fund's sub-advisor during its current fiscal year is shown in the table below:
LARGE CAP GROWTH FUND
Navellier 0.45% of average daily net assets EMERGING GROWTH FUND TCW 0.50% of average daily net assets allocated to TCW Westfield 0.45% of average daily net assets allocated to Westfield SMALL CAP GROWTH FUND Longwood 0.85% of average daily net assets allocated to Longwood Bjurman 0.90% of average daily net assets allocated to Bjurman MICRO CAP GROWTH FUND Bjurman 0.85% of average daily net assets -------------------------------------------------------------------------------- |
CHOOSING A CLASS OF SHARES
The Large Cap Growth Fund, the Emerging Growth Fund and the Small Cap Growth Fund each offer Class A, Class B and Class C shares. The Micro Cap Growth Fund offers Class A and Class C shares. Each class of shares has different sales charges and distribution fees. The amount of sales charges and distribution fees you pay will depend on which class of shares you decide to purchase.
The following table shows the amount of front-end sales charge you will pay on purchases of Class A shares. The amount of front-end sales charge is shown as a percentage of (1) offering price and (2) the net amount invested after the charge has been subtracted. Note that the front-end sales charge gets lower as your investment amount gets larger.
--------------------------------------------------------------------------------
SALES CHARGE SALES CHARGE
AS % OF AS % OF
AMOUNT OF YOUR INVESTMENT OFFERING PRICE NET AMOUNT INVESTED
================================================================================
Under $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.95% 3.04%
$500,000 but less than $1 million 2.25% 2.30%
$1 million or more 0.00% 0.00%
--------------------------------------------------------------------------------
|
REDUCED CLASS A SALES CHARGE. You may purchase shares at a reduced sales charge through programs such as aggregation, letter of intent and right of accumulation.
o Aggregation. In order to qualify for a reduced sales charge through
the aggregation program, you must inform your financial advisor or
Touchstone of any other investments that you, your spouse and your
children under the age of 21 have in the Touchstone Funds. This
includes, for example, investments held in a retirement account, an
employee benefit plan or with a financial advisor other than the one
handling your current purchase. Touchstone will credit the combined
value (at the current offering price) of all of your eligible accounts
to determine if your current purchase qualifies for a reduced sales
charge.
o Letter of Intent. You may use a letter of intent to qualify for a
reduced sales charge if you plan to invest at least $50,000 (excluding
any reinvestment of dividends and capital gains distributions) during
the next 13 months in Class A shares of any Touchstone Fund sold with
a front-end sales charge. A letter of intent is a letter you sign
whereby, based upon your representation to purchase at least $50,000
in Class A shares of the Touchstone Funds over the next thirteen
months, the Fund agrees to provide you the reduced sales charge
indicated in the above chart. The minimum initial investment under a
letter of intent is $10,000. You are not obligated to purchase
additional shares if you complete a letter of intent. However, if you
do not buy enough shares to qualify for the projected level of sales
charge by the end of the 13-month period (or when you sell your
shares, if earlier), your sales charges will be recalculated to
reflect your actual purchase level. During the term of the letter of
intent, shares representing 5% of your intended purchase will be held in escrow. If you do not purchase enough shares during the 13-month period to qualify for the projected reduced sales charge, the additional sales charge will be deducted from your escrow account. If you have purchased Class A shares of any Touchstone Fund within 90 days prior to signing a letter of intent, they may be included as part of your intended purchase.
o Right of Accumulation. A purchaser of Class A shares of a Fund has the right to combine the cost or current NAV (whichever is higher) of his existing Class A shares of the load funds distributed by Touchstone with the amount of his current purchases in order to take advantage of the reduced sales charges set forth in this Prospectus. The purchaser or his dealer must notify the transfer agent that an investment qualifies for a reduced sales charge. The reduced charge will be granted upon confirmation of the purchaser's holdings by the transfer agent. A purchaser includes an individual and his immediate family members, purchasing shares for his or their own account; or a trustee or other fiduciary purchasing shares for a single fiduciary account although more than one beneficiary is involved; or employees of a common employer, provided that economies of scale are realized through remittances from a single source and quarterly confirmation of such purchases; or an organized group, provided that the purchases are made through a central administration, or a single dealer, or by other means which result in economy of sales effort or expense.
Class B shares of the Funds are sold at NAV without an initial sales charge so that the full amount of your purchase payment may be immediately invested in the Funds. A CDSC will be charged if you redeem Class B shares within 6 years after you purchased them. The amount of the CDSC will depend on how long you have held your shares, as set forth in the following table:
--------------------------------------------------------------------------------
CDSC AS A % OF
YEAR SINCE PURCHASE PAYMENT MADE AMOUNT SUBJECT TO CHARGE
================================================================================
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 1.00%
Seventh and thereafter* None
--------------------------------------------------------------------------------
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* Class B shares will automatically convert to Class A shares after they have been held for approximately 8 years.
CONVERSION TO CLASS A SHARES. Class B shares will convert automatically to Class A shares in the month of your 8-year anniversary date or in the beginning of the 9th year after the date of your original purchase of those shares. The conversion is based on the relative NAVs of the shares of the two classes on the conversion date and no sales charge will be imposed. Class B shares you have acquired through automatic reinvestment of dividends or capital gains will be
converted in proportion to the total number of Class B shares you have purchased and own. Since the Rule 12b-1 distribution fees for Class A shares are lower than for Class B shares, converting to Class A shares will lower your expenses.
Class C shares of the Funds are sold at NAV without an initial sales charge so that the full amount of your purchase payment may be immediately invested in the Funds. A CDSC of 1.00% will be charged on Class C shares redeemed within 1 year after you purchased them.
Touchstone Securities, Inc. (Touchstone), the Trust's principal underwriter, at its expense (from a designated percentage of its income) currently provides additional compensation to certain dealers. Touchstone pursues a focused distribution strategy with a limited number of dealers who have sold shares of a Fund or other Touchstone Funds. Additional compensation is limited to such dealers. Touchstone reviews and makes changes to the focused distribution strategy on a continual basis. These payments are generally based on a pro rata share of a dealer's sales. Touchstone may also provide compensation in connection with conferences, sales or training programs for employees, seminars for the public, advertising and other dealer-sponsored programs.
INVESTING WITH TOUCHSTONE
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well requires a plan. We recommend that you meet with your financial advisor to plan a strategy that will best meet your financial goals.
You can contact your financial advisor to purchase shares of the Funds. You may also purchase shares of any Fund directly from Touchstone. In any event, you must complete an investment application. You may obtain an investment application from Touchstone, your financial advisor, or by visiting the touchstoneinvestments.com website.
For more information about how to purchase shares, telephone Touchstone (Nationwide call toll-free 1.800.543.0407).
! INVESTOR ALERT: Each Touchstone Fund reserves the right to reject any purchase request, including exchanges from other Touchstone Funds, that it regards as disruptive to efficient portfolio management. For example, a purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor.
You should read this Prospectus carefully and then determine how much you want to invest. Check below to find the minimum investment requirements and ways to purchase shares in the Funds.
LARGE CAP GROWTH FUND
EMERGING GROWTH FUND ALL
SMALL CAP GROWTH FUND MICRO CAP GROWTH FUND FUNDS
-----------------------------------------------------------
Initial Initial Additional
Investment Investment Investment
Regular Account $1,000 $10,000 $50
Retirement Plan Account or Custodial $ 250 $ 250 $50
Account Under a Uniform Gifts/Transfers
to Minors Act (UGTMA)
Investments through the Automatic $ 50 $ 50 $50
Investment Plan
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o INVESTOR ALERT: Touchstone may change these initial and additional investment minimums at any time.
HOUSEHOLDING POLICY. The Funds will send one copy of prospectuses and shareholder reports to households containing multiple shareholders with the same last name. This process, known as "householding," reduces costs and provides a convenience to shareholders. If you share the same last name and address with another shareholder and you prefer to receive separate prospectuses and shareholder reports, telephone Touchstone toll-free at 1.800.543.0407 and we will begin separate mailings to you within 30 days of your request.
If you or others in your household invest in the Funds through a broker or other financial institution, you may receive separate prospectuses and shareholder reports, regardless of whether or not you have consented to householding on your investment application.
Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means for you: When you open an account, we will ask for your name, residential address, date of birth, government identification number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If we do not receive these required pieces of information, there may be a delay in processing your investment request, which could subject your investment to market risk. If we are unable to immediately verify your identity, the Fund may restrict further investment until your identity is verified. However, if we are unable to verify your identity, the Fund reserves the right to close your account without notice and return your investment to you at the price determined as of 4:00 p.m. Eastern time on the day that your account is closed. If we close your account because we are unable to verify your identity, your investment will be subject to market fluctuation, which could result in a loss of a portion of your principal investment.
For information about how to purchase shares, telephone Touchstone (Nationwide call toll-free 1.800.543.0407).
You can invest in the Funds in the following ways:
BY MAIL OR THROUGH YOUR FINANCIAL ADVISOR
o Please make your check (drawn on a U.S. bank and payable in U.S.
dollars) payable to the Touchstone Funds. We do not accept third
party checks.
o Send your check with the completed investment application by regular
mail to Touchstone, P.O. Box 5354, Cincinnati, Ohio 45201-5354, or
by overnight mail to Touchstone, 221 East Fourth Street, Suite 300,
Cincinnati, Ohio 45202-4133.
o Your application will be processed subject to your check clearing.
If your check is returned for insufficient funds or uncollected
funds, you may be charged a fee and you will be responsible for any
resulting loss to the Fund.
o You may also open an account through your financial advisor.
o We price direct purchases in the Funds based upon the next
determined public offering price (NAV plus any applicable sales
charge) after your order is received. Direct purchase orders
received by Touchstone, or its authorized agent, by the close of the
regular session of trading on the New York Stock Exchange (NYSE),
generally 4:00 p.m. Eastern time, are processed at that day's public
offering price. Direct investments received by Touchstone, or its
authorized agent, after the close of the regular session of trading
on the NYSE, generally 4:00 p.m. Eastern time, are processed at the
public offering price next determined on the following business day.
It is the responsibility of Touchstone's authorized agent to
transmit orders that will be received by Touchstone in proper form
and in a timely manner.
BY EXCHANGE
o You may exchange shares of the Funds for shares of the same class of
another Touchstone Fund at NAV. You may also exchange Class A or
Class C shares of the Funds for Class A shares of any Touchstone
money market fund.
o You do not have to pay a fee for your exchange.
o Shares otherwise subject to a CDSC will not be charged a CDSC in an
exchange. However, when you redeem the shares acquired through the
exchange, the shares you redeem may be subject to a CDSC, depending
on when you originally purchased the exchanged shares. For purposes
of computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not be
affected by any exchange.
o If you exchange Class C shares for Class A shares of any Touchstone
money market fund, the amount of time you hold shares of the money
market fund will not be added to the holding period of your original
shares for the purpose of calculating the CDSC, if you later redeem
the exchanged shares. However, if you exchange back into your
original Class C shares, the prior holding period of your Class C
shares will be added to your current holding period of Class C
shares in calculating the CDSC.
o You should review the disclosure provided in the Prospectus relating
to the exchanged-for shares carefully before making an exchange of
your Fund shares.
THROUGH RETIREMENT PLANS
o You may invest in the Funds through various retirement plans. These include individual retirement plans and employer sponsored retirement plans, such as defined benefit and defined contribution plans.
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE IRAs)
o Spousal IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Coverdell Education Savings Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b)(7) Custodial Accounts
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401(k) plans, profit sharing
plans and money purchase plans)
o 457 plans
OOO SPECIAL TAX CONSIDERATION
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
For further information about any of the plans, agreements, applications and annual fees, contact Touchstone (Nationwide call toll-free 1.800.543.0407) or your financial advisor.
PURCHASES WITH SECURITIES. Shares may be purchased by tendering payment in-kind in the form of marketable securities, including but not limited to, shares of common stock, provided the acquisition of such securities is consistent with the applicable Fund's investment goal and is otherwise acceptable to the Advisor.
o Complete the investment form provided at the bottom of a recent
account statement.
o Make your check (drawn on a U.S. bank and payable in U.S. dollars)
payable to the Touchstone Funds.
o Write your account number on the check.
o Either: (1) Mail the check with the investment form to Touchstone;
or (2) Mail the check directly to your financial advisor at the
address printed on your account statement. Your financial advisor is
responsible for forwarding payment promptly to Touchstone.
o If your check is returned for insufficient funds or uncollected
funds, you may be charged a fee and you will be responsible for any
resulting loss to the Fund.
BY WIRE
o Purchases in the Funds will be processed at that day's NAV (or
public offering price, if applicable) if Touchstone receives a
properly executed wire by the close of the regular session of
trading on the NYSE, generally 4:00 p.m. Eastern time, on a day when
the NYSE is open for regular trading.
o Contact Touchstone or your financial advisor for further
instructions.
o Contact your bank and ask it to wire federal funds to Touchstone.
Specify your name and account number.
o Banks may charge a fee for handling wire transfers.
BY EXCHANGE
o You may add to your account by exchanging shares from an
unaffiliated mutual fund or from another Touchstone Fund.
o For information about how to exchange shares among the Touchstone
Funds, see "Opening an Account - By exchange" in this Prospectus.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments in a Fund of $50 or more to be processed electronically from a checking or savings account. You will need to complete the appropriate section in the investment application to do this.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be automatically reinvested in the Fund that pays them or in another Touchstone Fund within the same class of shares without a fee or sales charge. Dividends and capital gains will be reinvested in the Fund that pays them, unless you indicate otherwise on your investment application. You may also choose to have your dividends or capital gains paid to you in cash.
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security checks, private payroll checks, pension pay outs or any other pre-authorized government or private recurring payments in our Funds. This occurs on a monthly basis and the minimum investment is $50.
DOLLAR COST AVERAGING. Our dollar cost averaging program allows you to diversify your investments by investing the same amount on a regular basis. You can set up periodic automatic exchanges of at least $50 from one Touchstone Fund to any other. The applicable sales charge, if any, will be assessed.
PROCESSING ORGANIZATIONS. You may also purchase shares of the Funds through a "processing organization," (e.g., a mutual fund supermarket) which is a broker-dealer, bank or other financial institution that purchases shares for its customers. Some of the Touchstone Funds have authorized certain processing organizations to receive purchase and sales orders on their behalf. Before investing in the Funds through a processing organization, you should read any materials provided by the processing organization together with this Prospectus.
When shares are purchased this way, there may be various differences. The processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on the
Funds' behalf
Touchstone considers a purchase or sales order as received when an authorized processing organization, or its authorized designee, receives the order in proper form. These orders will be priced based on the Fund's NAV (or offering price, if applicable) next computed after such order is received in proper form. It is the responsibility of the processing organization to transmit properly completed orders so that they will be received by Touchstone in a timely manner.
Shares held through a processing organization may be transferred into your name following procedures established by your processing organization and Touchstone. Certain processing organizations may receive compensation from the Funds, Touchstone, Touchstone Advisors or their affiliates.
BY TELEPHONE
o You can sell or exchange your shares over the telephone, unless you have specifically declined this option. If you do not wish to have this ability, you must mark the appropriate section of the investment application. You may only sell shares over the telephone if the amount is less than $100,000.
o To sell your Fund shares by telephone, call Touchstone at
1.800.543.0407.
o Shares held in IRA accounts and qualified retirement plans cannot be
sold by telephone.
o If we receive your sale request before the close of the regular
session of trading on the NYSE, generally 4:00 p.m. Eastern time, on
a day when the NYSE is open for regular trading, the sale of your
shares will be processed at the next determined NAV on that day.
Otherwise it will occur on the next business day.
o Interruptions in telephone service could prevent you from selling
your shares by telephone when you want to. When you have difficulty
making telephone sales, you should mail to Touchstone (or send by
overnight delivery), a written request for the sale of your shares.
o In order to protect your investment assets, Touchstone will only
follow instructions received by telephone that it reasonably
believes to be genuine. However, there is no guarantee that the
instructions relied upon will always be genuine and Touchstone will
not be liable, in those cases. Touchstone has certain procedures to
confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case, it may be liable for
any losses due to unauthorized or fraudulent instructions. Some of
these procedures may include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account
shown on Touchstone's records
o Mailing checks only to the account address shown on
Touchstone's records
o Directing wires only to the bank account shown on Touchstone's
records
o Providing written confirmation for transactions requested by
telephone
o Tape recording instructions received by telephone
BY MAIL
o Write to Touchstone.
o Indicate the number of shares or dollar amount to be sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your investment
application.
o You may be required to have your signature guaranteed. (See
"Signature Guarantees" in this Prospectus for more information).
BY WIRE
o Complete the appropriate information on the investment application.
o If your proceeds are $1,000 or more, you may request that Touchstone
wire them to your bank account.
o You may be charged a fee by Touchstone's custodian or your bank.
o Redemption proceeds will only be wired to a commercial bank or
brokerage firm in the United States.
o Your redemption proceeds may be deposited without a charge directly
into your bank account through an ACH transaction. Contact
Touchstone for more information.
THROUGH A SYSTEMATIC WITHDRAWAL PLAN
o You may elect to receive, or send to a third party, withdrawals of
$50 or more if your account value is at least $5,000.
o Withdrawals can be made monthly, quarterly, semiannually or
annually.
o There is no special fee for this service.
o There is no minimum amount required for retirement plans.
OOO SPECIAL TAX CONSIDERATION
Systematic withdrawals may result in the sale of your shares at a loss or may
result in taxable investment gains.
THROUGH YOUR FINANCIAL ADVISOR
o You may also sell shares by contacting your financial advisor, who may charge you a fee for this service. Shares held in street name must be sold through your financial advisor or, if applicable, the processing organization.
o Your financial advisor is responsible for making sure that sale requests are transmitted to Touchstone in proper form and in a timely manner.
OOO SPECIAL TAX CONSIDERATION
Selling your shares may cause you to incur a taxable gain or loss.
o INVESTOR ALERT: Unless otherwise specified, proceeds will be sent to the record owner at the address shown on Touchstone's records.
The CDSC will not apply to redemptions of shares you received through reinvested dividends or capital gains distributions and may be waived under certain circumstances described below. The CDSC will be assessed on the lesser of your shares' NAV at the time of redemption or the time of purchase. The CDSC is paid to Touchstone to reimburse expenses incurred in providing distribution-related services to the Funds in connection with the sale of shares.
No CDSC is applied if:
o The redemption is due to the death or post-purchase disability of a shareholder
o The redemption is from a systematic withdrawal plan and represents no more than 10% of your annual account value
o The redemption is a benefit payment made from a qualified retirement plan, unless the redemption is due to termination of the plan or transfer of the plan to another financial institution
When we determine whether a CDSC is payable on a redemption, we assume that:
o The redemption is made first from amounts not subject to a CDSC;
then
o From the earliest purchase payment(s) that remain invested in the
Fund
The SAI contains further details about the CDSC and the conditions for waiving the CDSC.
o Proceeds from the sale of shares of $100,000 or more
o Proceeds to be paid when information on your investment application
has been changed within the last 30 days (including a change in your
name or your address, or the name or address of a payee)
o Proceeds are being sent to an address other than the address of
record
o Proceeds or shares are being sent/transferred from a joint account
to an individual's account
o Changing wire or ACH instructions or sending proceeds via wire or
ACH when instructions have been added within 30 days of your
redemption request
o Proceeds or shares are being sent/transferred between accounts with
different account registrations
PROCEEDS SENT TO FINANCIAL ADVISORS. Proceeds that are sent to your financial advisor will not usually be reinvested for you unless you provide specific instructions to do so. Therefore, the financial advisor may benefit from the use of your money.
FUND SHARES PURCHASED BY CHECK. If you purchase Fund shares by personal check, the proceeds of a sale of those shares will not be sent to you until the check has cleared, which may take up to 15 days. If you need your money sooner, you should purchase shares by bank wire.
REINSTATEMENT PRIVILEGE. You may, within 90 days of redemption, reinvest all or part of your sale proceeds by sending a written request and a check to Touchstone. If the redemption proceeds were from the sale of your Clas A or Class B shares, you can reinvest into Class A shares of any Touchstone Fund at NAV. Reinvestment will be at the NAV next calculated after Touchstone receives your request. If the proceeds were from the sale of your Class C shares, you can reinvest those proceeds into Clas C shares of any Touchstone Fund. If you paid a CDSC on the reinstated amount, you will not be subject to a CDSC if you later redeem that amount.
OOO SPECIAL TAX CONSIDERATION
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
LOW ACCOUNT BALANCES. If your balance falls below the minimum amount required for your account, based on actual amounts you have invested (as opposed to a reduction from market changes), your account may be subject to an annual account maintenance fee or Touchstone may sell your shares and send the proceeds to you. This involuntary sale does not apply to retirement accounts or custodian accounts under the Uniform Gifts/Transfers to Minors Act (UGTMA). Touchstone will notify you if your shares are about to be sold and you will have 30 days to increase your account balance to the minimum amount.
DELAY OF PAYMENT. It is possible that the payment of your sale proceeds could be postponed or your right to sell your shares could be suspended during certain circumstances. These circumstances can occur:
o When the NYSE is closed for other than customary weekends and
holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a sub-advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of a Fund's net assets
o During any other time when the SEC, by order, permits.
REDEMPTION IN KIND. Under unusual circumstances, when the Board of Trustees deems it appropriate, a Fund may make payment for shares redeemed in portfolio securities of the Fund taken at current value.
The Funds' investments are valued based on market value or, if no market value is available, based on fair value as determined by the Board of Trustees (or under their direction). All assets and liabilities initially expressed in foreign currency values will be converted into U.S. dollar values. Some specific pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost.
o Securities mainly traded on a U.S. exchange are valued at the last
sale price on that exchange or, if no sales occurred during the day,
at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However,
if an event that may change the value of a security occurs after the
time that the closing value on the non-U.S. exchange was determined,
the security may be priced based on fair value. This may cause the
value of the security on the books of the Fund to be significantly
different from the closing value on the non-U.S. exchange and may
affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when a Fund does not
price its shares, a Fund's NAV may change on days when shareholders
will not be able to buy or sell shares.
DISTRIBUTIONS AND TAXES
OOO SPECIAL TAX CONSIDERATION
You should consult your tax advisor to address your own tax situation.
Each Fund intends to distribute to its shareholders substantially all of its income and capital gains. Each Fund's dividends are distributed and paid annually. Distributions of any capital gains earned by a Fund will be made at least annually.
ORDINARY INCOME. Income and short-term capital gains that are distributed to you are taxable as ordinary income for federal income tax purposes regardless of how long you have held your Fund shares. To the extent the underlying income of a Fund consists of qualified dividend income, income distributions by the Fund may be subject to a maximum federal income tax rate of 15% for individuals and may qualify for the dividends received deduction for corporations.
LONG-TERM CAPITAL GAINS. Long-term capital gains distributed to you are taxable as long-term capital gains for federal income tax purposes regardless of how long you have held your Fund shares. The maximum individual tax rate on net long-term capital gains is 15%.
OOO SPECIAL TAX CONSIDERATION
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
BACKUP WITHHOLDING. A Fund may be required to withhold U.S. federal income tax on all taxable distributions and sales payable to shareholders who fail to provide their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The current backup withholding rate is 28%.
STATEMENTS AND NOTICES. You will receive an annual statement outlining the tax status of your distributions. You will also receive written notices of certain foreign taxes and distributions paid by the Funds during the prior taxable year.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's financial performance for the past 5 years (or if shorter, during the period of its operations). Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate an investor would have earned or lost on an investment in a Fund (assuming reinvestment of all dividends and distributions). The information (except information for the Large Cap Growth Fund for periods prior to December 31, 2003) has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements is included in the Annual Report, which is available upon request. Information for the Large Cap Growth Fund for periods prior to December 31, 2003 was audited by other independent accountants. There is no financial information for the Micro Cap Growth Fund since it did not begin operations until June 2004.
===============================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-------------------------------------------------------------------------------------------------------------------------------
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ------------------------------------------------------------------
2004(A) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period .... $ 16.53 $ 12.19 $ 16.63 $ 21.73 $ 23.59 $ 14.47
----------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss .................... (0.03) (0.07) (0.12) (0.13) (0.20) (0.12)
Net realized and unrealized gains
(losses) on investments ............. 0.81 (4.41) (4.32) (0.97) (1.61) 9.24
----------------------------------------------------------------------------------
Total from investment operations .......... 0.78 (4.34) (4.44) (0.10) (1.81) 9.12
----------------------------------------------------------------------------------
Distributions from net realized gains ..... -- -- -- -- (0.05) --
================================================================================
Net asset value at end of period .......... $ 17.31 $ 16.53 $ 12.19 $ 16.63 $ 21.73 $ 23.59
================================================================================
Total return(B) ........................... 4.72%(C) 35.60% 26.70 (23.47%) (7.66%) 63.03%
================================================================================
Net assets at end of period (000's) ....... $ 69,860 $ 62,187 $ 13,831 $ 20,835 $ 44,068 $ 12,667
Ratio of net expenses to
average net assets ..................... 1.30%(D) 1.39% 1.49 1.49% 1.48% 1.49%
Ratio of net investment loss to
average net assets ..................... (0.78%)(D) (0.93%) (0.82) (0.82%) (1.14%) (0.99%)
Portfolio turnover ........................ 60%(D) 60%(E) 115 115% 54% 75%
|
(A) Effective after the close of business on December 31, 2003, the Fund changed its fiscal year end to March 31.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Annualized.
(E) Reflects the portfolio turnover rate after realignment of the portfolio in connection with the acquisitions of the Navellier funds.
LARGE CAP GROWTH FUND - CLASS B
--------------------------------------------------------------------------------
=============================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-----------------------------------------------------------------------------
THREE
MONTHS PERIOD
ENDED ENDED
MARCH 31, DECEMBER 31,
2004(A) 2003(B)
-----------------------------------------------------------------------------
Net asset value at beginning of period ........... $ 16.50 $ 15.45
--------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.03) (0.06)
Net realized and unrealized gains
on investments ............................. 0.77 1.11
--------------------
Total from investment operations ................. 0.74 1.05
--------------------
Net asset value at end of period ................. $ 17.24 $ 16.50
====================
Total return(C) .................................. 4.48% 6.80%
====================
Net assets at end of period (000's) .............. $ 1,897 $ 1,003
====================
Ratio of net expenses to average net assets ...... 2.25%(D) 2.22%(D)
Ratio of net investment loss to average net assets (1.71%)(D) (1.80%)(D)
Portfolio turnover rate(D) ....................... 60% 60%(E)
|
(A) Effective after the close of business on December 31, 2003, the Fund changed its fiscal year end to March 31.
(B) Represents the period from commencement of operations (October 4, 2003)
through December 31, 2003.
(C) Total returns shown exclude the effect of applicable sales loads and are not annualized.
(D) Annualized.
(E) Reflects the portfolio turnover rate after realignment of the portfolio in connection with the acquisitions of the Navellier funds.
LARGE CAP GROWTH FUND - CLASS C
--------------------------------------------------------------------------------
===============================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-------------------------------------------------------------------------------
THREE
MONTHS PERIOD
ENDED ENDED
MARCH 31, DECEMBER 31,
2004(A) 2003(B)
-------------------------------------------------------------------------------
Net asset value at beginning of period ........... $ 16.50 $ 15.45
----------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.04) (0.05)
Net realized and unrealized gains
on investments ............................. 0.78 1.10
----------------------
Total from investment operations ................. 0.74 1.05
----------------------
Net asset value at end of period ................. $ 17.24 $ 16.50
======================
Total return(C) .................................. 4.48% 6.80%
======================
Net assets at end of period (000's) .............. $ 4,310 $ 2,465
======================
Ratio of net expenses to average net assets ...... 2.25%(D) 2.21%(D)
Ratio of net investment loss to average net assets (1.70%)(D) (1.78%)(D)
Portfolio turnover rate(D) ....................... 60% 60%(E)
|
(A) Effective after the close of business on December 31, 2003, the Fund changed its fiscal year end to March 31.
(B) Represents the period from commencement of operations (October 4, 2003)
through December 31, 2003.
(C) Total returns shown exclude the effect of applicable sales loads and are not annualized.
(D) Annualized.
(E) Reflects the portfolio turnover rate after realignment of the portfolio in connection with the acquisitions of the Navellier funds.
==========================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------------------------------------------------
THREE
YEAR YEAR YEAR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002 2001(A) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period .. $ 13.89 $ 19.52 $ 15.96 $ 17.93 $ 16.96 $ 13.40
------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss .................. (0.13) (0.14) (0.14) -- (0.06) (0.09)
Net realized and unrealized
gains (losses) on investments ..... 7.97 (5.29) 3.76 (1.97) 4.16 6.18
------------------------------------------------------------------------------
Total from investment operations ........ 7.84 (5.43) 3.62 (1.97) 4.10 6.09
------------------------------------------------------------------------------
Distributions from net realized gains ... -- (0.20) (0.06) -- (3.13) (2.53)
------------------------------------------------------------------------------
Net asset value at end of period ........ $ 21.73 $ 13.89 $ 19.52 $ 15.96 $ 17.93 $ 16.96
==============================================================================
Total return(B) ......................... 56.44% (27.90%) 22.72% (10.99%)(C) 25.92% 45.85%
==============================================================================
Net assets at end of period (000's) ..... $ 458,524 $ 153,247 $ 169,781 $ 19,141 $ 15,304 $ 10,743
==============================================================================
Ratio of net expenses to
average net assets ................... 1.49%(D) 1.50% 1.50% 1.50%(E) 1.50% 1.50%
Ratio of net investment loss to
average net assets ................... (0.93%)(D) (1.07%) (1.02%) (0.10%)(E) (0.40%) (0.66%)
Portfolio turnover ...................... 79% 62% 73% 68%(E) 98% 97%
|
(A) Effective after the close of business on March 31, 2001, the Fund changed its fiscal year-end to March 31.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 1.50% and the ratio of net investment loss to average net assets would have been (0.94%).
(E) Annualized.
===========================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-----------------------------------------------------------------------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002(A)
-----------------------------------------------------------------------------------------------------------
Net asset value at beginning of period .............. $ 12.53 $ 18.25 $ 16.45
----------------------------------------------
Income (loss) from investment operations:
Net investment loss .............................. (0.25) (0.14) (0.09)
Net realized and unrealized gains (losses)
on investments ................................ 7.75 (5.38) 1.95
----------------------------------------------
Total from investment operations .................... 7.50 (5.52) 1.86
----------------------------------------------
Distributions from net realized gains ............... -- (0.20) (0.06)
----------------------------------------------
Net asset value at end of period .................... $ 20.03 $ 12.53 $ 18.25
==============================================
Total return(B) ..................................... 59.86% (30.34%) 11.35%(C)
==============================================
Net assets at end of period (000's) ................. $64,918 $26,226 $15,335
==============================================
Ratio of net expenses to average net assets ......... 2.24%(D) 2.25% 2.25%(E)
Ratio of net investment loss to average net assets .. (1.68%)(D) (1.77%) (1.90%)(E)
Portfolio turnover rate ............................. 79% 62% 73%(E)
|
(A) Represents the period from commencement of operations (May 1, 2001) through March 31, 2002.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 2.25% and the ratio of net investment loss to average net assets would have been (1.69%).
(E) Annualized.
==========================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------------------------------------------------
THREE
YEAR YEAR YEAR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DEC. 31, DEC. 31,
2004 2003 2002 2001(A) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period .. $ 12.55 $ 18.26 $ 15.01 $ 16.87 $ 16.29 $ 13.04
---------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) ......... (0.23) (0.13) 0.01 (0.02) (0.17) (0.19)
Net realized and unrealized gains
(losses) on investments ........... 7.72 (5.38) 3.30 (1.84) 3.88 5.97
---------------------------------------------------------------------------
Total from investment operations ........ 7.49 (5.51) 3.31 (1.86) 3.71 5.78
---------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income ............................ -- -- -- -- (3.13) (2.53)
Distributions from net realized gains ... -- (0.20) (0.06) -- -- --
---------------------------------------------------------------------------
Total distributions ..................... -- (0.20) (0.06) -- (3.13) (2.53)
---------------------------------------------------------------------------
Net asset value at end of period ........ $ 20.04 $ 12.55 $ 18.26 $ 15.01 $ 16.87 $ 16.29
===========================================================================
Total return(C) ......................... 59.68% (30.27%) 22.09% (11.03%)(D) 24.58% 44.86%
===========================================================================
Net assets at end of period (000's) ..... $ 252,021 $ 97,743 $ 67,347 $ 7,600 $ 5,466 $ 3,964
===========================================================================
Ratio of net expenses to
average net assets ................... 2.24%(E) 2.25% 2.25% 2.25%(F) 2.25% 2.25%
Ratio of net investment loss to
average net assets ................... (1.68%)(E) (1.77%) (1.61%) (0.63%)(F) (1.15%) (1.41%)
Portfolio turnover ...................... 79% 62% 73% 68%(F) 98% 97%
|
(A) Effective after the close of business on March 31, 2001, the Fund changed its fiscal year-end to March 31.
(B) Represents the period from the commencement of operations (January 1, 1999)
through December 31, 1999.
(C) Total returns shown exclude the effect of applicable sales loads.
(D) Not annualized.
(E) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 2.25% and the ratio of net investment loss to average net assets would have been (1.69%).
(F) Annualized.
SMALL CAP GROWTH FUND - CLASS A
--------------------------------------------------------------------------------
================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003(A)
--------------------------------------------------------------------------------
Net asset value at beginning of period ........... $ 9.78 $ 10.00
---------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.14) (0.06)
Net realized and unrealized gains (losses)
on investments ............................. 6.78 (0.16)
---------------------
Total from investment operations ................. 6.64 (0.22)
---------------------
Distributions from net realized gains ............ (0.37) --
---------------------
Net asset value at end of period ................. $ 16.05 $ 9.78
=====================
Total return(B) .................................. 68.02% (2.20%)(C)
=====================
Net assets at end of period (000's) .............. $ 53,064 $15,230
=====================
Ratio of net expenses to average net assets ...... 1.89%(D) 1.95%(E)
Ratio of net investment loss to average net assets (1.34%)(D) (1.61%)(E)
Portfolio turnover ............................... 133% 128%(E)
(A) Represents the period from commencement of operations (October 21, 2002)
through March 31, 2003.
|
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 1.95% and the ratio of net investment loss to average net assets would have been (1.40%).
(E) Annualized.
SMALL CAP GROWTH FUND - CLASS B
--------------------------------------------------------------------------------
================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003(A)
--------------------------------------------------------------------------------
Net asset value at beginning of period ........... $ 9.75 $ 10.00
----------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.21) (0.06)
Net realized and unrealized gains (losses)
on investments ............................. 6.73 (0.19)
----------------------
Total from investment operations ................. 6.52 (0.25)
----------------------
Distributions from net realized gains ............ (0.37) --
----------------------
Net asset value at end of period ................. $ 15.90 $ 9.75
======================
Total return(B) .................................. 66.99% (2.50%)(C)
======================
Net assets at end of period (000's) .............. $ 7,831 $ 1,399
======================
Ratio of net expenses to average net assets ...... 2.63%(D) 2.69%(E)
Ratio of net investment loss to average net assets (2.09%)(D) (2.38%)(E)
Portfolio turnover ............................... 133% 128%(E)
(A) Represents the period from commencement of operations (October 21, 2002)
through March 31, 2003.
|
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 2.70% and the ratio of net investment loss to average net assets would have been (2.16%).
(E) Annualized.
SMALL CAP GROWTH FUND - CLASS C
--------------------------------------------------------------------------------
================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003(A)
--------------------------------------------------------------------------------
Net asset value at beginning of period ........... 9.74 10.00
----------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.21) (0.07)
Net realized and unrealized gains (losses)
on investments ............................. 6.75 (0.19)
----------------------
Total from investment operations ................. 6.54 (0.26)
----------------------
Distributions from net realized gains ............ (0.37) --
----------------------
Net asset value at end of period ................. 15.91 9.74
======================
Total return(B) .................................. 67.26% (2.60%)(C)
======================
Net assets at end of period (000's) .............. 14,596 3,029
======================
Ratio of net expenses to average net assets ...... 2.63%(D) 2.69%(E)
Ratio of net investment loss to average net assets (2.09%)(D) (2.39%)(E)
Portfolio turnover ............................... 133% 128%(E)
(A) Represents the period from commencement of operations (October 21, 2002)
through March 31, 2003.
|
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 2.70% and the ratio of net investment loss to average net assets would have been (2.16%).
(E) Annualized.
TOUCHSTONE INVESTMENTS
DISTRIBUTOR
Touchstone Securities, Inc.
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202-4133
800.638.8194
www.touchstoneinvestments.com
INVESTMENT ADVISOR
Touchstone Advisors, Inc.
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202-4133
TRANSFER AGENT
Integrated Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
SHAREHOLDER SERVICE
800.543.0407
A Member of Western & Southern Financial Group(R)
For investors who want more information about the Funds, the following documents are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed information about the Funds and is legally a part of this Prospectus.
ANNUAL/SEMIANNUAL REPORTS: The Funds' annual and semiannual reports provide additional information about the Funds' investments. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year.
You can get free copies of the SAI, the reports, other information and answers to your questions about the Funds by contacting your financial advisor, or the Funds at:
Touchstone Funds
P.O. Box 5354
Cincinnati, Ohio 45201-5354
1.800.543.0407
http://www.touchstoneinvestments.com
Information about the Funds (including the SAI) can be reviewed and copied at the Securities and Exchange Commission's public reference room in Washington, D.C. You can receive information about the operation of the public reference room by calling the SEC at 1.202.942.8090.
Reports and other information about the Funds are available on the SEC's internet site at http://www.sec.gov. For a fee, you can get text-only copies of reports and other information by writing to the Public Reference Room of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-0102, or by sending an e-mail request to: publicinfo@sec.gov.
Investment Company Act file no. 811-3651
ed 30 Fund Touchstone Growth Opportunities Fund Touchstone Value Plus Fund Touchstone Enhanced 30 Fund Touchstone Growth Opportunities Fund Touchstone Value Plus Fund Touchstone Enhanced 30 Fund Touchstone Growth Opportunities Fund Touchstone Value Plus Fund Touchstone Enhanced 30 Fund Touchstone Growth Opportunities Fund Touchstone Value Plus Fund Touchstone Enhanced 30 Fund Touchstone Growth Opportunities Fund Touchstone Value Plus Fund Touchstone
TOUCHSTONE
INVESTMENTS
Touchstone Value Plus Fund
Touchstone Enhanced 30 Fund
Touchstone Growth Opportunities Fund
RESEARCH O DESIGN O SELECT O MONITOR
The Securities and Exchange Commission has not approved the Funds' shares as an
investment or determined whether this Prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
Multiple Classes of Shares are Offered by this Prospectus
PROSPECTUS AUGUST 1, 2004
TOUCHSTONE INVESTMENTS
Touchstone Value Plus Fund
Touchstone Enhanced 30 Fund
Touchstone Growth Opportunities Fund
Each Fund is a series of Touchstone Strategic Trust (the Trust), a group of equity mutual funds. The Trust is part of the Touchstone Funds that also includes Touchstone Investment Trust, a group of taxable bond and money market mutual funds, Touchstone Tax-Free Trust, a group of tax-free bond and money market mutual funds and Touchstone Variable Series Trust, a group of variable series funds. Each Touchstone Fund has a different investment goal and risk level. For further information about the Touchstone Funds, contact Touchstone at 1.800.543.0407.
VALUE PLUS FUND
At least 75% of the Fund's assets will be invested in large cap companies and the remainder will generally be invested in mid cap companies.
The Fund's securities will be considered for sale when the sub-advisor believes they are overvalued relative to their growth potential, when there is a deterioration in fundamental criteria, or when their price decreases by at least 10% relative to the market.
o If the stock market as a whole goes down
o If the stocks in the Fund's portfolio are not undervalued as
expected
o Because large cap companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer
tastes, and also may not be able to attain the high growth rate of
successful smaller companies, especially during extended periods of
economic expansion
o Because securities of mid cap companies may be more thinly traded
and may have more frequent and larger price changes than securities
of large cap companies
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
o Because value oriented funds may underperform when growth investing
is in favor
o If the sub-advisor's stock selection process does not identify
attractive investments
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
VALUE PLUS FUND -- CLASS A TOTAL RETURNS
YEAR TOTAL RETURN
1999 15.51% Best Quarter:
2nd Quarter 2003 +17.59%
2000 1.91%
Worst Quarter:
2001 -1.77% 3rd Quarter 2002 -18.72%
2002 -26.02%
2003 29.43%
|
The year-to-date return for the Fund's Class A shares as of June 30, 2004 is 3.52%.
The table compares the Fund's average annual total returns to those of the Russell 1000 Value Index and the S&P 500 Index. During the past fiscal year the Fund eliminated the S&P 500 Index as its secondary index. The table shows the effect of the applicable sales charge. The after-tax returns shown in the table are for Class A shares only. The after-tax returns for other classes of shares offered by the Fund will differ from the Class A after-tax returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
SINCE
CLASS
1 YEAR 5 YEARS STARTED(1)
================================================================================================
VALUE PLUS FUND CLASS A
Return Before Taxes 22.02% 0.85% 1.50%
Return After Taxes on Distributions(2) 21.90% 0.14% 0.86%
Return After Taxes on Distributions and Sale of Fund Shares 14.46% 0.45% 1.04%
Russell 1000 Value Index(3) 30.03% 3.56% 3.65%
S&P 500 Index(4) 28.69% -0.57% 1.31%
------------------------------------------------------------------------------------------------
VALUE PLUS FUND CLASS B
Return Before Taxes 24.47% N/A -4.92%
Russell 1000 Value Index(3) 30.03% N/A 1.84%
S&P 500 Index(4) 28.69% N/A -2.69%
------------------------------------------------------------------------------------------------
VALUE PLUS FUND CLASS C
Return Before Taxes 28.38% 1.33% 1.63%
Russell 1000 Value Index(3) 30.03% 3.56% 3.65%
S&P 500 Index(4) 28.69% -0.57% 1.31%
------------------------------------------------------------------------------------------------
|
(1) Class A shares began operations on May 1, 1998, Class B shares began
operations on May 1, 2001 and Class C shares began operations on January
1, 1999. The Class C performance was calculated using the historical
performance of the Class C predecessor, which was another mutual fund that
began operations on May 1, 1998.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
(3) The Russell 1000 Value Index is a widely recognized unmanaged index of the
Russell 1000 securities that have a less-than-average growth orientation.
(The Russell 1000 securities offer investors access to the extensive large
cap segment of the U.S. equity universe representing approximately 92% of
the U.S. market.) The Index reflects no deductions for fees, expenses or
taxes.
(4) The S&P 500 Index is a widely recognized unmanaged index of common stock
prices. The Index reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
==========================================================================================================
Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 5.00%(2) 1.00%(3)
Wire Redemption Fee Up to $15 Up to $15 Up to $15
|
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
============================================================================================
Management Fees 0.75% 0.75% 0.75%
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0.50% 3.56% 1.49%
Total Annual Fund Operating Expenses 1.50% 5.31% 3.24%
Fee Waiver and/or Expense Reimbursement(4) 0.20% 3.26% 1.19%
Net Expenses 1.30% 2.05% 2.05%
--------------------------------------------------------------------------------------------
|
* Purchases of $1 million or more do not pay a front-end sales charge, but
may pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) You will pay a 5.00% contingent deferred sales charge if shares are
redeemed within 1 year of their purchase. The contingent deferred sales
charge will be incrementally reduced over time. After the 6th year, there
is no contingent deferred sales charge. The contingent deferred sales
charge may be waived under certain circumstances described in this
Prospectus.
(3) The 1.00% contingent deferred sales charge is waived if shares are held
for 1 year or longer or under other circumstances described in this
Prospectus.
(4) Touchstone Advisors has contractually agreed to waive a portion of its
advisory fee and/or reimburse certain Fund expenses in order to limit Net
Expenses to 1.30% for Class A shares and 2.05% for Class B and Class C
shares (the Sponsor Agreement). The Sponsor Agreement will remain in place
until at least March 31, 2005.
EXAMPLE. The following example should help you compare the cost of investing in the Value Plus Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except that contractual fee waivers are reflected only for the length of the contractual limit, i.e., the first year in the example. The example also reflects changes in the 10 year operating expenses of Class B shares since Class B shares convert to Class A shares after 8 years. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
ASSUMING
ASSUMING REDEMPTION AT END OF PERIOD NO REDEMPTION
=======================================================================================
Class A Shares Class B Shares Class C Shares Class B Shares
---------------------------------------------------------------------------------------
1 Year $ 700 $ 608 $ 208 $ 208
3 Years(1) $1,003 $1,498 $ 887 $1,298
5 Years(1) $1,329 $2,481 $1,590 $2,381
10 Years(1) $2,246 $4,306(2) $3,459 $4,306(2)
---------------------------------------------------------------------------------------
|
(1) The examples for the 3, 5 and 10 year periods are calculated using the
Total Annual Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement with Touchstone Advisors for periods after year 1.
(2) Based on conversion to Class A shares after 8 years.
ENHANCED 30 FUND
The Fund's portfolio is based on the 30 stocks that comprise the Dow Jones Industrial Average. The Dow Jones Industrial Average is a measurement of general market price movement for 30 widely held stocks. The sub-advisor seeks to surpass the total return of the Dow Jones Industrial Average by substituting stocks not included in the Dow Jones Industrial Average that offer above average growth potential for those stocks in the Dow Jones Industrial Average that appear to have less growth potential. The Fund's portfolio will at all times consist of 30 stocks and up to 1/3 of these holdings may represent substituted stocks in the enhanced portion of the portfolio. The Fund's investments may include companies in the technology sector.
The sub-advisor uses a database of 4,000 stocks from which to choose the companies that will be substituted in the enhanced portion of the portfolio. A specific process is followed to assist the sub-advisor in its selections:
o The 4,000 stocks are reduced to 1,400 by screening for quality and
market capitalization ($10 billion minimum)
o A model is applied to select stocks that the sub-advisor believes
are priced at a discount to their true value. This model reduces the
stock choices to about 300 companies
o The sub-advisor then searches for those companies that have
excellent earnings potential
Stocks are sold when the sub-advisor believes they are overpriced or face a significant reduction in earnings prospects. The portfolio is rebalanced periodically or as needed due to changes in the Dow Jones Industrial Average or in other securities in the portfolio.
The sub-advisor's selection process is expected to cause the Fund's portfolio to have the following characteristics:
o Attractive valuation
o Above-average earnings and dividend growth
o Above-average market capitalization ratio
o Dominant industry position
o Seasoned management
o Above-average quality
Unlike the Dow Jones Industrial Average, the Enhanced 30 Fund is not price-weighted.
o If the stock market as a whole goes down
o Because large cap companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer
tastes, and also may not be able to attain the high growth rate of
successful smaller companies, especially during extended periods of
economic expansion
o If the stock selection model does not accurately identify stocks
that are priced at a discount to their true value
o If the market continually values the stocks in the Fund's portfolio
lower than the sub-advisor believes they should be valued
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find out more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
ENHANCED 30 FUND -- CLASS A TOTAL RETURNS
YEAR TOTAL RETURN Best Quarter:
2nd Quarter 2003 +18.81%
2001 -8.95%
Worst Quarter:
2002 -21.66% 3rd Quarter 2002 -20.19%
2003 30.86%
|
The year-to-date return for the Fund's Class A shares as of June 30, 2004 is 2.98%.
The table compares the Fund's average annual total returns to those of the Dow Jones Industrial Average. The table shows the effect of the applicable sales charge. The after-tax returns shown in the table are for Class A shares only. The after-tax returns for other classes of shares offered by the Fund will differ from the Class A after-tax returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
SINCE
CLASS
1 YEAR STARTED(1)
=============================================================================================
ENHANCED 30 FUND CLASS A
Return Before Taxes 23.26% -3.94%
Return After Taxes on Distributions(2) 23.11% -4.17%
Return After Taxes on Distributions and Sale of Fund Shares(3) 15.28% -3.45%
Dow Jones Industrial Average(4) 28.29% 1.08%
---------------------------------------------------------------------------------------------
ENHANCED 30 FUND CLASS B
Return Before Taxes 26.24% -2.84%
Dow Jones Industrial Average(4) 28.29% 1.14%
---------------------------------------------------------------------------------------------
ENHANCED 30 FUND CLASS C
Return Before Taxes 30.08% -2.90%
Dow Jones Industrial Average(4) 28.29% 0.75%
---------------------------------------------------------------------------------------------
|
(1) Class A shares began operations on May 1, 2000, Class B shares began
operations on May 1, 2001 and Class C shares began operations on May 16,
2000.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
(3) When the "Return After Taxes on Distributions and Sale of Fund Shares" is
higher, it is because of realized losses. If a capital loss occurs upon
the redemption of the Fund's shares, the capital loss is recorded as a tax
benefit, which increases the return and translates into an assumed tax
deduction that benefits the shareholder
(4) The Dow Jones Industrial Average is a measurement of general market price
movement for 30 widely held stocks. The Dow Jones Industrial Average
reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
==========================================================================================================
Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 5.00%(2) 1.00%(3)
Wire Redemption Fee Up to $15 Up to $15 Up to $15
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
============================================================================================================
Management Fees 0.65% 0.65% 0.65%
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 1.28% 2.36% 2.04%
Total Annual Fund Operating Expenses 2.18% 4.01% 3.69%
Fee Waiver and/or Expense Reimbursement(4) 1.21% 2.29% 1.97%
Net Expenses 0.97% 1.72% 1.72%
------------------------------------------------------------------------------------------------------------
|
* Purchases of $1 million or more do not pay a front-end sales charge, but
may pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) You will pay a 5.00% contingent deferred sales charge if shares are
redeemed within 1 year of their purchase. The contingent deferred sales
charge will be incrementally reduced over time. After the 6th year, there
is no contingent deferred sales charge. The contingent deferred sales
charge may be waived under certain circumstances described in this
Prospectus.
(3) The 1.00% contingent deferred sales charge is waived if shares are held
for 1 year or longer or under other circumstances described in this
Prospectus.
(4) Touchstone Advisors has contractually agreed to waive a portion of its
advisory fee and/or reimburse certain Fund expenses in order to limit Net
Expenses to 1.00% or below for Class A shares and 1.75% or below for Class
B and Class C shares (the Sponsor Agreement). The Sponsor Agreement will
remain in place until at least March 31, 2005.
EXAMPLE. The following example should help you compare the cost of investing in the Enhanced 30 Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except that contractual fee waivers are reflected only for the length of the contractual limit, i.e., the first year in the example. The example also reflects changes in the 10 year operating expenses of Class B shares since Class B shares convert to Class A shares after 8 years. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
ASSUMING
ASSUMING REDEMPTION AT END OF PERIOD NO REDEMPTION
====================================================================================
Class A Shares Class B Shares Class C Shares Class B Shares
------------------------------------------------------------------------------------
1 Year $ 668 $ 575 $ 175 $ 175
3 Years(1) $1,108 $1,211 $ 947 $1,011
5 Years(1) $1,573 $1,965 $1,740 $1,865
10 Years(1) $2,854 $3,672(2) $3,814 $3,672(2)
------------------------------------------------------------------------------------
|
(1) The examples for the 3, 5 and 10 year periods are calculated using the Total Annual Fund Operating Expenses before the limits agreed to under the Sponsor Agreement with Touchstone Advisors for periods after year 1.
(2) Based on conversion to Class A shares after 8 years.
GROWTH OPPORTUNITIES FUND
The sub-advisor will invest in two basic categories of companies:
o Companies which the sub-advisor believes have shown above-average
and consistent long-term growth in earnings and cash flow (net
income plus depreciation and amortization) and have excellent
prospects for future growth.
o Companies that are currently experiencing an increase in earnings
and/or cash flow or are projected to do so in the next 18 to 36
months.
The Fund is non-diversified and may invest a significant percentage of its assets in the securities of a single company.
The sub-advisor expects to hold investments in the Fund for an average of 18 to 36 months. However, changes in the sub-advisor's outlook and market conditions may significantly affect the amount of time the Fund holds a security. The Fund's portfolio turnover may vary greatly from year to year and during a particular year. The sub-advisor does not set a price target for its holdings in order to determine when to sell an investment. Rather, the sub-advisor generally will sell a security if one or more of the following occurs:
(1) an adverse change in the fundamentals of a company or an industry;
(2) excessive valuation;
(3) better risk/reward opportunities may be found in other stocks; or
(4) excessive overweighting.
o If the stock market as a whole goes down
o If the market continually values the stocks in the Fund's portfolio
lower than the sub-advisor believes they should be valued
o If the companies in which the Fund invests do not grow as rapidly or
increase in value as expected
o If the sub-advisor's investment approach does not accurately
identify attractive investments
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
o Because a non-diversified fund may hold a significant percentage of
its assets in the securities of one company, it may be more
sensitive to market changes than a diversified fund
o Because securities of mid cap companies may be more thinly traded
and may have more frequent and larger price changes than securities
of large cap companies
o Because large cap companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer
tastes, and also may not be able to attain the high growth rate of
successful smaller companies, especially during extended periods of
economic expansion
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about the Fund's investments and risks under the "Investment Strategies and Risks" section of this Prospectus.
GROWTH OPPORTUNITIES FUND -- CLASS A TOTAL RETURNS
YEAR TOTAL RETURN
1996 20.65%
Best Quarter:
1997 23.78% 4th Quarter 1999 +47.98%
1998 39.06% Worst Quarter:
3rd Quarter 2001 -26.71%
1999 68.25%
2000 -2.56%
2001 -28.47%
2002 -35.76%
2003 39.74%
|
The year-to-date return for the Fund's Class A shares as of June 30, 2004 is 2.82%.
The table compares the Fund's average annual total returns to those of the Russell 1000 Growth Index and the S&P 500 Index. During the past fiscal year the Fund changed its primary index from the S&P 500 Index to the Russell 1000 Growth Index because the Russell 1000 Growth Index more accurately reflects the Fund's portfolio composition. The table shows the effect of the applicable sales charge. The after-tax returns shown in the table are for Class A shares only. The after-tax returns for other classes of shares offered by the Fund will differ from the Class A after-tax returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
SINCE
CLASS
1 YEAR 5 YEARS STARTED(1)
==============================================================================================================
GROWTH OPPORTUNITIES FUND CLASS A
Return Before Taxes 31.69% -0.15% 9.84%
Return After Taxes on Distributions(2) 31.69% -0.86% 9.02%
Return After Taxes on Distributions and Sale of Fund Shares 20.60% -0.33% 8.37%
Russell 1000 Growth Index(3) 29.75% -5.11% 7.32%
S&P 500 Index(4) 28.69% -0.57% 9.81%
--------------------------------------------------------------------------------------------------------------
GROWTH OPPORTUNITIES FUND CLASS B
Return Before Taxes 36.08% -- -12.00%
Russell 1000 Growth Index(3) 29.75% -- -6.50%
S&P 500 Index(4) 28.69% -- -2.69%
--------------------------------------------------------------------------------------------------------------
GROWTH OPPORTUNITIES FUND CLASS C
Return Before Taxes 40.23% -- -2.01%
Russell 1000 Growth Index(3) 29.75% -- -7.31%
S&P 500 Index(4) 28.69% -- 2.54%
--------------------------------------------------------------------------------------------------------------
|
(1) Class A shares began operations on September 29, 1995, Class B shares
began operations on May 1, 2001 and Class C shares began operations on
August 2, 1999.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
(3) The Russell 1000 Growth Index measures the performance of those Russell
1000 securities with higher price-to-book ratios and higher forecasted
growth values. (The Russell 1000 securities offer investors access to the
extensive large cap segment of the U.S. equity universe representing
approximately 92% of the U.S. market.) The Index reflects no deductions
for fees, expenses or taxes.
(4) The S&P 500 Index is a widely recognized unmanaged index of common stock
prices. The Index reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
============================================================================================================
Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) 5.75%(1) None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or the amount redeemed, whichever is less) * 5.00%(2) 1.00%(3)
Wire Redemption Fee Up to $15 Up to $15 Up to $15
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ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
=======================================================================================
Management Fees 0.91% 0.91% 0.91%
Distribution (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses 0.44% 0.93% 0.69%
Total Annual Fund Operating Expenses 1.60% 2.84% 2.60%
---------------------------------------------------------------------------------------
|
* Purchases of $1 million or more do not pay a front-end sales charge, but
may pay a contingent deferred sales charge of 1.00% if shares are redeemed
within 1 year of their purchase.
(1) You may pay a reduced sales charge on very large purchases. There is no
initial sales charge on certain purchases in a qualified retirement plan.
(2) You will pay a 5.00% contingent deferred sales charge if shares are
redeemed within 1 year of their purchase. The contingent deferred sales
charge will be incrementally reduced over time. After the 6th year, there
is no contingent deferred sales charge. The contingent deferred sales
charge may be waived under certain circumstances described in this
Prospectus.
(3) The 1.00% contingent deferred sales charge is waived if shares are held
for 1 year or longer or under other circumstances described in this
Prospectus.
EXAMPLE. The following example should help you compare the cost of investing in the Growth Opportunities Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except it reflects changes in the 10 year operating expenses of Class B shares since Class B shares convert to Class A shares after 8 years. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
ASSUMING
ASSUMING REDEMPTION AT END OF PERIOD NO REDEMPTION
================================================================================
Class A Shares Class B Shares Class C Shares Class B Shares
--------------------------------------------------------------------------------
1 Year $ 728 $ 687 $ 363 $ 287
3 Years $1,051 $1,080 $ 808 $ 880
5 Years $1,396 $1,599 $1,380 $1,499
10 Years $2,366 $2,871(1) $2,934 $2,871(1)
--------------------------------------------------------------------------------
|
(1) Based on conversion to Class A shares after 8 years.
INVESTMENT STRATEGIES AND RISKS
Each Fund may depart from its investment strategies by taking temporary defensive positions in response to adverse market, economic, political or other conditions, including conditions when a sub-advisor is unable to identify attractive investment opportunities. A Fund's temporary investments may include debt securities or cash equivalents. During these times, a Fund may not achieve its investment goal.
DO THE FUNDS HAVE OTHER INVESTMENT STRATEGIES, IN ADDITION TO THEIR PRINCIPAL
VALUE PLUS FUND. The Value Plus Fund may also invest in:
o Preferred stocks
o Investment grade debt securities
o Convertible securities
o American depository receipts (ADRs) and other depository receipts
In addition, the Fund may invest up to 10% of its total assets in:
o Cash equivalent investments
o Short-term debt securities
GROWTH OPPORTUNITIES FUND. The Growth Opportunities Fund may also invest up to 10% of its total assets in:
o Common stocks of small cap companies
o Securities of foreign companies
o American depository receipts (ADRs)
o Non-investment grade debt securities
The Fund may also invest up to 30% of its total assets in investment grade debt securities.
o They are organized under the laws of a foreign country
o They maintain their principal place of business in a foreign country
o The principal trading market for their securities is located in a
foreign country
o They derive at least 50% of their revenues or profits from
operations in foreign countries
o They have at least 50% of their assets located in foreign countries
INVESTMENT GRADE DEBT SECURITIES are generally rated BBB or better by Standard & Poor's Rating Service (S&P) and Fitch Ratings (Fitch) or Baa or better by Moody's Investors Service, Inc. (Moody's).
NON-INVESTMENT GRADE DEBT SECURITIES are higher risk, lower quality securities, often referred to as "junk bonds," and are considered speculative. They are rated below BBB by S&P and Fitch or below Baa by Moody's.
ADRS are securities that represent an ownership interest in a foreign security. They are generally issued by a U.S. bank to U.S. buyers as a substitute for direct ownership of a foreign security and are traded on U.S. exchanges.
"SMALL CAP," "MID CAP" AND "LARGE CAP" COMPANIES. Generally companies are categorized as follows:
o A small cap company has a market capitalization of less than $1.5
billion.
o A mid cap company has a market capitalization of between $1.5
billion and $10 billion.
o A large cap company has a market capitalization of more than $10
billion
UNDERVALUED STOCKS. A stock is considered undervalued if the sub-advisor believes it should be trading at a higher price than it is at the time of purchase. Factors considered may include:
o Price relative to earnings
o Price relative to cash flow
o Price relative to financial strength
EMERGING GROWTH COMPANIES include:
o Companies that the sub-advisor believes may have earnings that grow
faster than the U.S. economy in general due to new products,
management changes at the company or economic shocks such as high
inflation or sudden increases or decreases in interest rates
o Companies that the sub-advisor believes have unrecognized asset
values, undervalued growth or emerging growth
o Companies undergoing a turnaround
THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS ARE LISTED BELOW:
MARKET RISK. A fund that invests in common stocks is subject to stock market risk. Stock prices in general may decline over short or even extended periods, regardless of the success or failure of a particular company's operations. Stock markets tend to run in cycles, with periods when stock prices generally go up and periods when they generally go down. In addition, stocks fall into three broad market capitalization categories - large cap, mid cap and small cap. Investing primarily in one category carries the risk that due to market conditions, that category may be out of favor. For example, if valuations of large cap companies appear to be greatly out of proportion to the valuations of small or mid cap companies, investors may migrate to the stocks of small and mid-sized companies, causing a fund that invests in these companies to increase in value more rapidly than a fund that invests in larger, fully-valued companies. The price of stocks tends to go up and down more than the price of bonds.
o Small Cap Companies. Small cap stock risk is the risk that stocks of smaller companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Small companies may have limited product lines or financial resources, or may be dependent upon a small or inexperienced management group. In addition, small cap stocks typically are traded in lower volume, and their issuers typically are subject to greater degrees of changes in their earnings and prospects.
o Mid Cap Companies. Mid cap stock risk is the risk that stocks of mid-sized companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Mid-sized companies may have limited product lines or financial resources, and may be dependent upon a particular niche of the market.
o Large Cap Companies. Large cap stock risk is the risk that stocks of larger companies may underperform relative to those of small and mid-sized companies. Larger, more established companies may be unable to respond quickly to new competitive challenges, such as changes in technology and consumer tastes. Many larger companies may not be able to attain the high growth rate of successful smaller companies, especially during extended periods of economic expansion.
o Emerging Growth Companies. Investment in emerging growth companies is subject to enhanced risks because these companies generally have limited product lines, markets or financial resources and often exhibit a lack of management depth. These securities can be difficult to sell and are usually more volatile than securities of larger, more established companies.
o Technology Securities. The value of technology securities may fluctuate dramatically and technology securities may be subject to greater than average financial and market risk. Investments in the high technology sector include the risk that certain products may be subject to competitive pressures and aggressive pricing and may become obsolete and the risk that new products will not meet expectations or even reach the market.
NON-DIVERSIFICATION RISK. If a Fund is non-diversified, it may invest a significant percentage of its assets in the securities of a single company. Because the Fund's holdings may be concentrated in a single company, the Fund may be more sensitive to any single economic, business, political or regulatory occurrence than a diversified fund.
INVESTMENT STYLE RISK. Different investment styles tend to shift in and out of favor depending upon market and economic conditions as well as investor sentiment. A Fund may outperform or underperform other funds that employ a different investment style. Examples of different investment styles include growth and value investing. Growth stocks may be more volatile than other stocks because they are more sensitive to investor perceptions of the issuing company's growth of earnings potential. Also, since growth companies usually invest a high portion of earnings in their business, growth stocks may lack the dividends of some value stocks that can cushion stock prices in a falling market. Growth oriented funds may underperform when value investing is in favor. Value stocks are those which are undervalued in comparison to their peers due to adverse business developments or other factors. Value investing carries the risk that the market will not recognize a security's inherent value for a long time, or that a stock judged to be undervalued may actually be appropriately priced or overvalued. Value oriented funds may underperform when growth investing is in favor.
OTHER RISKS OF INVESTING IN THE FUNDS ARE LISTED BELOW:
DEBT SECURITY RISK. A Fund that invests in debt securities is subject to the risk that the market value of the debt securities will decline because of rising interest rates. The price of debt securities is generally linked to the prevailing market interest rates. In general, when interest rates rise, the price of debt securities falls, and when interest rates fall, the price of debt securities rises. The price volatility of a debt security also depends on its maturity. Generally, the longer the maturity of a debt security, the greater its sensitivity to changes in interest rates. To compensate investors for this higher risk, debt securities with longer maturities generally offer higher yields than debt securities with shorter maturities.
The debt securities in a Fund's portfolio are subject to credit risk. Credit risk is the possibility that an issuer will fail to make timely payments of interest or principal, when due. Securities rated in the lowest category of investment grade securities have some risky characteristics and changes in economic conditions are more likely to cause issuers of these securities to be unable to make payments.
o NON-INVESTMENT GRADE DEBT SECURITIES. Non-investment grade debt securities are sometimes referred to as "junk bonds" and are very risky with respect to their issuers' ability to make payments of interest and principal. There is a high risk that a Fund that invests in non-investment grade debt securities could suffer a loss caused by the default of an issuer of such securities. Part of the reason for this high risk is that, in the event of a default or bankruptcy, holders of non-investment grade debt securities generally will not receive payments until the holders of all other debt have been paid. In addition, the market for non-investment grade debt securities has, in the past, had more frequent and larger price changes than the markets for other securities. Non-investment grade debt securities can also be more difficult to sell for good value.
FOREIGN RISK. Investing in foreign securities poses unique risks such as fluctuation in currency exchange rates, market illiquidity, price volatility, high trading costs, difficulties in settlement, regulations on stock exchanges, limits on foreign ownership, less stringent accounting, reporting and disclosure requirements, and other considerations. Diplomatic, political or economic developments, including nationalization or appropriation, could affect investments in foreign securities. In the past, equity and debt instruments of foreign markets have had more frequent and larger price changes than those of U.S. markets.
THE FUNDS' MANAGEMENT
Touchstone Advisors is responsible for selecting each Fund's sub-advisor, subject to approval by the Board of Trustees. Touchstone Advisors selects a sub-advisor that has shown good investment performance in its areas of expertise. Touchstone Advisors considers various factors in evaluating a Fund's sub-advisor, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over 5 years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength
o Quality of service
Touchstone Advisors will also continually monitor the performance of the Funds' sub-advisors through various analyses and through in-person, telephone and written consultations with the sub-advisors. Touchstone Advisors discusses its expectations for performance with the sub-advisor. Touchstone Advisors provides written evaluations and recommendations to the Board of Trustees, including whether or not a sub-advisor's contract should be renewed, modified or terminated.
Touchstone Advisors has been registered as an investment advisor under the Investment Advisers Act of 1940, as amended, since 1994. As of December 31, 2003, Touchstone Advisors had approximately $2.6 billion in assets under management.
The Trust and Touchstone Advisors have applied for, and the Securities and Exchange Commission has granted, an exemptive order that permits the Trust or Touchstone Advisors, under certain conditions, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. The Funds must still obtain shareholder approval of any sub-advisory agreement with a sub-advisor affiliated with the Trust or Touchstone Advisors other than by reason of serving as a sub-advisor to one or more Touchstone Funds. Shareholders of a Fund will be notified of any changes in its sub-advisor.
Touchstone Advisors is also responsible for running all of the operations of the Funds, except for those that are subcontracted to the sub-advisors, custodian, transfer and accounting agent and administrator. Each Fund pays Touchstone Advisors a fee for its services. Out of this fee Touchstone Advisors pays the Fund sub-advisor a fee for its services. The fee paid to Touchstone Advisors by each Fund during its most recent fiscal year is shown in the table below:
-------------------------------------------------------------------------------- Value Plus Fund 0.75% of average daily net assets Enhanced 30 Fund 0.65% of average daily net assets Growth Opportunities Fund 0.91% of average daily net assets -------------------------------------------------------------------------------- |
FORT WASHINGTON INVESTMENT ADVISORS, INC. (FORT WASHINGTON)
420 East Fourth Street, Cincinnati, OH 45202
Fort Washington has been registered as an investment advisor since 1990 and provides investment advisory services to individuals, institutions, mutual funds and variable annuity products. Fort Washington has managed the Fund since its inception.
John C. Holden, CFA, and Bradley A. Reed, CFA, are primarily responsible for managing the Fund. Mr. Holden joined Fort Washington in 1997 and is Vice President and Senior Portfolio Manager. Mr. Reed joined Fort Washington in 1999 and is a Senior Research Manager. Prior to joining Fort Washington, Mr. Reed was a Management Associate with the Western & Southern Financial Group. Mr. Holden has managed the Fund since 1998 and Mr. Reed has managed the Fund since 2004.
Fort Washington is an affiliate of Touchstone Advisors. Therefore, Touchstone Advisors may have a conflict of interest when making decisions to keep Fort Washington as the Fund's sub-advisor. The Board of Trustees reviews Touchstone Advisors' decisions, with respect to the retention of Fort Washington, to reduce the possibility of a conflict of interest situation.
TODD INVESTMENT ADVISORS, INC. (TODD)
101 South Fifth Street, Suite 3160, Louisville, KY 40202
Todd has been registered as an investment advisor since 1967 and provides investment advisory services to individual and institutional clients. Todd has managed the Fund since its inception.
Curtiss M. Scott, Jr., CFA, has primary responsibility for the day-to-day management of the Fund and has managed the Fund since its inception. Mr. Scott joined Todd in 1996 and is the Senior Equity Portfolio Manager. He has 25 years of experience as a large cap portfolio manager. Mr. Scott is supported by Robert P. Bordogna, President and Chief Executive Officer of Todd, Bosworth M. Todd, founder of Todd, and John J. White, CFA, Director of Research and Portfolio Manager of Todd.
Todd is an affiliate of Touchstone Advisors. Therefore, Touchstone Advisors may have a conflict of interest when making decisions to keep Todd as the Fund's sub-advisor. The Board of Trustees reviews Touchstone Advisors' decisions, with respect to the retention of Todd, to reduce the possibility of a conflict of interest situation.
Mastrapasqua has been registered as an investment advisor since 1993 and provides investment advisory services to individual and institutional clients.
Frank Mastrapasqua, Ph.D., Chairman and Chief Executive Officer of Mastrapasqua, and Thomas A. Trantum, CFA, President and Chief Operating Officer of Mastrapasqua, are primarily responsible for the day-to-day management of the Fund. Mr. Mastrapasqua and Mr. Trantum have served as portfolio managers for Mastrapasqua since 1993 and have been managing the Fund since its inception.
VALUE PLUS FUND
Fort Washington 0.45% of average daily net assets ENHANCED 30 FUND Todd 0.25% of average daily net assets GROWTH OPPORTUNITIES FUND Mastrapasqua 0.51% of average daily net assets -------------------------------------------------------------------------------- |
CHOOSING A CLASS OF SHARES
Each Fund offers Class A shares, Class B shares and Class C shares. Each class of shares has different sales charges and distribution fees. The amount of sales charges and distribution fees you pay will depend on which class of shares you decide to purchase.
The following table shows the amount of front-end sales charge you will pay on purchases of Class A shares. The amount of front-end sales charge is shown as a percentage of (1) offering price and (2) the net amount invested after the charge has been subtracted. Note that the front-end sales charge gets lower as your investment amount gets larger.
------------------------------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF
AMOUNT OF YOUR INVESTMENT OFFERING PRICE NET AMOUNT INVESTED
======================================================================================================
Under $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.95% 3.04%
$500,000 but less than $1 million 2.25% 2.30%
$1 million or more 0.00% 0.00%
------------------------------------------------------------------------------------------------------
|
REDUCED CLASS A SALES CHARGE. You may purchase shares at a reduced sales charge through programs such as aggregation, letter of intent and right of accumulation.
o Aggregation. In order to qualify for a reduced sales charge through the aggregation program, you must inform your financial advisor or Touchstone of any other investments that you, your spouse and your children under the age of 21 have in the Touchstone Funds. This includes, for example, investments held in a retirement account, an employee benefit plan or with a financial advisor other than the one handling your current purchase. Touchstone will credit the combined value (at the current offering price) of all of your eligible accounts to determine if your current purchase qualifies for a reduced sales charge.
o Letter of Intent. You may use a letter of intent to qualify for a reduced sales charge if you plan to invest at least $50,000 (excluding any reinvestment of dividends and capital gains distributions) during the next 13 months in Class A shares of any Touchstone Fund sold with a front-end sales charge. A letter of intent is a letter you sign whereby, based upon your representation to purchase at least $50,000 in Class A shares of the Touchstone Funds over the next thirteen months, the Fund agrees to provide you the reduced sales charge indicated in the above chart. The minimum initial investment under a letter of intent is $10,000. You are not obligated to purchase additional shares if you complete a letter of intent. However, if you do not buy enough shares to qualify for the projected level of sales charge by the end of the 13-month period (or when you sell your shares, if earlier), your sales charges will be recalculated to reflect your actual purchase level. During the term of the letter of intent, shares representing 5% of your intended purchase will be held in escrow. If you do not purchase enough shares during the 13-month period to qualify for the projected reduced sales charge, the additional sales charge will be deducted from your escrow account. If you have purchased Class A shares of any Touchstone Fund within 90 days prior to signing a letter of intent, they may be included as part of your intended purchase.
o Right of Accumulation. A purchaser of Class A shares of a Fund has the right to combine the cost or current NAV (whichever is higher) of his existing Class A shares of the load funds distributed by Touchstone with the amount of his current purchases in order to take advantage of the reduced sales charges set forth in this Prospectus. The purchaser or his dealer must notify the transfer agent that an investment qualifies for a reduced sales charge. The reduced charge will be granted upon confirmation of the purchaser's holdings by the transfer agent. A purchaser includes an individual and his immediate family members, purchasing shares for his or their own account; or a trustee or other fiduciary purchasing shares for a single fiduciary account although more than one beneficiary is involved; or employees of a common employer, provided that economies of scale are realized through remittances from a single source and quarterly confirmation of such purchases; or an organized group, provided that the purchases are made through a central administration, or a single dealer, or by other means which result in economy of sales effort or expense.
Class B shares of the Funds are sold at NAV without an initial sales charge so that the full amount of your purchase payment may be immediately invested in the Funds. A CDSC will be charged if you redeem Class B shares within 6 years after you purchased them. The amount of the CDSC will depend on how long you have held your shares, as set forth in the following table:
--------------------------------------------------------------------------------
CDSC AS A % OF
YEAR SINCE PURCHASE PAYMENT MADE AMOUNT SUBJECT TO CHARGE
================================================================================
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 1.00%
Seventh and thereafter* None
--------------------------------------------------------------------------------
|
* Class B shares will automatically convert to Class A shares after they have been held for approximately 8 years.
CONVERSION TO CLASS A SHARES. Class B shares will convert automatically to Class A shares in the month of your 8-year anniversary date or in the beginning of the 9th year after the date of your original purchase of those shares. The conversion is based on the relative NAVs of the shares of the two classes on the conversion date and no sales charge will be imposed. Class B shares you have acquired through automatic reinvestment of dividends or capital gains will be converted in proportion to the total number of Class B shares you have purchased and own. Since the Rule 12b-1 distribution fees for Class A shares are lower than for Class B shares, converting to Class A shares will lower your expenses.
Class C shares of the Funds are sold at NAV without an initial sales charge so that the full amount of your purchase payment may be immediately invested in the Funds. A CDSC of 1.00% will be charged on Class C shares redeemed within 1 year after you purchased them.
Touchstone Securities Inc. (Touchstone), the Trust's principal underwriter, at its expense (from a designated percentage of its income) currently provides additional compensation to certain dealers. Touchstone pursues a focused distribution strategy with a limited number of dealers who have sold shares of a Fund or other Touchstone Funds. Additional compensation is limited to such dealers. Touchstone reviews and makes changes to the focused distribution strategy on a continual basis. These payments are generally based on a pro rata share of a dealer's sales. Touchstone may also provide compensation in connection with conferences, sales or training programs for employees, seminars for the public, advertising and other dealer-sponsored programs.
INVESTING WITH TOUCHSTONE
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well requires a plan. We recommend that you meet with your financial advisor to plan a strategy that will best meet your financial goals.
For more information about how to purchase shares, telephone Touchstone (Nationwide call toll-free 1.800.543.0407).
! INVESTOR ALERT: Each Touchstone Fund reserves the right to reject any purchase request, including exchanges from other Touchstone Funds, that it regards as disruptive to efficient portfolio management. For example, a purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor.
You should read this Prospectus carefully and then determine how much you want to invest. Check below to find the minimum investment requirements and ways to purchase shares in the Funds.
--------------------------------------------------------------------------------
Initial Additional
Investment Investment
--------------------------------------------------------------------------------
REGULAR ACCOUNT $1,000 $50
RETIREMENT PLAN ACCOUNT OR CUSTODIAL ACCOUNT UNDER $ 250 $50
A UNIFORM GIFTS/TRANSFERS TO MINORS ACT (UGTMA)
INVESTMENTS THROUGH THE AUTOMATIC INVESTMENT PLAN $ 50 $50
--------------------------------------------------------------------------------
o INVESTOR ALERT: Touchstone may change these initial and additional
investment minimums at any time.
|
HOUSEHOLDING POLICY. The Funds will send one copy of prospectuses and shareholder reports to households containing multiple shareholders with the same last name. This process, known as "householding," reduces costs and provides a convenience to shareholders. If you share the same last name and address with another shareholder and you prefer to receive separate prospectuses and shareholder reports, telephone Touchstone toll-free at 1.800.543.0407 and we will begin separate mailings to you within 30 days of your request.
If you or others in your household invest in the Funds through a broker or other financial institution, you may receive separate prospectuses and shareholder reports, regardless of whether or not you have consented to householding on your investment application.
Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means for you: When you open an account, we will ask for your name, residential address, date of birth, government identification number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If we do not receive these required pieces of information, there may be a delay in processing your investment request, which could subject your investment to market risk. If we are unable to immediately verify your identity, the Fund may restrict further investment until your identity is verified. However, if we are unable to verify your identity, the Fund reserves the right to close your account without notice and return your investment to you at the price determined as of 4:00 p.m. Eastern time on the day that your account is closed. If we close your account because we are unable to verify your identity, your investment will be subject to market fluctuation, which could result in a loss of a portion of your principal investment.
For information about how to purchase shares, telephone Touchstone (Nationwide call toll-free 1.800.543.0407).
You can invest in the Funds in the following ways:
BY MAIL OR THROUGH YOUR FINANCIAL ADVISOR
o Please make your check (drawn on a U.S. bank and payable in U.S.
dollars) payable to the Touchstone Funds. We do not accept third
party checks.
o Send your check with the completed investment application by regular
mail to Touchstone, P.O. Box 5354, Cincinnati, Ohio 45201-5354, or
by overnight mail to Touchstone, 221 East Fourth Street, Suite 300,
Cincinnati, Ohio 45202-4133.
o Your application will be processed subject to your check clearing.
If your check is returned for insufficient funds or uncollected
funds, you may be charged a fee and you will be responsible for any
resulting loss to the Fund.
o You may also open an account through your financial advisor.
o We price direct purchases in the Funds based upon the next
determined public offering price (NAV plus any applicable sales
charge) after your order is received. Direct purchase orders
received by Touchstone, or its authorized agent, by the close of the
regular session of trading on the New York Stock Exchange (NYSE),
generally 4:00 p.m. Eastern time, are processed at that day's public
offering price. Direct investments received by Touchstone, or its
authorized agent, after the close of the regular session of trading
on the NYSE, generally 4:00 p.m. Eastern time, are processed at the
public offering price next determined on the following business day.
It is the responsibility of Touchstone's authorized agent to
transmit orders that will be received by Touchstone in proper form
and in a timely manner.
BY EXCHANGE
o You may exchange shares of the Funds for shares of the same class of
another Touchstone Fund at NAV. You may also exchange Class A or
Class C shares of the Funds for Class A shares of any Touchstone
money market fund.
o You do not have to pay a fee for your exchange.
o Shares otherwise subject to a CDSC will not be charged a CDSC in an
exchange. However, when you redeem the shares acquired through the
exchange, the shares you redeem may be subject to a CDSC, depending
on when you originally purchased the exchanged shares. For purposes
of computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not be
affected by any exchange.
o If you exchange Class C shares for Class A shares of any Touchstone
money market fund, the amount of time you hold shares of the money
market fund will not be added to the holding period of your original
shares for the purpose of calculating the CDSC, if you later redeem
the exchanged shares. However, if you exchange back into your
original Class C shares, the prior holding period of your Class C
shares will be added to your current holding period of Class C
shares in calculating the CDSC.
o You should review the disclosure provided in the Prospectus relating
to the exchanged-for shares carefully before making an exchange of
your Fund shares.
THROUGH RETIREMENT PLANS
o You may invest in the Funds through various retirement plans. These include individual retirement plans and employer sponsored retirement plans, such as defined benefit and defined contribution plans.
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE IRAs)
o Spousal IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Coverdell Education Savings Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b)(7) Custodial Accounts
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401(k) plans, profit sharing
plans and money purchase plans)
o 457 plans
OOO SPECIAL TAX CONSIDERATION
To determine which type of retirement plan is appropriate for you, please contact your tax advisor.
For further information about any of the plans, agreements, applications and annual fees, contact Touchstone (Nationwide call toll-free 1.800.543.0407) or your financial advisor.
PURCHASES WITH SECURITIES. Shares may be purchased by tendering payment in-kind in the form of marketable securities, including but not limited to, shares of common stock, provided the acquisition of such securities is consistent with the applicable Fund's investment goal and is otherwise acceptable to the Advisor.
o Complete the investment form provided at the bottom of a recent
account statement.
o Make your check (drawn on a U.S. bank and payable in U.S. dollars)
payable to the Touchstone Funds.
o Write your account number on the check.
o Either: (1) Mail the check with the investment form to Touchstone;
or (2) Mail the check directly to your financial advisor at the
address printed on your account statement. Your financial advisor is
responsible for forwarding payment promptly to Touchstone.
o If your check is returned for insufficient funds or uncollected
funds, you may be charged a fee and you will be responsible for any
resulting loss to the Fund.
BY WIRE
o Purchases in the Funds will be processed at that day's NAV (or
public offering price, if applicable) if Touchstone receives a
properly executed wire by the close of the regular session of
trading on the NYSE, generally 4:00 p.m. Eastern time, on a day when
the NYSE is open for regular trading.
o Contact Touchstone or your financial advisor for further
instructions.
o Contact your bank and ask it to wire federal funds to Touchstone.
Specify your name and account number.
o Banks may charge a fee for handling wire transfers.
BY EXCHANGE
o You may add to your account by exchanging shares from an
unaffiliated mutual fund or from another Touchstone Fund.
o For information about how to exchange shares among the Touchstone
Funds, see "Opening an Account - By exchange" in this Prospectus.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments in a Fund of $50 or more to be processed electronically from a checking or savings account. You will need to complete the appropriate section in the investment application to do this.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be automatically reinvested in the Fund that pays them or in another Touchstone Fund within the same class of shares without a fee or sales charge. Dividends and capital gains will be reinvested in the Fund that pays them, unless you indicate otherwise on your investment application. You may also choose to have your dividends or capital gains paid to you in cash.
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security checks, private payroll checks, pension pay outs or any other pre-authorized government or private recurring payments in our Funds. This occurs on a monthly basis and the minimum investment is $50.
DOLLAR COST AVERAGING. Our dollar cost averaging program allows you to diversify your investments by investing the same amount on a regular basis. You can set up periodic automatic exchanges of at least $50 from one Touchstone Fund to any other. The applicable sales charge, if any, will be assessed.
PROCESSING ORGANIZATIONS. You may also purchase shares of the Funds through a "processing organization," (e.g., a mutual fund supermarket) which is a broker-dealer, bank or other financial institution that purchases shares for its customers. Some of the Touchstone Funds have authorized certain processing organizations to receive purchase and sales orders on their behalf. Before investing in the Funds through a processing organization, you should read any materials provided by the processing organization together with this Prospectus.
When shares are purchased this way, there may be various differences. The processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on the
Funds' behalf
Touchstone considers a purchase or sales order as received when an authorized processing organization, or its authorized designee, receives the order in proper form. These orders will be priced based on the Fund's NAV (or offering price, if applicable) next computed after such order is received in proper form. It is the responsibility of the processing organization to transmit properly completed orders so that they will be received by Touchstone in a timely manner.
Shares held through a processing organization may be transferred into your name following procedures established by your processing organization and Touchstone. Certain processing organizations may receive compensation from the Funds, Touchstone, Touchstone Advisors or their affiliates.
BY TELEPHONE
o You can sell or exchange your shares over the telephone, unless you have specifically declined this option. If you do not wish to have this ability, you must mark the appropriate section of the investment application. You may only sell shares over the telephone if the amount is less than $100,000.
o To sell your Fund shares by telephone, call Touchstone at
1.800.543.0407.
o Shares held in IRA accounts and qualified retirement plans cannot be
sold by telephone.
o If we receive your sale request before the close of the regular
session of trading on the NYSE, generally 4:00 p.m. Eastern time, on
a day when the NYSE is open for regular trading, the sale of your
shares will be processed at the next determined NAV on that day.
Otherwise it will occur on the next business day.
o Interruptions in telephone service could prevent you from selling
your shares by telephone when you want to. When you have difficulty
making telephone sales, you should mail to Touchstone (or send by
overnight delivery), a written request for the sale of your shares.
o In order to protect your investment assets, Touchstone will only
follow instructions received by telephone that it reasonably
believes to be genuine. However, there is no guarantee that the
instructions relied upon will always be genuine and Touchstone will
not be liable, in those cases. Touchstone has certain procedures to
confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case, it may be liable for
any losses due to unauthorized or fraudulent instructions. Some of
these procedures may include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account
shown on Touchstone's records
o Mailing checks only to the account address shown on
Touchstone's records
o Directing wires only to the bank account shown on Touchstone's
records
o Providing written confirmation for transactions requested by
telephone
o Tape recording instructions received by telephone
BY MAIL
o Write to Touchstone.
o Indicate the number of shares or dollar amount to be sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your investment
application.
o You may be required to have your signature guaranteed (See
"Signature Guarantees" in this Prospectus for more information).
BY WIRE
o Complete the appropriate information on the investment application.
o If your proceeds are $1,000 or more, you may request that Touchstone
wire them to your bank account.
o You may be charged a fee by Touchstone's custodian or your bank.
o Redemption proceeds will only be wired to a commercial bank or
brokerage firm in the United States.
o Your redemption proceeds may be deposited without a charge directly
into your bank account through an ACH transaction. Contact
Touchstone for more information.
THROUGH A SYSTEMATIC WITHDRAWAL PLAN
o You may elect to receive, or send to a third party, withdrawals of
$50 or more if your account value is at least $5,000.
o Withdrawals can be made monthly, quarterly, semiannually or
annually.
o There is no special fee for this service.
o There is no minimum amount required for retirement plans.
OOO SPECIAL TAX CONSIDERATION
Systematic withdrawals may result in the sale of your shares at a loss or may result in taxable investment gains.
THROUGH YOUR FINANCIAL ADVISOR
o You may also sell shares by contacting your financial advisor, who
may charge you a fee for this service. Shares held in street name
must be sold through your financial advisor or, if applicable, the
processing organization.
o Your financial advisor is responsible for making sure that sale
requests are transmitted to Touchstone in proper form and in a
timely manner.
OOO SPECIAL TAX CONSIDERATION
Selling your shares may cause you to incur a taxable gain or loss.
o INVESTOR ALERT: Unless otherwise specified, proceeds will be sent to the record owner at the address shown on Touchstone's records.
The CDSC will not apply to redemptions of shares you received through reinvested dividends or capital gains distributions and may be waived under certain circumstances described below. The CDSC will be assessed on the lesser of your shares' NAV at the time of redemption or the time of purchase. The CDSC is paid to Touchstone to reimburse expenses incurred in providing distribution-related services to the Funds in connection with the sale of shares.
No CDSC is applied if:
o The redemption is due to the death or post-purchase disability of a
shareholder
o The redemption is from a systematic withdrawal plan and represents
no more than 10% of your annual account value
o The redemption is a benefit payment made from a qualified retirement
plan, unless the redemption is due to termination of the plan or
transfer of the plan to another financial institution
When we determine whether a CDSC is payable on a redemption, we assume that:
o The redemption is made first from amounts not subject to a CDSC;
then
o From the earliest purchase payment(s) that remain invested in the
Fund
The SAI contains further details about the CDSC and the conditions for waiving the CDSC.
o Proceeds from the sale of shares of $100,000 or more
o Proceeds to be paid when information on your investment application
has been changed within the last 30 days (including a change in your
name or your address, or the name or address of a payee)
o Proceeds are being sent to an address other than the address of
record
o Proceeds or shares are being sent/transferred from a joint account
to an individual's account
o Changing wire or ACH instructions or sending proceeds via wire or
ACH when instructions have been added within 30 days of your
redemption request
o Proceeds or shares are being sent/transferred between accounts with
different account registrations
PROCEEDS SENT TO FINANCIAL ADVISORS. Proceeds that are sent to your financial advisor will not usually be reinvested for you unless you provide specific instructions to do so. Therefore, the financial advisor may benefit from the use of your money.
FUND SHARES PURCHASED BY CHECK. If you purchase Fund shares by personal check, the proceeds of a sale of those shares will not be sent to you until the check has cleared, which may take up to 15 days. If you need your money sooner, you should purchase shares by bank wire.
REINSTATEMENT PRIVILEGE. You may, within 90 days of redemption, reinvest all or part of your sale proceeds by sending a written request and a check to Touchstone. If the redemption proceeds were from the sale of your Clas A or Class B shares, you can reinvest into Class A shares of any Touchstone Fund at NAV. Reinvestment will be at the NAV next calculated after Touchstone receives your request. If the proceeds were from the sale of your Class C shares, you can reinvest those proceeds into Clas C shares of any Touchstone Fund. If you paid a CDSC on the reinstated amount, you will not be subject to a CDSC if you later redeem that amount.
OOO SPECIAL TAX CONSIDERATION
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
LOW ACCOUNT BALANCES. If your balance falls below the minimum amount required for your account, based on actual amounts you have invested (as opposed to a reduction from market changes), your account may be subject to an annual account maintenance fee or Touchstone may sell your shares and send the proceeds to you. This involuntary sale does not apply to retirement accounts or custodian accounts under the Uniform Gifts/Transfers to Minors Act (UGTMA). Touchstone will notify you if your shares are about to be sold and you will have 30 days to increase your account balance to the minimum amount.
DELAY OF PAYMENT. It is possible that the payment of your sale proceeds could be postponed or your right to sell your shares could be suspended during certain circumstances. These circumstances can occur:
o When the NYSE is closed for other than customary weekends and
holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a sub-advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of a Fund's net assets
o During any other time when the SEC, by order, permits.
REDEMPTION IN KIND. Under unusual circumstances, when the Board of Trustees deems it appropriate, a Fund may make payment for shares redeemed in portfolio securities of the Fund taken at current value.
Each Fund's share price (also called NAV) and offering price (NAV plus a sales
charge, if applicable) is determined as of the close of trading (normally 4:00
p.m. Eastern time) every day the NYSE is open. Each Fund calculates its NAV per
share, generally using market prices, by dividing the total value of its net
assets by the number of shares outstanding. Shares are purchased or sold at the
next offering price determined after your purchase or sale order is received in
proper form by Touchstone or its authorized agent.
The Funds' investments are valued based on market value or, if no market value is available, based on fair value as determined by the Board of Trustees (or under their direction). All assets and liabilities initially expressed in foreign currency values will be converted into U.S. dollar values. Some specific pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost.
o Securities mainly traded on a U.S. exchange are valued at the last
sale price on that exchange or, if no sales occurred during the day,
at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However,
if an event that may change the value of a security occurs after the
time that the closing value on the non-U.S. exchange was determined,
the security may be priced based on fair value. This may cause the
value of the security on the books of the Fund to be significantly
different from the closing value on the non-U.S. exchange and may
affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when a Fund does not
price its shares, a Fund's NAV may change on days when shareholders
will not be able to buy or sell shares.
DISTRIBUTIONS AND TAXES
OOO SPECIAL TAX CONSIDERATION
You should consult your tax advisor to address your own tax situation.
Each Fund intends to distribute to its shareholders substantially all of its income and capital gains. Each Fund's dividends are distributed and paid annually. Distributions of any capital gains earned by a Fund will be made at least annually.
ORDINARY INCOME. Income and short-term capital gains that are distributed to you are taxable as ordinary income for federal income tax purposes regardless of how long you have held your Fund shares. To the extent that underlying income of a Fund consists of qualified dividend income, income distributions by the Fund may be subject to a maximum federal income tax rate of 15% for individuals and may qualify for the dividends received deduction for corporations.
LONG-TERM CAPITAL GAINS. Long-term capital gains distributed to you are taxable as long-term capital gains for federal income tax purposes regardless of how long you have held your Fund shares. The maximum individual tax rate on net long-term capital gains is 15%.
OOO SPECIAL TAX CONSIDERATION
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
BACKUP WITHHOLDING. A Fund may be required to withhold U.S. federal income tax on all taxable distributions and sales payable to shareholders who fail to provide their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The current backup withholding rate is 28%.
STATEMENTS AND NOTICES. You will receive an annual statement outlining the tax status of your distributions. You will also receive written notices of certain foreign taxes and distributions paid by the Funds during the prior taxable year.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's financial performance during the past five years (or, if shorter, during its operations). Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate an investor would have earned or lost on an investment in a Fund (assuming reinvestment of all dividends and distributions). The information has been audited by Ernst & Young LLP, whose report, along with the Funds' financial statements, is included in the Annual Report, which is available upon request.
=======================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-----------------------------------------------------------------------------------------------------------------------
THREE
YEAR YEAR YEAR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DEC. 31, DEC. 31,
2004 2003 2002 2001(A) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period ..... $ 7.45 $ 10.49 $ 10.27 $ 10.74 $ 11.77 $ 10.41
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income ................... 0.06 0.05 0.02 0.01 0.06 0.01
Net realized and unrealized gains
(losses) on investments .............. 2.69 (3.05) 0.22 (0.47) 0.12 1.60
-----------------------------------------------------------------------
Total from investment operations ........... 2.75 (3.00) 0.24 (0.46) 0.18 1.61
-----------------------------------------------------------------------
Less distributions:
Dividends from net investment income .... (0.06) (0.04) (0.02) (0.01) (0.06) (0.01)
Distributions from net realized gains ... -- -- -- -- (0.92) (0.24)
Return of capital ....................... -- -- -- -- (0.23) --
-----------------------------------------------------------------------
Total distributions ........................ (0.06) (0.04) (0.02) (0.01) (1.21) (0.25)
-----------------------------------------------------------------------
Net asset value at end of period ........... $ 10.14 $ 7.45 $ 10.49 $ 10.27 $ 10.74 $ 11.77
=======================================================================
Total return(B) ............................ 37.04% (28.59%) 2.34% (4.29%)(C) 1.91% 15.51%
=======================================================================
Net assets at end of period (000's) ........ $ 64,612 $ 46,113 $ 93,214 $ 51,442 $ 49,807 $ 31,808
=======================================================================
Ratio of net expenses to
average net assets ...................... 1.30% 1.30% 1.30% 1.30%(D) 1.30% 1.30%
Ratio of net investment income
to average net assets ................... 0.68% 0.58% 0.23% 0.37%(D) 0.51% 0.08%
Portfolio turnover ......................... 44% 58% 33% 48%(D) 83% 60%
|
(A) Effective after the close of business on December 31, 2000, the Fund changed its fiscal year-end to March 31.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Annualized.
=============================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-------------------------------------------------------------------------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002(A)
-------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period ................. $ 7.18 $ 10.18 $ 10.72
--------------------------------------------
Income (loss) from investment operations:
Net investment loss ................................. --(B) --(B) (0.01)
Net realized and unrealized gains (losses)
on investments ................................... 2.58 (2.96) (0.53)
--------------------------------------------
Total from investment operations ....................... 2.58 (2.96) (0.54)
--------------------------------------------
Dividends from net investment income ................... (0.03) (0.04) --
--------------------------------------------
Net asset value at end of period ....................... $ 9.73 $ 7.18 $ 10.18
============================================
Total return(C) ........................................ 36.04% (29.05%) (5.01%)(D)
============================================
Net assets at end of period (000's) .................... $ 753 $ 367 $ 130
============================================
Ratio of net expenses to average net assets ............ 2.05% 2.05% 2.05%(E)
Ratio of net investment loss to average net assets ..... (0.09%) (0.06%) (0.77%)(E)
Portfolio turnover rate ................................ 44% 58% 33%(E)
|
(A) Represents the period from the commencement of operations (May 1, 2001)
through March 31, 2002.
(B) Amount rounds to less than $0.01 per share.
(C) Total returns shown exclude the effect of applicable sales loads.
(D) Not annualized.
(E) Annualized.
======================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
----------------------------------------------------------------------------------------------------------------------
THREE
YEAR YEAR YEAR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DEC. 31, DEC. 31,
2004 2003 2002 2001(A) 2000 1999(B)
----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period .... $ 7.22 $ 10.18 $ 10.02 $ 10.50 $ 11.48 $ 10.26
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss .................... --(C) (0.02) (0.04) (0.01) (0.02) (0.07)
Net realized and unrealized gains
(losses) on investments ............. 2.59 (2.94) 0.20 (0.47) 0.19 1.53
-----------------------------------------------------------------------
Total from investment operations .......... 2.59 (2.96) 0.16 (0.48) 0.17 1.46
-----------------------------------------------------------------------
Less distributions:
Dividends from net investment income ... (0.03) -- -- -- -- --
Distributions from net realized gains .. -- -- -- -- (0.92) (0.24)
Return of capital ...................... -- -- -- -- (0.23) --
-----------------------------------------------------------------------
Total distributions ....................... (0.03) -- -- -- (1.15) (0.24)
-----------------------------------------------------------------------
Net asset value at end of period .......... $ 9.78 $ 7.22 $ 10.18 $ 10.02 $ 10.50 $ 11.48
=======================================================================
Total return(D) ........................... 35.89% (29.08%) 1.60% (4.57%)(E) 1.87% 14.24%
=======================================================================
Net assets at end of period (000's) ....... $ 1,867 $ 1,512 $ 2,548 $ 1,705 $ 2,011 $ 548
=======================================================================
Ratio of net expenses to
average net assets ..................... 2.05% 2.05% 2.05% 2.05%(F) 2.05% 2.05%
Ratio of net investment loss to
average net assets ........................ (0.05%) (0.15%) (0.51%) (0.33%)(F) (0.21%) (0.65%)
Portfolio turnover ........................ 44% 58% 33% 48%(F) 83% 60%
|
(A) Effective after the close of business on December 31, 2000, the Fund changed its fiscal year-end to March 31.
(B) Represents the period from the commencement of operations (January 1, 1999)
through December 31, 1999.
(C) Amount rounds to less than $0.01 per share.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Not annualized.
(F) Annualized.
======================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
----------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002 2001(A)
----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period ........ $ 6.71 $ 9.19 $ 8.90 $ 10.00
---------------------------------------------------------------
Income (loss) from investment operations:
Net investment income ...................... 0.07 0.06 0.06 0.05
Net realized and unrealized gains
(losses) on investments ................. 2.37 (2.46) 0.28 (1.10)
---------------------------------------------------------------
Total from investment operations .............. 2.44 (2.40) 0.34 (1.05)
---------------------------------------------------------------
Dividends from net investment income .......... (0.05) (0.08) (0.05) (0.05)
---------------------------------------------------------------
Net asset value at end of period .............. $ 9.10 $ 6.71 $ 9.19 $ 8.90
===============================================================
Total return(B) ............................... 36.41% (26.19%) 3.86% (10.57%)(C)
===============================================================
Net assets at end of period (000's) ........... $8,783 $ 6,109 $7,561 $ 6,208
===============================================================
Ratio of net expenses to average net assets 0.97%(D) 1.00% 1.00% 1.00%(E)
Ratio of net investment income to
average net assets ......................... 0.85%(D) 0.90% 0.70% 0.54%(E)
Portfolio turnover rate ....................... 10% 29% 9% 3%(E)
|
(A) Represents the period from the commencement of operations (May 1, 2000)
through March 31, 2001.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 1.00% and the ratio of net investment income to average net assets would have been 0.82%.
(E) Annualized.
===========================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
-----------------------------------------------------------------------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002(A)
-----------------------------------------------------------------------------------------------------------
Net asset value at beginning of period ........ $ 6.69 $ 9.13 $ 9.50
-----------------------------------------------
Income (loss) from investment operations:
Net investment income ...................... 0.01 0.01 0.02
Net realized and unrealized gains
(losses) on investments ................. 2.36 (2.45) (0.37)
-----------------------------------------------
Total from investment operations .............. 2.37 (2.44) (0.35)
-----------------------------------------------
Dividends from net investment income .......... (0.02) --(B) (0.02)
-----------------------------------------------
Net asset value at end of period .............. $ 9.04 $ 6.69 $ 9.13
===============================================
Total return(C) ............................... 35.37% (26.70%) (3.60%)(D)
===============================================
Net assets at end of period (000's) ........... $1,456 $ 729 $ 860
===============================================
Ratio of net expenses to average net assets ... 1.72%(E) 1.75% 1.75%(F)
Ratio of net investment income to
average net assets ......................... 0.10%(E) 0.18% 0.03%(F)
Portfolio turnover rate ....................... 10% 29% 9%(F)
|
(A) Represents the period from the commencement of operations (May 1, 2001)
through March 31, 2002.
(B) Amount rounds to less than $0.01 per share.
(C) Total returns shown exclude the effect of applicable sales loads.
(D) Not annualized.
(E) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 1.75% and the ratio of net investment income to average net assets would have been 0.07%.
(F) Annualized.
=====================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
---------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002 2001(A)
---------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period ........ $ 6.72 $ 9.13 $ 8.88 $ 10.00
---------------------------------------------------------------
Income (loss) from investment operations:
Net investment income ...................... 0.01 0.01 0.01 0.01
Net realized and unrealized gains
(losses) on investments ................. 2.37 (2.41) 0.25 (1.12)
---------------------------------------------------------------
Total from investment operations .............. 2.38 (2.40) 0.26 (1.11)
---------------------------------------------------------------
Dividends from net investment income .......... (0.02) (0.01) (0.01) (0.01)
---------------------------------------------------------------
Net asset value at end of period .............. $ 9.08 $ 6.72 $ 9.13 $ 8.88
===============================================================
Total return(B) ............................... 35.38% (26.32%) 3.00% (11.12%)(C)
===============================================================
Net assets at end of period (000's) ........... $2,260 $ 920 $ 900 $ 128
===============================================================
Ratio of net expenses to average net assets ... 1.72%(D) 1.74% 1.75% 1.73%(E)
Ratio of net investment income (loss) to
average net assets ......................... 0.13%(D) 0.18% (0.05%) (0.46%)(E)
Portfolio turnover rate ....................... 10% 29% 9% 3%(E)
|
(A) Represents the period from the commencement of operations (May 16, 2000)
through March 31, 2001.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 1.75% and the ratio of net investment income to average net assets would have been 0.10%.
(E) Annualized.
===================================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
-----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year ......... $ 12.70 $ 18.18 $ 19.97 $ 32.43 $ 17.50
---------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss ....................... (0.21) (0.19) (0.18) (0.13) (0.16)
Net realized and unrealized gains
(losses) on investments ................ 5.57 (5.29) (1.61) (12.33) 15.51
---------------------------------------------------------------------------------
Total from investment operations ............. 5.36 (5.48) (1.79) (12.46) 15.35
---------------------------------------------------------------------------------
Distributions from net realized gains ........ -- -- -- -- (0.42)
---------------------------------------------------------------------------------
Net asset value at end of year ............... $ 18.06 $ 12.70 $ 18.18 $ 19.97 $ 32.43
=================================================================================
Total return(A) .............................. 42.20% (30.14%) (8.96%) (38.42%) 88.88%
=================================================================================
Net assets at end of year (000's) ............ $117,605 $84,472 $121,791 $107,435 $79,066
=================================================================================
Ratio of net expenses to
average net assets ........................ 1.60% 1.83% 1.49% 1.54% 1.52%
Ratio of net investment loss to
average net assets ........................ (1.23%) (1.40%) (0.98%) (0.66%) (1.05%)
Portfolio turnover rate ...................... 47% 39% 52% 35% 44%
Amount of debt outstanding at
end of year (000's) ....................... n/a $ -- $ -- n/a n/a
Average daily amount of debt outstanding
during the year (000's)(B) ................ n/a $ 242 $ 24 n/a n/a
Average daily number of capital shares
outstanding during the year (000's)(B) .... n/a 8,916 8,481 n/a n/a
Average amount of debt per share
during the year (B) ....................... n/a $ 0.03 $ --(C) n/a n/a
|
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Based on fund level shares outstanding.
(C) Amount rounds to less than $0.01 per share.
============================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
------------------------------------------------------------------------------------------------------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002(A)
------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period ............. $12.13 $ 17.78 $ 22.74
-----------------------------------------------
Income (loss) from investment operations:
Net investment loss ............................. (0.38) (0.36) (0.17)
Net realized and unrealized gains (losses)
on investments ............................... 5.56 (5.29) (4.79)
-----------------------------------------------
Total from investment operations ................... 5.18 (5.65) (4.96)
-----------------------------------------------
Net asset value at end of period ................... $17.31 $ 12.13 $ 17.78
===============================================
Total return(B) .................................... 42.70% (31.78%) (21.81%)(C)
===============================================
Net assets at end of period (000's) ................ $3,608 $ 2,463 $ 3,380
===============================================
Ratio of net expenses to average net assets ........ 2.84% 3.16% 2.37%(D)
Ratio of net investment loss to average net assets . (2.45%) (2.71%) (1.93%)(D)
Portfolio turnover rate ............................ 47% 39% 52%(D)
Amount of debt outstanding at end of period (000's) n/a $ -- $ --
Average daily amount of debt outstanding
during the period (000's)(E) .................... n/a $ 242 $ 24
Average daily number of capital shares outstanding
during the period (000's)(E) .................... n/a 8,916 8,481
Average amount of debt per share during the period(E) n/a $ 0.03 $ --(F)
|
(A) Represents the period from the commencement of operations (May 1, 2001)
through March 31, 2002.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Annualized.
(E) Based on fund level shares outstanding.
(F) Amount rounds to less than $0.01 per share.
================================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002 2001 2000(A)
--------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period .......... $ 12.17 $ 17.78 $ 19.74 $ 32.30 $ 18.65
------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss .......................... (0.37) (0.36) (0.32) (0.19) (0.11)
Net realized and unrealized gains
(losses) on investments ................... 5.59 (5.25) (1.64) (12.37) 14.18
------------------------------------------------------------------------
Total from investment operations ................ 5.22 (5.61) (1.96) (12.56) 14.07
------------------------------------------------------------------------
Dividends from net investment income ............ -- -- -- -- (0.42)
------------------------------------------------------------------------
Net asset value at end of period ................ $ 17.39 $ 12.17 $ 17.78 $ 19.74 $ 32.30
========================================================================
Total return(B) ................................. 42.89% (31.55%) (9.93%) (38.89%) 76.52% (C)
========================================================================
Net assets at end of period (000's) ............. $28,470 $21,727 $40,967 $36,475 $10,794
========================================================================
Ratio of net expenses to average net assets ..... 2.60% 2.87% 2.31% 2.19% 2.33%(D)
Ratio of net investment loss to
average net assets ........................... (2.21%) (2.42%) (1.78%) (1.31%) (1.77%)(D)
Portfolio turnover rate ......................... 47% 39% 52% 35% 44%(D)
Amount of debt outstanding at
end of period (000's) ........................ n/a $ -- $ -- n/a n/a
Average daily amount of debt outstanding
during the period (000's)(E) ................. n/a $ 242 $ 24 n/a n/a
Average daily number of capital shares
outstanding during the
period (000's)(E) ............................ n/a 8,916 8,481 n/a n/a
Average amount of debt per share
during the period(E) ......................... n/a $ 0.03 $ --(F) n/a n/a
|
(A) Represents the period from the commencement of operations (August 2, 1999)
through March 31, 2000.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Annualized.
(E) Based on fund level shares outstanding.
(F) Amount rounds to less than $0.01 per share.
TOUCHSTONE INVESTMENTS
DISTRIBUTOR
Touchstone Securities, Inc.
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202-4133
800.638.8194
www.touchstoneinvestments.com
INVESTMENT ADVISOR
Touchstone Advisors, Inc.
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202-4133
TRANSFER AGENT
Integrated Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
SHAREHOLDER SERVICE
800.543.0407
A Member of Western & Southern Financial Group(R)
For investors who want more information about the Funds, the following documents are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed information about the Funds and is legally a part of this Prospectus.
ANNUAL/SEMIANNUAL REPORTS: The Funds' annual and semiannual reports provide additional information about the Funds' investments. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected a Fund's performance during its last fiscal year.
You can get free copies of the SAI, the reports, other information and answers
to your questions about the Funds by contacting your financial advisor, or the
Funds at:
Touchstone Funds
P.O. Box 5354
Cincinnati, Ohio 45201-5354
1.800.543.0407
http://www.touchstoneinvestments.com
Information about the Funds (including the SAI) can be reviewed and copied at the Securities and Exchange Commission's public reference room in Washington, D.C. You can receive information about the operation of the public reference room by calling the SEC at 1.202.942.8090.
Reports and other information about the Funds are available on the SEC's internet site at http://www.sec.gov. For a fee, you can get text-only copies of reports and other information by writing to the Public Reference Room of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-0102, or by sending an e-mail request to: publicinfo@sec.gov.
Investment Company Act file no. 811-3651
Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund Touchstone Small Cap Growth Fund
AUGUST 1, 2004
Touchstone Small Cap Growth Fund - Class I
RESEARCH o DESIGN o SELECT o MONITOR
The Securities and Exchange Commission has not approved the Fund's shares as
an investment or determined whether this Prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
SMALL CAP GROWTH FUND
Under normal circumstances, the Fund will invest at least 80% of its assets in common stock of small cap companies. Shareholders will be provided with at least 60 days' prior notice of any change in this policy. A small cap company has a market capitalization of less than $1.5 billion. The Fund will seek to maintain a weighted average market capitalization that falls within the range of the Russell 2000 Index.
The Fund is sub-advised by two separate management teams, a small cap team and a micro cap team. The Fund sub-advisors employ a growth-oriented approach to equity investment management and seek to invest in high quality, reasonably priced companies believed to have above average earnings growth prospects. The Fund's investments may include securities in the technology sector.
The small cap management team will sell a security when it reaches its growth rate calculated on a price-to-earnings basis. The micro cap management team will continually evaluate for sale securities of companies it believes are overvalued, have lost earnings momentum, or are in industries no longer expected to perform well. Any position that has declined 15-20% from its cost or recent high will be evaluated as a potential sale candidate by both management teams.
o If the stock market as a whole goes down
o If the sub-advisors' investment approach does not accurately
identify attractive investments
o If the companies in which the Fund invests do not grow as rapidly or
increase in value as expected
o Because securities of small cap companies may be more thinly traded
and may have more frequent and larger price changes than securities
of large cap companies
o Because the Fund may invest in the technology sector which at times
may be subject to greater market fluctuation than other sectors
o Because growth oriented funds will typically underperform when value
investing is in favor
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
As with any mutual fund, there is no guarantee that the Fund will achieve its goal.
You can find more information about certain securities in which the Fund may invest and a more detailed description of risks under the "Investment Strategies and Risks" section of this Prospectus.
SMALL CAP GROWTH FUND - CLASS A TOTAL RETURN
2003 55.33% Best Quarter: 2nd Quarter 2003 +27.30% Worst Quarter: 1st Quarter 2003 -3.83% |
The year-to-date return of the Fund's Class A shares as of June 30, 2004 is 2.92%.
The table compares the Fund's Class A average annual total returns to those of the Russell 2000 Growth Index. The table shows the effect of the applicable sales charge. The returns for other classes of shares offered by the Fund, including Class I shares, will differ from the Class A returns.
The Fund's past performance (before and after taxes) does not necessarily indicate how it will perform in the future.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 2003
Since
1 Year Class Started(1)
------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND CLASS A
Return Before Taxes 46.41% 39.55%
Return After Taxes on Distributions(2) 45.25% 38.62%
Return After Taxes on Distributions and Sale of Fund Shares 30.20% 33.25%
Russell 2000 Growth Index(3) 48.54% 45.40%
------------------------------------------------------------------------------------------------
|
1 Class A shares of the Fund began operations on October 21, 2002.
2 After-tax returns are calculated using the historical highest individual
federal marginal income tax rates, and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on the investor's tax
situation and may differ from those shown above. After-tax returns do not
apply to investors who hold shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan.
3 The Russell 2000 Growth Index is an unmanaged capitalization weighted
price only index which is comprised of the 2,000 smallest growth stocks in
the Russell 3000 Index. (The Russell 3000 Index measures the performance
of the 3,000 largest U.S. companies based on total market capitalization,
which represents approximately 98% of the investable U.S. equity market.)
The Index reflects no deductions for fees, expenses or taxes.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT). There are no
shareholder transaction fees.
---------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 1.25%
Other Expenses(1) 0.73%
Total Annual Fund Operating Expenses 1.98%
Fee Waiver and/or Expense Reimbursement 0.43%
Net Expenses(2) 1.55%
---------------------------------------------------------------------------------------
|
1 Other Expenses are based on estimated amounts for the current fiscal year.
2 Touchstone Advisors has contractually agreed to waive a portion of its
advisory fee and/or reimburse certain Fund expenses in order to limit Net
Expenses to 1.55% (the Sponsor Agreement). The Sponsor Agreement will
remain in place until at least March 31, 2005.
1 Year $ 158 3 Years $ 580 5 Years $1,028 10 Years $2,272 ------------------------------------------------------------------------------- |
The example for the 3, 5 and 10 year periods is calculated using the Total Annual Fund Operating Expenses before the limits agreed to under the Sponsor Agreement with Touchstone Advisors for periods after year 1.
INVESTMENT STRATEGIES AND RISKS
DOES THE FUND HAVE OTHER INVESTMENT STRATEGIES, IN ADDITION TO ITS PRINCIPAL
o Initial public offerings
o Securities of emerging growth companies
o Securities of foreign companies
o American depository receipts (ADRs), American depository shares
(ADSs) and other depository receipts
o Securities of companies in emerging market countries
o Cash equivalents
o They are organized under the laws of a foreign country
o They maintain their principal place of business in a foreign country
o The principal trading market for their securities is located in a foreign
country
o They derive at least 50% of their revenues or profits from operations in
foreign countries
o They have at least 50% of their assets located in foreign countries
AMERICAN DEPOSITORY RECEIPTS (ADRS), AMERICAN DEPOSITORY SHARES (ADSS) AND OTHER DEPOSITORY RECEIPTS. ADRs and ADSs are securities that represent an ownership interest in a foreign security. They are generally issued by a U.S. bank to U.S. buyers as a substitute for direct ownership of a foreign security and are traded on U.S. exchanges.
SMALL CAP COMPANIES. A small cap company has a market capitalization of less than $1.5 billion.
EMERGING GROWTH COMPANIES include:
o Companies that the sub-advisor believes may have earnings that grow faster
than the U.S. economy in general due to new products, management changes
at the company or economic shocks such as high inflation or sudden
increases or decreases in interest rates
o Companies that the sub-advisor believes have unrecognized asset values,
undervalued growth or emerging growth
o Companies undergoing a turnaround
EMERGING MARKET COUNTRIES are countries other than Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. When the Fund invests in securities of a company in an emerging market country, it invests in securities issued by a company that meet one or more of the following criteria:
o It is organized under the laws of an emerging market country
o It maintains its principal place of business in an emerging market country
o The principal trading market for its securities is located in an emerging
market country
o It derives at least 50% of its revenues or profits from operations within
emerging market countries
o It has at least 50% of its assets located in emerging market countries
THE PRINCIPAL RISKS OF INVESTING IN THE FUND ARE LISTED BELOW.
MARKET RISK. A fund that invests in common stocks is subject to stock market risk. Stock prices in general may decline over short or even extended periods, regardless of the success or failure of a particular company's operations. Stock markets tend to run in cycles, with periods when stock prices generally go up and periods when they generally go down. In addition, stocks fall into three broad market categories - large cap, mid cap and small cap. Investing primarily in one category carries the risk that due to market conditions, that category may be out of favor. For example, if valuations of small cap companies appear to be greatly out of proportion to the valuations of larger cap companies, investors may migrate to the stocks of larger cap companies, causing a fund that invests in these companies to increase in value more rapidly than a fund that invests in smaller valued companies. The price of stocks tends to go up and down more than the price of bonds.
o Small Cap Companies. Small cap stock risk is the risk that stocks of smaller companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Small companies may have limited product lines or financial resources, or may be dependent upon a small or inexperienced management group. In addition, small cap stocks typically are traded in lower volume, and their issuers typically are subject to greater degrees of changes in their earnings and prospects.
o Technology Securities. The value of technology securities may fluctuate dramatically and technology securities may be subject to greater than average financial and market risk. Investments in the high technology sector include the risk that certain products may be subject to competitive pressures and aggressive pricing and may become obsolete and the risk that new products will not meet expectations or even reach the marketplace.
INVESTMENT STYLE RISK. Different investment styles tend to shift in and out of favor depending upon market and economic conditions as well as investor sentiment. The Fund may outperform or underperform other funds that employ a different investment style. Examples of different investment styles include growth and value investing. Growth stocks may be more volatile than other stocks because they are more sensitive to investor perceptions of the issuing company's growth of earnings potential. Also, since growth companies usually invest a high portion of earnings in their business, growth stocks may lack the dividends of some value stocks that can cushion stock prices in a falling market. Growth oriented funds will typically underperform when value investing is in favor. Value stocks are those which are undervalued in comparison to their peers due to adverse business developments or other factors.
OTHER RISKS OF INVESTING IN THE FUND ARE LISTED BELOW.
EMERGING GROWTH COMPANIES. Investment in emerging growth companies is subject to enhanced risks because these companies generally have limited product lines, markets or financial resources and often exhibit a lack of management depth. These securities can be difficult to sell and are usually more volatile than securities of larger, more established companies.
INITIAL PUBLIC OFFERINGS (IPOS). IPO risk is the risk that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transaction costs. IPO shares are subject to market risk and liquidity risk (i.e., the potential that the Fund may be unable to dispose of the IPO shares promptly or at a reasonable price). When the Fund's asset base is small, a significant portion of its performance could be attributable to investments in IPOs, because such investments would have a magnified impact on the Fund. As the Fund's assets grow, the effect of investments in IPOs on the Fund's performance probably will decline, which could reduce performance.
FOREIGN RISK. Investing in foreign securities poses unique risks such as fluctuation in currency exchange rates, market illiquidity, price volatility, high trading costs, difficulties in settlement, regulations on stock exchanges, limits on foreign ownership, less stringent accounting, reporting and disclosure requirements, and other considerations. Diplomatic, political or economic developments, including nationalization or appropriation, could affect investments in foreign securities. In the past, equity instruments of foreign markets have had more frequent and larger price changes than those of U.S. markets.
o Emerging Market Countries. Investments in a country that is still relatively underdeveloped involves exposure to economic structures that are generally less diverse and mature than in the U.S. and to political and legal systems that may be less stable. In the past, markets of developing countries have had more frequent and larger price changes than those of developed countries. Economic or political changes may cause larger price changes in these securities than in other foreign securities.
THE FUND'S MANAGEMENT
Touchstone Advisors is responsible for selecting the Fund's sub-advisors, subject to approval by the Board of Trustees. Touchstone Advisors selects a sub-advisor that has shown good investment performance in its areas of expertise. Touchstone Advisors considers various factors in evaluating the Fund's sub-advisors, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over 5 years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength
o Quality of service
Touchstone Advisors will also continually monitor the performance of the Fund's sub-advisors through various analyses and through in-person, telephone and written consultations with the sub-advisors. Touchstone Advisors discusses its expectations for performance with the sub-advisors. Touchstone Advisors provides written evaluations and recommendations to the Board of Trustees, including whether or not a sub-advisor's contract should be renewed, modified or terminated.
Touchstone Advisors has been registered as an investment advisor under the Investment Advisers Act of 1940, as amended, since 1994. As of December 31, 2003, Touchstone Advisors had approximately $2.6 billion in assets under management.
The Trust and Touchstone Advisors have applied for, and the Securities and Exchange Commission has granted, an exemptive order that permits the Trust or Touchstone Advisors, under certain conditions, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. The Fund must still obtain shareholder approval of any sub-advisory agreement with a sub-advisor affiliated with the Trust or Touchstone Advisors other than by reason of serving as a sub-advisor to one or more Touchstone Funds. Shareholders of the Fund will be notified of any changes in its sub-advisors.
Two or more sub-advisors may manage the Fund, with each managing a portion of the Fund's assets. Touchstone Advisors allocates how much of the Fund's assets are managed by each sub-advisor. Touchstone Advisors may change these allocations from time to time, often based upon the results of the evaluations of the Fund sub-advisors.
Touchstone Advisors is also responsible for running all of the operations of the Fund, except for those that are subcontracted to the sub-advisors, custodian, transfer and accounting agent and administrator. The Fund pays Touchstone Advisors a fee for its services. Out of this fee Touchstone Advisors pays each Fund sub-advisor a fee for its services. The fee paid to Touchstone Advisors by the Fund during its most recent fiscal year was 1.25% of its average daily net assets.
LONGWOOD INVESTMENT ADVISORS, INC. (LONGWOOD)
1275 Drummers Lane, Wayne, PA 19087
Longwood has been registered as an investment advisor since 1995 and provides investment advisory services to individual and institutional clients.
Robert Davidson has managed the portion of the Fund's investments allocated to it by the Advisor since the Fund's inception. Mr. Davidson, Chief Investment Officer of Longwood, founded Longwood in 1993 and has over 23 years of investment experience.
BJURMAN, BARRY & ASSOCIATES (BJURMAN)
10100 Santa Monica Boulevard, Suite 1200, Los Angeles, CA 90067
Bjurman has been registered as an investment advisor since 1970 and provides investment advisory services to individuals, institutions, pension plans and mutual funds.
The Investment Policy Committee of Bjurman has managed the portion of the Fund's investments allocated to Bjurman since the Fund's inception. O. Thomas Barry III, CFA, CIC, is the lead manager of the Committee and Co-Manager of the Fund. Mr. Barry, Chief Investment Officer and Senior Executive Vice President of Bjurman, joined the firm in 1978 and has over 30 years of investment experience. Stephen W. Shipman, CFA, is a member of the Committee and Co-Manager of the Fund. Mr. Shipman, Director of Research and Executive Vice President of Bjurman, joined Bjurman in 1993 and has over 17 years of investment experience.
Longwood 0.85% of the average daily net assets allocated to Longwood Bjurman 0.90% of the average daily net assets allocated to Bjurman ------------------------------------------------------------------------------- |
INVESTING WITH TOUCHSTONE
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well requires a plan. We recommend that you meet with your financial advisor to plan a strategy that will best meet your financial goals. The Fund offers four classes of shares: Class A, Class B, Class C and Class I shares. Class A, Class B and Class C shares are offered in a separate prospectus. For more information about these shares, telephone Touchstone (Nationwide call toll-free 1.800.543.0407) or your financial adviser.
PRINCIPAL UNDERWRITER. Touchstone Securities, Inc. (Touchstone), the Trust's principal underwriter, at its expense (from a designated percentage of its income) currently provides additional compensation to certain dealers. Touchstone pursues a focused distribution strategy with a limited number of dealers who have sold shares of the Fund or other Touchstone Funds. Additional compensation is limited to such dealers. Touchstone reviews and makes changes to the focused distribution strategy on a continual basis. These payments are generally based on a pro rata share of a dealer's sales. Touchstone may also provide compensation in connection with conferences, sales or training programs for employees, seminars for the public, advertising and other dealer-sponsored programs.
Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. What this means for you: When you open an account, we will ask for your name, residential address, date of birth, government identification number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If we do not receive these required pieces of information, there may be a delay in processing your investment request, which could subject your investment to market risk. If we are unable to immediately verify your identity, the Fund may restrict further investment until your identity is verified. However, if we are unable to verify your identity, the Fund reserves the right to close your account without notice and return your investment to you at the price determined as of 4:00 p.m. Eastern time on the day that your account is closed. If we close your account because we are unable to verify your identity, your investment will be subject to market fluctuation, which could result in a loss of a portion of your principal investment.
o You may invest in Class I shares by establishing an account through financial institutions that have appropriate selling agreements with Touchstone.
o Before investing in the Fund through your financial institution, you should read any materials provided by your financial institution together with this Prospectus.
o The minimum amount for initial investments in Class I shares of the Fund is $10,000. There is no minimum amount for additional investments.
o Your financial institution will act as the shareholder of record of your Class I shares.
o Touchstone reserves the right to reject any purchase request that it regards as disruptive to efficient portfolio management. For example, a purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor.
o Purchase orders received by financial institutions by the close of the regular session of trading on the New York Stock Exchange (NYSE), generally 4:00 p.m. Eastern time, are processed at that day's net asset value (NAV). Purchase orders received by financial institutions after the close of the regular session of trading on the NYSE are processed at the NAV next determined on the following business day. It is the responsibility of the financial institution to transmit orders that will be received by Touchstone in proper form and in a timely manner.
o Touchstone considers a purchase or sales order as received when an authorized financial institution, or its authorized designee, receives the order in proper form. These orders will be priced based on the Fund's NAV next computed after such order is received in proper form.
o Financial institutions may set different minimum initial and additional investment requirements, may impose other restrictions or may charge you fees for their services.
o Financial institutions may designate intermediaries to accept purchase and sales orders on the Fund's behalf.
o Your financial institution may receive compensation from the Fund, Touchstone, Touchstone Advisors or their affiliates.
o For more information about how to purchase shares, telephone Touchstone (Nationwide call toll-free 1.800.543.0407) or your financial institution.
PURCHASES WITH SECURITIES. Shares may be purchased by tendering payment in-kind in the form of marketable securities, including but not limited to, shares of common stock, provided the acquisition of such securities is consistent with the Fund's investment goal and is otherwise acceptable to the Advisor.
o Your financial institution is responsible for making sure that sale requests are transmitted to Touchstone in proper form and in a timely manner.
o Your financial institution may charge you a fee for selling your shares.
o Redemption proceeds will only be wired to a commercial bank or brokerage firm in the United States.
o Your financial institution will be required to provide an original Medallion Signature Guaranteed letter of instruction to Touchstone in order to redeem shares in amounts of $100,000 or more.
DELAY OF PAYMENT. It is possible that the payments of your sale proceeds could be postponed or your right to sell your shares could be suspended during certain circumstances. These circumstances can occur:
o When the NYSE is closed for other than customary weekends and
holidays
o When trading on the NYSE is restricted
o When an emergency situation causes the Fund's sub-advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of the Fund's net assets
o During any other time when the SEC, by order, permits.
REDEMPTION IN KIND. Under unusual circumstances, when the Board of Trustees deems it appropriate, the Fund may make payment for shares redeemed in portfolio securities of the Fund taken at current value.
The Fund's investments are valued based on market value or, if no market value is available, based on fair value as determined by the Board of Trustees (or under their direction). All assets and liabilities initially expressed in foreign currency values will be converted into U.S. dollar values. Some specific pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days or less are valued on the basis of amortized cost.
o Securities mainly traded on a U.S. exchange are valued at the last sale price on that exchange or, if no sales occurred during the day, at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally valued according to the preceding closing values on that exchange. However, if an event that may change the value of a security occurs after the time that the closing value on the non-U.S. exchange was determined, the security may be priced based on fair value. This may cause the value of the security on the books of the Fund to be significantly different from the closing value on the non-U.S. exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S. exchange may trade on weekends or other days when the Fund does not price its shares, the Fund's NAV may change on days when shareholders will not be able to buy or sell shares.
DISTRIBUTIONS AND TAXES
OOO SPECIAL TAX CONSIDERATION
You should consult with your tax advisor to address your own tax situation.
The Fund intends to distribute to its shareholders substantially all of its income and capital gains. The Fund intends to declare and pay dividends annually. Distributions of any capital gains earned by the Fund willbe made at least annually.
ORDINARY INCOME. Income and short-term capital gains that are distributed to you are taxable as ordinary income for federal income tax purposes regardless of how long you have held your Fund shares. To the extent the underlying income of the Fund consists of qualified dividend income, income distributions by the Fund may be subject to a maximum federal income tax rate of 15% for individuals and may qualify for the dividends received deduction for corporations.
LONG-TERM CAPITAL GAINS. Long-term capital gains distributed to you are taxable as long-term capital gains for federal income tax purposes regardless of how long you have held your Fund shares. The maximum individual tax rate on net long-term capital gains is 15%.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. federal income tax on all taxable distributions and sales payable to shareholders who fail to provide their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The current backup withholding rate is 28%.
STATEMENTS AND NOTICES. You will receive an annual statement outlining the tax status of your distributions. You will also receive written notices of certain foreign taxes and distributions paid by the Fund during the prior taxable year.
SMALL CAP GROWTH FUND - CLASS A
--------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003(A)
--------------------------------------------------------------------------------
Net asset value at beginning of period ........... $ 9.78 $ 10.00
---------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.14) (0.06)
Net realized and unrealized gains (losses)
on investments ............................. 6.78 (0.16)
---------------------
Total from investment operations ................. 6.64 (0.22)
---------------------
Distributions from net realized gains ............ (0.37) --
---------------------
Net asset value at end of period ................. $ 16.05 $ 9.78
=====================
Total return(B) .................................. 68.02% (2.20%)(C)
=====================
Net assets at end of period (000's) .............. $ 53,064 $15,230
=====================
Ratio of net expenses to average net assets ...... 1.89%(D) 1.95%(E)
Ratio of net investment loss to average net assets (1.34%)(D) (1.61%)(E)
Portfolio turnover ............................... 133% 128%(E)
(A) Represents the period from commencement of operations (October 21, 2002)
through March 31, 2003.
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(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 1.95% and the ratio of net investments loss to average net assets would have been (1.40%).
(E) Annualized.
SMALL CAP GROWTH FUND - CLASS B
--------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003(A)
--------------------------------------------------------------------------------
Net asset value at beginning of period ........... $ 9.75 $ 10.00
----------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.21) (0.06)
Net realized and unrealized gains (losses)
on investments ............................. 6.73 (0.19)
----------------------
Total from investment operations ................. 6.52 (0.25)
----------------------
Distributions from net realized gains ............ (0.37) --
----------------------
Net asset value at end of period ................. $ 15.90 $ 9.75
======================
Total return(B) .................................. 66.99% (2.50%)(C)
======================
Net assets at end of period (000's) .............. $ 7,831 $ 1,399
======================
Ratio of net expenses to average net assets ...... 2.63%(D) 2.69%(E)
Ratio of net investment loss to average net assets (2.09%)(D) (2.38%)(E)
Portfolio turnover ............................... 133% 128%(E)
(A) Represents the period from commencement of operations (October 21, 2002)
through March 31, 2003.
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(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 2.70% and the ratio of net investments loss to average net assets would have been (2.16%).
(E) Annualized.
SMALL CAP GROWTH FUND - CLASS C
--------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003(A)
--------------------------------------------------------------------------------
Net asset value at beginning of period ........... 9.74 10.00
----------------------
Income (loss) from investment operations:
Net investment loss ........................... (0.21) (0.07)
Net realized and unrealized gains (losses)
on investments ............................. 6.75 (0.19)
----------------------
Total from investment operations ................. 6.54 (0.26)
----------------------
Distributions from net realized gains ............ (0.37) --
----------------------
Net asset value at end of period ................. 15.91 9.74
======================
Total return(B) .................................. 67.26% (2.60%)(C)
======================
Net assets at end of period (000's) .............. 14,596 3,029
======================
Ratio of net expenses to average net assets ...... 2.63%(D) 2.69%(E)
Ratio of net investment loss to average net assets (2.09%)(D) (2.39%)(E)
Portfolio turnover ............................... 133% 128%(E)
(A) Represents the period from commencement of operations (October 21, 2002)
through March 31, 2003.
|
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Not annualized.
(D) Absent voluntary expense reimbursements, the ratio of net expenses to average net assets would have been 2.70% and the ratio of net investments loss to average net assets would have been (2.16%).
(E) Annualized.
TOUCHSTONE INVESTMENTS
DISTRIBUTOR
Touchstone Securities, Inc.
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202-4133
1.800.638.8194
www.touchstoneinvestments.com
INVESTMENT ADVISOR
Touchstone Advisors, Inc.
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202-4133
TRANSFER AGENT
Integrated Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
SHAREHOLDER SERVICE
1.800.543.0407
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed information about the Fund and is legally a part of this Prospectus.
ANNUAL/SEMIANNUAL REPORTS: The Fund's annual and semiannual reports provide additional information about the Fund's investments. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.
You can get free copies of the SAI, the reports, other information and answers to your questions about the Fund by contacting your financial advisor, or the Fund at:
Touchstone Funds
P.O. Box 5354
Cincinnati, Ohio 45201-5354
1.800.543.0407
http://www.touchstoneinvestments.com
Information about the Fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commission's public reference room in Washington, D.C. You can receive information about the operation of the public reference room by calling the SEC at 1.202.942.8090.
Reports and other information about the Fund are available on the SEC's internet site at http://www.sec.gov. For a fee, you can get text-only copies of reports and other information by writing to the Public Reference Room of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-0102, or by sending an e-mail request to: publicinfo@sec.gov.
Investment Company Act file no. 811-3651
TOUCHSTONE STRATEGIC TRUST
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2004
Emerging Growth Fund
Value Plus Fund
Enhanced 30 Fund
Large Cap Growth Fund
Growth Opportunities Fund
Small Cap Growth Fund
Micro Cap Growth Fund
This Statement of Additional Information is not a prospectus. It should be read together with the Funds' Prospectuses dated August 1, 2004. The Funds' financial statements are contained in the Annual Report, which is incorporated by reference into this Statement of Additional Information. You may receive a copy of a Fund's Prospectus or most recent Annual and Semiannual Report by writing the Trust at P.O. Box 5354, Cincinnati, Ohio 45201-5354, by calling the Trust nationwide toll-free 800-543-0407, in Cincinnati 362-4921, or by visiting our website at touchstoneinvestments.com.
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
TOUCHSTONE STRATEGIC TRUST
221 EAST FOURTH STREET, SUITE 300
CINCINNATI, OHIO 45202-4133
TABLE OF CONTENTS
PAGE
THE TRUST.....................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS.................................4
INVESTMENT LIMITATIONS.......................................................27
TRUSTEES AND OFFICERS........................................................32
THE INVESTMENT ADVISOR AND SUB-ADVISORS..................................... 36
PROXY VOTING PROCEDURES......................................................44
THE DISTRIBUTOR..............................................................50
DISTRIBUTION PLANS...........................................................52
SECURITIES TRANSACTIONS......................................................54
CODE OF ETHICS...............................................................58
PORTFOLIO TURNOVER...........................................................58
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE.........................58
CHOOSING A SHARE CLASS.......................................................59
OTHER PURCHASE INFORMATION...................................................66
OTHER REDEMPTION INFORMATION.................................................67
TAXES........................................................................67
HISTORICAL PERFORMANCE INFORMATION...........................................70
PRINCIPAL SECURITY HOLDERS...................................................82
CUSTODIAN....................................................................85
AUDITORS.....................................................................86
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENT................................86
FINANCIAL STATEMENTS.........................................................87
APPENDIX.....................................................................88
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Touchstone Strategic Trust (the "Trust"), formerly Countrywide Strategic Trust, an open-end, diversified management investment company, was organized as a Massachusetts business trust on November 18, 1982. The Trust currently offers seven series of shares to investors: the Large Cap Growth Fund (formerly the Equity Fund), the Growth Opportunities Fund (formerly the Growth/Value Fund), the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund, the Small Cap Growth Fund and the Micro Cap Growth Fund (referred to individually as a "Fund" and collectively as the "Funds"). Each Fund has its own investment goal and policies.
Pursuant to an Agreement and Plan of Reorganization, on May 1, 2000, each of the Emerging Growth Fund and the Value Plus Fund succeeded to the assets and liabilities of another mutual fund of the same name that was an investment series of Touchstone Series Trust. The investment goals, strategies, policies and restrictions of each Fund and its predecessor fund are substantially identical. The financial data and information in this Statement of Additional Information with respect to the Emerging Growth Fund and the Value Plus Fund for periods ended prior to May 1, 2000 are for the predecessor funds.
Pursuant to an Agreement and Plan of Reorganization dated June 30, 2003, the Large Cap Growth Fund series of the Trust was reorganized by acquiring the Navellier Millennium Large Cap Growth Portfolio and the Navellier Performance Large Cap Growth Portfolio. The investment goal and fundamental restrictions of the Touchstone Large Cap Growth Fund did not change, but certain investment strategies changed as a result of the reorganization. The financial data and performance in this Statement of Additional Information with respect to the Large Cap Growth Fund are carried forward from the Navellier Performance Large Cap Growth Portfolio.
Shares of each Fund have equal voting rights and liquidation rights. Each Fund shall vote separately on matters submitted to a vote of the shareholders except in matters where a vote of all series of the Trust in the aggregate is required by the Investment Company Act of 1940, as amended (the "1940 Act") or otherwise. When matters are submitted to shareholders for a vote, each shareholder is entitled to one vote for each full share owned and fractional votes for fractional shares owned. The Trust does not normally hold annual meetings of shareholders. The Trustees shall promptly call and give notice of a meeting of shareholders for the purpose of voting upon the removal of any Trustee when requested to do so in writing by shareholders holding 10% or more of the Trust's outstanding shares. The Trust will comply with the provisions of Section 16(c) of the 1940 Act in order to facilitate communications among shareholders.
Each share of a Fund represents an equal proportionate interest in the assets and liabilities belonging to that Fund with each other share of that Fund and is entitled to such dividends and distributions out of the income belonging to the Fund as are declared by the Trust. The shares do not have cumulative voting rights or any preemptive or conversion rights, and the Trustees have the authority from time to time to divide or combine the shares of any Fund into a greater or lesser number of shares of that Fund so long as the proportionate beneficial interest in the assets belonging to that Fund and the rights of shares of any other Fund are in no way affected. In case
of any liquidation of a Fund, the holders of shares of the Fund being liquidated will be entitled to receive as a class a distribution out of the assets, net of the liabilities, belonging to that Fund. Expenses attributable to any Fund are borne by that Fund. Any general expenses of the Trust not readily identifiable as belonging to a particular Fund are allocated by or under the direction of the Trustees in such manner as the Trustees determine to be fair and equitable. Generally, the Trustees allocate such expenses on the basis of relative net assets or number of shareholders. No shareholder is liable to further calls or to assessment by the Trust without his express consent.
Class A shares, Class B shares and Class C shares of a Fund represent an interest in the same assets of such Fund, have the same rights and are identical in all material respects except that (i) each class of shares may bear different distribution fees; (ii) each class of shares is subject to different sales charges; (iii) certain other class specific expenses will be borne solely by the class to which such expenses are attributable, including transfer agent fees attributable to a specific class of shares, printing and postage expenses related to preparing and distributing materials to current shareholders of a specific class, registration fees incurred by a specific class of shares, the expenses of administrative personnel and services required to support the shareholders of a specific class, litigation or other legal expenses relating to a class of shares, Trustees' fees or expenses incurred as a result of issues relating to a specific class of shares and accounting fees and expenses relating to a specific class of shares; and (iv) each class has exclusive voting rights with respect to matters relating to its own distribution arrangements. The Board of Trustees may classify and reclassify the shares of a Fund into additional classes of shares at a future date.
Under Massachusetts law, under certain circumstances, shareholders of a Massachusetts business trust could be deemed to have the same type of personal liability for the obligations of the Trust as does a partner of a partnership. However, numerous investment companies registered under the 1940 Act have been formed as Massachusetts business trusts and the Trust is not aware of an instance where such result has occurred. In addition, the Trust Agreement 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. The Trust Agreement also provides for the indemnification out of the Trust property for all losses and expenses of any shareholder held personally liable for the obligations of the Trust. Moreover, it provides that the Trust will, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon. As a result, and particularly because the Trust assets are readily marketable and ordinarily substantially exceed liabilities, management believes that the risk of shareholder liability is slight and limited to circumstances in which the Trust itself would be unable to meet its obligations. Management believes that, in view of the above, the risk of personal liability is remote.
Each Fund has its own investment goal, strategies and related risks. There can be no assurance that a Fund's investment goal will be met. The investment goal and practices of each Fund (except the Growth Opportunities Fund) are nonfundamental policies that may be changed by the Board of Trustees without shareholder approval, except in those instances where shareholder approval is expressly required. If there is a change in a Fund's investment goal, shareholders should consider whether the Fund remains an appropriate investment in light of their current
financial position and needs. The investment restrictions of the Funds are fundamental and can only be changed by vote of a majority of the outstanding shares of the applicable Fund.
A more detailed discussion of some of the terms used and investment policies described in the Prospectuses (see "Investment Strategies and Risks") appears below:
FIXED-INCOME AND OTHER DEBT SECURITIES
Fixed-income and other debt instrument securities include all bonds, high yield or "junk" bonds, municipal bonds, debentures, U.S. Government securities, mortgage-related securities including government stripped mortgage-related securities, zero coupon securities and custodial receipts. The market value of fixed-income obligations of the Funds will be affected by general changes in interest rates which will result in increases or decreases in the value of the obligations held by the Funds. The market value of the obligations held by a Fund can be expected to vary inversely to changes in prevailing interest rates. As a result, shareholders should anticipate that the market value of the obligations held by the Fund generally would increase when prevailing interest rates are declining and generally will decrease when prevailing interest rates are rising. Shareholders also should recognize that, in periods of declining interest rates, a Fund's yield will tend to be somewhat higher than prevailing market rates and, in periods of rising interest rates, a Fund's yield will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to a Fund from the continuous sale of its shares will tend to be invested in instruments producing lower yields than the balance of its portfolio, thereby reducing the Fund's current yield. In periods of rising interest rates, the opposite can be expected to occur. In addition, securities in which a Fund may invest may not yield as high a level of current income as might be achieved by investing in securities with less liquidity, less creditworthiness or longer maturities.
Ratings made available by Standard & Poor's Rating Service ("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings are relative and subjective and are not absolute standards of quality. Although these ratings are initial criteria for selection of portfolio investments, a Fund Sub-Advisor also will make its own evaluation of these securities. Among the factors that will be considered are the long-term ability of the issuers to pay principal and interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities" below.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts. For a description of commercial paper ratings, see the Appendix.
MEDIUM AND LOWER RATED AND UNRATED SECURITIES. Securities rated in the fourth highest category by a rating organization although considered investment grade, may possess speculative characteristics, and changes in economic or other conditions are more likely to impair the ability of issuers of these securities to make interest and principal payments than is the case with respect to issuers of higher grade bonds.
Generally, medium or lower-rated securities and unrated securities of comparable quality, sometimes referred to as "junk bonds," offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions and (ii) are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. The yield of junk bonds will fluctuate over time.
The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality bonds. In addition, medium and lower rated securities and comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because medium and lower-rated securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. Since the risk of default is higher for lower rated debt securities, the Fund Sub-Advisor's research and credit analysis are an especially important part of managing securities of this type held by a Fund. In light of these risks, the Board of Trustees of the Trust has instructed the Fund Sub-Advisor, in evaluating the creditworthiness of an issue, whether rated or unrated, to take various factors into consideration, which may include, as applicable, the issuer's financial resources, its sensitivity to economic conditions and trends, the operating history of and the community support for the facility financed by the issue, the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower-rated categories is more volatile than that of higher quality securities, and the markets in which medium and lower-rated or unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the Funds to obtain accurate market quotations for purposes of valuing their respective portfolios and calculating their respective net asset values. Moreover, the lack of a liquid trading market may restrict the availability of securities for the Funds to purchase and may also have the effect of limiting the ability of a Fund to sell securities at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment expectations. If an issuer calls the obligation for redemption, a Fund may have to replace the security with a lower yielding security, resulting in a decreased return for shareholders. Also, as the principal value of bonds moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by a Fund may decline relatively proportionately more than a portfolio consisting of higher rated securities. If a Fund experiences unexpected net redemptions, it may be forced to sell its higher rated bonds, resulting in a decline in the overall credit quality of the securities held by the Fund and increasing the exposure of the Fund to the risks of lower rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require sale of these securities by the Fund, but the Fund Sub-Advisor will consider this event in its determination of whether the Fund should continue to hold the securities.
While the market for high yield corporate debt securities has been in existence for many years and has weathered previous economic downturns, the 1980's brought a dramatic increase in the use of such securities to fund highly leveraged corporate acquisitions and restructuring. Past experience may not provide an accurate indication of future performance of the high yield bond market, especially during periods of economic recession. In fact, from 1989 to 1991, the percentage of lower-rated debt securities that defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active than that for higher rated debt securities, which can adversely affect the prices at which the former are sold. If market quotations are not available, lower-rated debt securities will be valued in accordance with procedures established by the Board of Trustees, including the use of outside pricing services. Judgment plays a greater role in valuing high yield corporate debt securities than is the case for securities for which more external sources for quotations and last sale information is available. Adverse publicity and changing investor perception may affect the ability of outside pricing services to value lower-rated debt securities and the ability to dispose of these securities.
In considering investments for a Fund, the Fund Sub-Advisor will attempt to identify those issuers of high yielding debt securities whose financial condition is adequate to meet future obligations, has improved or is expected to improve in the future. The Fund Sub-Advisor's analysis focuses on relative values based on such factors as interest or dividend coverage, asset coverage, earnings prospects and the experience and managerial strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue litigation or otherwise exercise its rights as a security holder to seek to protect the interest of security holders if it determines this to be in the best interest of the Fund.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. 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, un-conditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Investments in time deposits maturing in more than seven days will be subject to the SEC's restrictions that limit investments in illiquid securities to no more than 15% of the value of a Fund's net assets.
The Growth Opportunities Fund may also invest in certificates of deposit, bankers' acceptances and time deposits issued by foreign branches of national banks. Eurodollar certificates of deposit are negotiable U.S. dollar denominated certificates of deposit issued by foreign branches of major U.S. commercial banks. Eurodollar bankers' acceptances are U.S. dollar denominated bankers' acceptances "accepted" by foreign branches of major U.S. commercial banks. Investments in the obligations of foreign branches of U.S. commercial banks may be subject to special risks, including future political and economic developments, imposition of withholding taxes on income, establishment of exchange controls or other restrictions, less governmental supervision and the lack of uniform accounting, auditing and financial reporting standards that might affect an investment adversely.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued or guaranteed by the U.S. Government, its agencies, authorities or instrumentalities. Some U.S. Government securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others are supported by: (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. Government to purchase the agency's obligations, such as securities of the FNMA; or (iii) only the credit of the issuer, such as securities of the Student Loan Marketing Association. No assurance can be given that the U.S. Government will provide financial support in the future to U.S. Government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States.
Securities guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government or any of its agencies, authorities or instrumentalities; and (ii) participation interests in loans made to foreign governments or other entities that are so guaranteed. The secondary market for certain of these participation interests is limited and, therefore, may be regarded as illiquid.
MORTGAGE-RELATED SECURITIES. There are several risks associated with mortgage-related securities generally. One is that the monthly cash inflow from the underlying loans may not be sufficient to meet the monthly payment requirements of the mortgage-related security. Prepayment of principal by mortgagors or mortgage foreclosures will shorten the term of the underlying mortgage pool for a mortgage-related security. Early returns of principal will affect the average life of the mortgage-related securities remaining in a Fund. 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. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgage-related securities. Conversely, in periods of falling interest rates the rate of prepayment tends to increase, thereby shortening the average life of a pool. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of a Fund. Because prepayments of principal generally occur when interest rates are declining, it is likely that a Fund will have to reinvest the proceeds of prepayments at lower interest rates than those at which the assets were previously invested. If this occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related securities may have less potential for capital appreciation in periods of falling interest rates than other fixed-income securities of comparable maturity, although these securities may have a comparable risk of decline in market value in periods of rising interest rates. To the extent that a Fund purchases mortgage-related securities at a premium, unscheduled prepayments, which are made at par, will result in a loss equal to any unamortized premium.
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 Fund invests, the investment may be subject to a greater or lesser risk of prepayment than other types of mortgage-related securities.
Mortgage-related securities may not be readily marketable. To the extent any of these securities are not readily marketable in the judgment of the Fund Sub-Advisor, the Funds' restrictions on investments in illiquid instruments will apply.
STRIPPED MORTGAGE-RELATED SECURITIES. These securities are either issued and guaranteed, or privately issued but collateralized by securities issued, by GNMA, FNMA or FHLMC. These securities represent beneficial ownership interests in either periodic principal distributions ("principal-only") or interest distributions ("interest-only") on mortgage-related certificates issued by GNMA, FNMA or FHLMC, as the case may be. The certificates underlying the stripped mortgage-related securities represent all or part of the beneficial interest in pools of mortgage loans. A Fund will invest in stripped mortgage-related securities in order to enhance yield or to benefit from anticipated appreciation in value of the securities at times when its Fund Sub-Advisor believes that interest rates will remain stable or increase. In periods of rising interest rates, the expected increase in the value of stripped mortgage-related securities may offset all or a portion of any decline in value of the securities held by the Fund.
Investing in stripped mortgage-related securities involves the risks normally associated with investing in mortgage-related securities. See "Mortgage-Related Securities" above. In addition, the yields on stripped mortgage- related securities are extremely sensitive to the prepayment experience on the mortgage loans underlying the certificates collateralizing the securities. If a decline in the level of prevailing interest rates results in a rate of principal prepayments higher than anticipated, distributions of principal will be accelerated, thereby reducing the yield to maturity on interest-only stripped mortgage-related securities and increasing the yield to maturity on principal-only stripped mortgage-related securities. Sufficiently high prepayment rates could result in a Fund not fully recovering its initial investment in an interest-only stripped mortgage-related security. Under current market conditions, the Fund expects that investments in stripped mortgage-related securities will consist primarily of interest-only securities. Stripped mortgage-related securities are currently traded in an over-the-counter market maintained by several large investment-banking firms. There can be no assurance that the Fund will be able to affect a trade of a stripped mortgage-related security at a time when it wishes to do so. The Fund will acquire stripped mortgage-related securities only if a secondary market for the securities exists at the time of acquisition. Except for stripped mortgage-related securities based on fixed rate FNMA and FHLMC mortgage certificates that meet certain liquidity criteria established by the Board of Trustees, a Fund will treat government stripped mortgage-related securities and privately-issued mortgage-related securities as illiquid and will limit its investments in these securities, together with other illiquid investments, to not more than 15% of net assets.
The Growth Opportunities Fund may also purchase Coupons Under Book Entry Safekeeping ("CUBES"), Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities ("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which means that they are sold at a substantial discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. This discount is amortized over the life of the security, and such amortization will constitute the income earned on the security for both accounting and tax purposes. Because of these features, these securities may be subject to greater interest rate volatility than interest paying U.S. Treasury obligations. The Growth Opportunities Fund will limit its investment in such instruments to 20% of its total assets. STRIPS are Separately Traded Registered Interest and Principal Securities.
ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt obligations that are issued or purchased at a significant discount from face value. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity or the particular interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. Zero coupon securities do not require the periodic payment of interest. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash. These investments may experience greater volatility in market value than U.S. Government securities that make regular payments of interest. A Fund accrues income on these investments for tax and accounting purposes, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the Fund's distribution obligations, in which case the Fund will forego the purchase of additional income producing assets with these funds. Zero coupon securities include STRIPS, that is, securities underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. They also include CUBES, which are component parts of U.S. Treasury bonds and represent scheduled interest and principal payments on the bonds.
CUSTODIAL RECEIPTS. Custodial receipts or certificates, such as CATS, TIGRs and Financial Corporation certificates ("FICO Strips"), are securities underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. The underwriters of these certificates or receipts purchase a U.S. Government security and deposit the security in an irrevocable trust or custodial account with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the U.S. Government security. Custodial receipts evidencing specific coupon or principal payments have the same general attributes as zero coupon U.S. Government securities, described above. Although typically under the terms of a custodial receipt a Fund is authorized to assert its rights directly against the issuer of the underlying obligation, the Fund may be required to assert through the custodian bank such rights as may exist against the underlying issuer. Thus, if the underlying issuer fails to pay principal and/or interest when due, a Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the issuer. In addition, if the trust or custodial account in which the underlying security has been deposited were determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would be reduced in respect of any taxes paid.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. These are instruments in amounts owed by a corporate, governmental or other borrower to another party. They may represent amounts owed to lenders or lending syndicates (loans and loan participations), to suppliers of goods or services (trade claims or other receivables) or to other parties. Direct debt instruments purchased by a Fund may have a maturity of any number of days or years, may be secured or unsecured, and may be of any credit quality. Direct debt instruments involve the risk of loss in the case of default or insolvency of the borrower. Direct debt instruments may offer less legal protection to a Fund in the event of fraud or misrepresentation. In addition, loan participations involve a risk of insolvency of the lending bank or other financial intermediary. Direct debt instruments also may include standby financing commitments that obligate a Fund to supply additional cash to the borrower on demand at a time when a Fund would not have otherwise done so, even if the borrower's condition makes it unlikely that the amount will ever be repaid.
These instruments will be considered illiquid securities and so will be limited in accordance with the Funds' restrictions on illiquid securities.
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 that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the 1933 Act are referred to as "private placements" or "restricted securities" and are purchased directly from the issuer or in the secondary market. Investment companies do not typically hold a significant amount of these restricted securities or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and an investment company 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. An investment company might also have to register such restricted securities in order to dispose of them, which would result in additional expense and delay. Adverse market conditions could impede such a public offering of securities. Each Fund may not invest more than 15% of its net assets in securities that are illiquid or otherwise not readily marketable.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restriction on their resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the 1933 Act on resales of certain securities to qualified institutional buyers. The 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.
A Fund Sub-Advisor will monitor the liquidity of Rule 144A securities in each Fund's portfolio under the supervision of the Board of Trustees. In reaching liquidity decisions, the Fund 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 and other potential purchasers wishing to purchase or sell the security; (3) dealer undertakings to make a market in the security and (4) 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).
A Fund may purchase securities in the United States that are not registered for sale under federal securities laws but which can be resold to institutions under SEC Rule 144A or under an exemption from such laws. Provided that a dealer or institutional trading market in such securities exists, these restricted securities or Rule 144A securities are treated as exempt from the Funds' limit on illiquid securities. The Board of Trustees of the Trust, with advice and information from the respective Fund Sub-Advisor, will determine the liquidity of restricted securities or Rule 144A securities by looking at factors such as trading activity and the availability of reliable price information and, through reports from such Fund Sub-Advisor, the Board of Trustees of the Trust will monitor trading activity in restricted securities. If institutional trading in restricted securities or Rule 144A securities were to decline, a Fund's illiquidity could increase and the Fund could be adversely affected.
A Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the 1933 Act. Section 4(2) commercial
paper is restricted as to disposition under federal securities laws and is
generally sold to institutional investors who agree that they are purchasing the
paper for investment purposes and not with a view to public distribution. Any
resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors through or
with the assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Fund Sub-Advisor
believes that Section 4(2) commercial paper and possibly certain other
restricted securities that meet the criteria for liquidity established by the
Trustees are quite liquid. The Fund intends therefore, to treat the restricted
securities which meet the criteria for liquidity established by the Trustees,
including Section 4(2) commercial paper, as determined by the Sub-Advisor, as
liquid and not subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund does not intend to subject such paper to the limitation applicable to
restricted securities.
No Fund will invest more than 10% of its total assets in restricted securities (excluding Rule 144A securities).
FOREIGN SECURITIES
Investing in securities issued by foreign companies and governments involves considerations and potential risks not typically associated with investing in obligations issued by the U.S. Government and domestic corporations. Less information may be available about foreign companies than about domestic companies and foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic companies. The values of foreign investments are affected by changes in currency rates or exchange control regulations, restrictions or prohibitions on the repatriation of foreign currencies, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad) or changed circumstances in dealings between nations. Costs are also incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions and custody fees are generally higher than those charged in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in enforcing contractual obligations and could be subject to extended clearance and settlement periods.
The Growth Opportunities Fund may invest up to 10% of its total assets at the time of purchase in the securities of foreign issuers. The Emerging Growth Fund may invest up to 20% of its total assets in securities of foreign issuers. The Large Cap Growth Fund may invest up to 15% of its total assets in foreign securities traded on the U.S. market.
EMERGING MARKET COUNTRIES. Emerging market countries are countries other than Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. When a Fund invests in securities of a company in an emerging market country, it invests in securities issued by a company that (i) has its principal trading market for its stock in an emerging market country, or (ii) derives at least 50% of its revenues or profits from corporations within emerging market countries or has at least
50% of its assets located in emerging market countries. The Emerging Growth Fund may invest up to 10% of its total assets in emerging market countries. The Large Cap Growth Fund may invest up to 15% of its total assets in securities of emerging market countries traded on the U.S. market.
Investments in securities of issuers based in underdeveloped countries entail all of the risks of investing in foreign issuers outlined in this section to a heightened degree. These heightened risks include: (i) expropriation, confiscatory taxation, nationalization, and less social, political and economic stability; (ii) the smaller size of the market for such securities and a low or nonexistent volume of trading, resulting in a lack of liquidity and in price volatility; (iii) certain national policies which may restrict a Fund's investment opportunities including restrictions on investing in issuers in industries deemed sensitive to relevant national interests; and (iv) the absence of developed capital markets and legal structures governing private or foreign investment and private property and the possibility that recent favorable economic and political developments could be slowed or reversed by unanticipated events.
CURRENCY EXCHANGE RATES. A Fund's share value may change significantly when the currencies, other than the U.S. dollar, in which the Fund's investments are denominated, strengthen or weaken against the U.S. dollar. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries as seen from an international perspective. Currency exchange rates can also be affected unpredictably by intervention by U.S. or foreign governments or central banks or by currency controls or political developments in the United States or abroad.
ADRS, ADSS, EDRS AND CDRS. American Depository Receipts ("ADRs") and American Depository Shares ("ADSs") are U.S. dollar-denominated receipts typically issued by domestic banks or trust companies that represent the deposit with those entities of securities of a foreign issuer. They are publicly traded on exchanges or over-the-counter in the United States. European Depositary Receipts ("EDRs"), which are sometimes referred to as Continental Depositary Receipts ("CDRs"), may also be purchased by the Funds. EDRs and CDRs are generally issued by foreign banks and evidence ownership of either foreign or domestic securities. Certain institutions issuing ADRs, ADSs or EDRs may not be sponsored by the issuer of the underlying foreign securities. A non-sponsored depository may not provide the same shareholder information that a sponsored depository is required to provide under its contractual arrangements with the issuer of the underlying foreign securities.
OPTIONS
A Fund may write (sell), to a limited extent, only covered call and put options ("covered options") in an attempt to increase income. However, the Fund may forgo the benefits of appreciation on securities sold or may pay more than the market price on securities acquired pursuant to call and put options written by the Fund.
When a Fund writes a covered call option, it gives the purchaser of the option the right to buy the underlying security at the price specified in the option (the "exercise price") by exercising the option at any time during the option period. If the option expires unexercised, the Fund will realize income in an amount equal to the premium received for writing the option. If the option is exercised, a decision over which the Fund has no control, the Fund must sell the underlying security to the option holder at the exercise price. By writing a covered call option, the Fund forgoes, in exchange for the premium less the commission ("net premium"), the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price.
When a Fund writes a covered put option, it gives the purchaser of the option the right to sell the underlying security to the Fund at the specified exercise price at any time during the option period. If the option expires unexercised, the Fund will realize income in the amount of the premium received for writing the option. If the put option is exercised, a decision over which the Fund has no control, the Fund must purchase the underlying security from the option holder at the exercise price. By writing a covered put option, the Fund, in exchange for the net premium received, accepts the risk of a decline in the market value of the underlying security below the exercise price.
A Fund may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written. This transaction is called a "closing purchase transaction." Where the Fund cannot effect a closing purchase transaction, it may be forced to incur brokerage commissions or dealer spreads in selling securities it receives or it may be forced to hold underlying securities until an option is exercised or expires.
When a Fund writes an option, an amount equal to the net premium received by the Fund is included in the liability section of the Fund's Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked to market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires on its stipulated expiration date or if the Fund enters into a closing purchase transaction, the Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold), and the deferred credit related to such option will be eliminated. If a call option is exercised, the Fund will realize a gain or loss from the sale of the underlying security and the proceeds of the sale will be increased by the premium originally received. The writing of covered call options may be deemed to involve the pledge of the securities against which the option is being written.
When a Fund writes a call option, it will "cover" its obligation by segregating the underlying security on the books of the Fund's custodian or by placing liquid securities in a segregated account at the Fund's custodian. When a Fund writes a put option, it will "cover" its obligation by placing liquid securities in a segregated account at the Fund's custodian.
A Fund may purchase call and put options on any securities in which it may invest. The Fund would normally purchase a call option in anticipation of an increase in the market value of such securities. The purchase of a call option would entitle the Fund, in exchange for the premium paid, to purchase a security at a specified price during the option period. The Fund would ordinarily have a gain if the value of the securities increased above the exercise price sufficiently to cover the premium and would have a loss if the value of the securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline in the market value of securities in its portfolio ("protective puts") or securities of the type in which it is permitted to invest. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell a security, which may or may not be held in the Fund's portfolio, at a specified price during the option period. The purchase of protective puts is designed merely to offset or hedge against a decline in the market value of the Fund's portfolio securities. Put options also may be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price of securities which the Fund does not own. The Fund would ordinarily recognize a gain if the value of the securities decreased below the exercise price sufficiently to cover the premium and would recognize a loss if the value of the securities remained at or above the exercise price. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of underlying portfolio securities.
The Funds have adopted certain other nonfundamental policies concerning option transactions that are discussed below. A Fund's activities in options may also be restricted by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot be reflected in the option markets. It is impossible to predict the volume of trading that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue.
OPTIONS ON STOCKS. A Fund may write or purchase options on stocks. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying stock at the exercise price at any time during the option period. Similarly, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy the underlying stock at the exercise price at any time during the option period. A covered call option with respect to which a Fund owns the underlying stock sold by the Fund exposes the Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying stock or to possible continued holding of a stock which might otherwise have been sold to protect against depreciation in the market price of the stock. A covered put option sold by a Fund exposes the Fund during the term of the option to a decline in price of the underlying stock.
To close out a position when writing covered options, a Fund may make a "closing purchase transaction" which involves purchasing an option on the same stock with the same exercise price and expiration date as the option which it has previously written on the stock. The Fund will realize a profit or loss for a closing purchase transaction if the amount paid to purchase an option is less or more, as the case may be, than the amount received from the sale thereof. To close out
a position as a purchaser of an option, the Fund may make a "closing sale transaction" which involves liquidating the Fund's position by selling the option previously purchased.
OPTIONS ON SECURITIES INDEXES. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the index. Such options will be used for the purposes described above under "Options on Securities" or, to the extent allowed by law, as a substitute for investment in individual securities.
Options on securities indexes entail risks in addition to the risks of options on securities. The absence of a liquid secondary market to close out options positions on securities indexes is more likely to occur, although the Fund generally will only purchase or write such an option if the Fund Sub-Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in such options may be interrupted if trading in certain securities included in the index is interrupted. The Fund will not purchase such options unless the respective Fund Sub-Advisor believes the market is sufficiently developed such that the risk of trading in such options is no greater than the risk of trading in options on securities.
Price movements in a Fund's portfolio may not correlate precisely with movements in the level of an index and, therefore, the use of options on indexes cannot serve as a complete hedge. Because options on securities indexes require settlement in cash, the Fund Sub-Advisor may be forced to liquidate portfolio securities to meet settlement obligations.
When a Fund writes a put or call option on a securities index it will cover the position by placing liquid securities in a segregated asset account with the Fund's custodian.
Options on securities indexes are generally similar to options on stock except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, 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
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in securities index options prior to expiration by entering into a closing transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of the index rather than the price of a particular security, whether the Fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of securities prices in the market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in price of a particular security. Accordingly, successful use by a Fund of options on security indexes will be subject to the Fund Sub-Advisor's ability to predict correctly movement in the direction of that securities market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual securities.
RELATED INVESTMENT POLICIES. A Fund may purchase and write put and call options on securities indexes listed on domestic and, in the case of those Funds which may invest in foreign securities, on foreign exchanges. A securities index fluctuates with changes in the market values of the securities included in the index.
OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies are used for hedging purposes in a manner similar to that in which futures contracts on foreign currencies, or forward contracts, are utilized. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Fund may purchase put options on the foreign currency. If the value of the currency does decline, a Fund will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the Fund may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of hedging purposes. For example, where a Fund anticipates a decline in the dollar value of foreign currency denominated securities due to adverse fluctuations in exchange rates, it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the options will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency, which, if rates move in the manner projected, will expire, unexercised and allow the Fund to hedge such increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to purchase or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements in exchange rates.
The Funds may write covered call options on foreign currencies. A call option written on a foreign currency by a Fund is "covered" if the Fund owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Fund has a call on the same foreign currency and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash and liquid securities in a segregated account with its custodian.
The Funds may also write call options on foreign currencies that are not covered for cross-hedging purposes. A call option on a foreign currency is for cross-hedging purposes if it is not covered, but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Fund owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Fund collateralizes the option by maintaining in a segregated account with its custodian, cash or liquid securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked to market daily.
RELATED INVESTMENT POLICIES. Each Fund that may invest in foreign securities may write covered put and call options and purchase put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of portfolio securities and against increases in the dollar cost of securities to be acquired. The Fund may use options on currency to cross-hedge, which involves writing or purchasing options on one currency to hedge against changes in exchange rates for a different, but related currency. As with other types 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 Fund 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 be used to hedge against fluctuations in exchange rates although, in the event of exchange rate movements adverse to the Fund's position, it may not forfeit the entire amount of the premium plus related transaction costs. In addition, the Fund may purchase call options on currency when the Fund Sub-Advisor anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange will exist for any particular option, or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying currency or dispose of assets held in a segregated account until the options expire. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has
purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying currency. The Fund pays brokerage commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies are traded over-the-counter and involve liquidity and credit risks that may not be present in the case of exchange-traded currency options. A Fund's ability to terminate over-the-counter options ("OTC Options") will be more limited than the exchange-traded options. It is also possible that broker-dealers participating in OTC Options transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, the Fund will treat purchased OTC Options and assets used to cover written OTC Options as illiquid securities. With respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the repurchase formula.
FORWARD CURRENCY CONTRACTS. Because, when investing in foreign securities, a Fund buys and sells securities denominated in currencies other than the U.S. dollar and receives interest, dividends and sale proceeds in currencies other than the U.S. dollar, such Funds from time to time may enter into forward currency transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. A Fund either enters into these transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or uses forward currency contracts to purchase or sell foreign currencies.
A forward currency contract is an obligation by a Fund to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract. Forward currency contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward currency contract generally has no deposit requirement and is traded at a net price without commission. Each Fund maintains with its custodian a segregated account of liquid securities in an amount at least equal to its obligations under each forward currency contract. Neither spot transactions nor forward currency contracts eliminate fluctuations in the prices of the Fund's securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.
A Fund may enter into foreign currency hedging transactions in an attempt to protect against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in foreign currency exchange rates that would adversely affect a portfolio position or an anticipated investment position. Since consideration of the prospect for currency parities will be incorporated into a Fund Sub-Advisor's long-term investment decisions, a Fund will not routinely enter into foreign currency hedging transactions with respect to security transactions; however, the Fund Sub-Advisors believe that it is important to have the flexibility to enter into foreign currency hedging transactions when they determine that the transactions would be in a Fund's best interest. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of such securities between the date the forward currency contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may in the future assert authority to regulate forward currency contracts. In such event the Fund's ability to utilize forward currency contracts may be restricted. Forward currency contracts may reduce the potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts. The use of forward currency contracts may not eliminate fluctuations in the underlying U.S. dollar equivalent value of the prices of or rates of return on a Fund's foreign currency denominated portfolio securities and the use of such techniques will subject a Fund to certain risks.
The matching of the increase in value of a forward currency contract and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise. In addition, a Fund may not always be able to enter into forward currency contracts at attractive prices and this will limit the Fund's ability to use such contract to hedge or cross-hedge its assets. Also, with regard to a Fund's use of cross-hedges, there can be no assurance that historical correlations between the movements of certain foreign currencies relative to the U.S. dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying a Fund's cross-hedges and the movements in the exchange rates of the foreign currencies in which the Fund's assets that are the subject of such cross-hedges are denominated.
BORROWING AND LENDING
BORROWING. The Funds may borrow money from banks (including their custodian bank) or from other lenders to the extent permitted under applicable law, for temporary or emergency purposes and to meet redemptions and may pledge their assets to secure such borrowings. The 1940 Act requires the Funds to maintain asset coverage of at least 300% for all such borrowings, and should such asset coverage at any time fall below 300%, the Funds would be required to reduce their borrowings within three days to the extent necessary to meet the requirements of the 1940 Act. To reduce their borrowings, the Funds might be required to sell securities at a time when it would be disadvantageous to do so. In addition, because interest on money borrowed is a Fund expense that it would not otherwise incur, the Funds may have less net investment income during periods when its borrowings are substantial. The interest paid by the Funds on borrowings may be more or less than the yield on the securities purchased with borrowed funds, depending on prevailing market conditions.
A Fund will not make any borrowing that would cause its outstanding borrowings to exceed one-third of the value of its total assets. As a matter of current operating policy, the Emerging Growth Fund, the Enhanced 30 Fund, the Value Plus Fund, the Large Cap Growth Fund and the Small Cap Growth Fund each intend to borrow money only as a temporary measure for extraordinary or emergency purposes. This policy is not fundamental and may be changed by the Board of Trustees without shareholder approval.
LENDING. By lending its securities, a Fund can increase its income by continuing to receive interest on the loaned securities as well as by either investing the cash collateral in short-term securities or obtaining yield in the form of interest paid by the borrower when U.S. Government obligations are used as collateral. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. Each Fund will adhere to the following conditions whenever its securities are loaned: (i) the Fund must receive at least 100 percent cash collateral or equivalent securities from the borrower; (ii) the borrower must increase this collateral whenever the market value of the securities including accrued interest rises above the level of the collateral; (iii) the Fund must be able to terminate the loan at any time; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (v) the Fund may pay only reasonable custodian fees in connection with the loan; and (vi) voting rights on the loaned securities may pass to the borrower; provided, however, that if a material event adversely affecting the investment occurs, the Board of Trustees must terminate the loan and regain the right to vote the securities.
As a matter of current operating policy, the Large Cap Growth Fund intends to limit the amount of loans of portfolio securities to no more than 25% of its net assets. This policy may be changed by the Board of Trustees without shareholder approval.
OTHER INVESTMENT POLICIES
SWAP AGREEMENTS. To help enhance the value of its portfolio or manage its exposure to different types of investments, the Funds may enter into interest rate, currency and mortgage swap agreements and may purchase and sell interest rate "caps," "floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make regular payments equal to a floating interest rate on a specified amount (the "notional principal amount") in return for payments equal to a fixed interest rate on the same amount for a specified period. If a swap agreement provides for payment in different currencies, the parties may also agree to exchange the notional principal amount. Mortgage swap agreements are similar to interest rate swap agreements, except that notional principal amount is tied to a reference pool of mortgages. In a cap or floor, one party agrees, usually in return for a fee, to make payments under particular circumstances. For example, the purchaser of an interest rate cap has the right to receive payments to the extent a specified interest rate exceeds an agreed level; the purchaser of an interest rate floor has the right to receive payments to the extent a specified interest rate falls below an agreed level. A collar entitles the purchaser to receive payments to the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile. Swap agreements may have a considerable impact on a Fund's performance, depending on how they are used. Swap agreements involve risks depending upon the other party's creditworthiness and ability to perform, as judged by the Fund Sub-Advisor, as well as the Fund's ability to terminate its swap agreements or reduce its exposure through offsetting transactions. All swap agreements are considered as illiquid securities and, therefore, will be limited, along with all of a Fund's other illiquid securities, to 15% of that Fund's net assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed advantageous at a particular time, a Fund may purchase securities on a when-issued or delayed-delivery basis, in which case delivery of the securities occurs beyond the normal settlement period; payment for or delivery of the securities would be made prior to the reciprocal delivery or payment by the other party to the transaction. A Fund will enter into when-issued or delayed-delivery transactions for the purpose of acquiring securities and not for the purpose of leverage. When-issued securities purchased by a Fund may include securities purchased on a "when, as and if issued" basis under which the issuance of the securities depends on the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring.
Securities purchased on a when issued or delayed-delivery basis may expose a Fund to risk because the securities may experience fluctuations in value prior to their actual delivery. The Fund does not accrue income with respect to a when-issued or delayed-delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed-delivery basis can involve the additional risk that the yield available in the market when the delivery takes place may be higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which a Fund purchases a security and simultaneously commits to resell that security to the seller at an agreed upon time and price, thereby determining the yield during the term of the agreement. In the event of a bankruptcy or other default of the seller of a repurchase agreement, a Fund could experience both delays in liquidating the underlying security and losses. To minimize these possibilities, each Fund intends to enter into repurchase agreements only with its Custodian, with banks having assets in excess of $10 billion and with broker-dealers who are recognized as primary dealers in U.S. Government obligations by the Federal Reserve Bank of New York. The Funds will enter into repurchase agreements that are collateralized by U.S. Government obligations. Collateral for repurchase agreements is held in safekeeping in the customer-only account of the Funds' Custodian at the Federal Reserve Bank. At the time a Fund enters into a repurchase agreement, the value of the collateral, including accrued interest, will equal or exceed the value of the repurchase agreement and, in the case of a repurchase agreement exceeding one day, the seller agrees to maintain sufficient collateral so that the value of the underlying collateral, including accrued interest, will at all times equal or exceed the value of the repurchase agreement.
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS. In a reverse repurchase agreement a Fund agrees to sell portfolio securities to financial institutions such as banks and broker-dealers and to repurchase them at a mutually agreed date and price. Forward roll transactions are equivalent to reverse repurchase agreements but involve mortgage-backed securities and involve a repurchase of a substantially similar security. At the time the Fund enters into a reverse repurchase agreement or forward roll transaction it will place in a segregated custodial account cash or liquid securities having a value equal to the repurchase price, including accrued interest. Reverse repurchase agreements and forward roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase price of the securities. Reverse repurchase agreements and forward roll transactions are considered to be borrowings by a Fund.
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when the Fund Sub-Advisor believes that pursuing the Fund's basic investment strategy may be inconsistent with the best interests of its shareholders, a Fund may invest its assets without limit in the following money market instruments: securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities (including those purchased in the form of custodial receipts), repurchase agreements, certificates of deposit, master notes, time deposits and bankers' acceptances issued by banks or savings and loan associations having assets of at least $500 million as of the end of their most recent fiscal year and high quality commercial paper.
A Fund also may hold a portion of its assets in money market instruments or cash in amounts designed to pay expenses, to meet anticipated redemptions or pending investments in accordance with its objectives and policies. Any temporary investments may be purchased on a when-issued basis.
CONVERTIBLE SECURITIES. Convertible securities may offer higher income than the common stocks into which they are convertible and include fixed-income or zero coupon debt securities, which may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. Prior to their conversion, convertible securities may have characteristics similar to both non-convertible debt securities and equity securities. While convertible securities generally offer lower yields than non-convertible debt securities of similar quality, their prices may reflect changes in the value of the underlying common stock. Convertible securities entail less credit risk than the issuer's common stock.
ASSET COVERAGE. To assure that a Fund's use of futures and related options, as well as when-issued and delayed-delivery transactions, forward currency contracts and swap transactions, are not used to achieve investment leverage, the Fund will cover such transactions, as required under applicable SEC interpretations, either by owning the underlying securities or by establishing a segregated account with its custodian containing liquid securities in an amount at all times equal to or exceeding the Fund's commitment with respect to these instruments or contracts.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at a specified price and are valid for a specific time period. Rights are similar to warrants, but normally have a short duration and are distributed by the issuer to its shareholders. A Fund may purchase warrants and rights, provided that no Fund presently intends to invest more than 5% of its net assets at the time of purchase in warrants and rights other than those that have been acquired in units or attached to other securities.
SHORT-TERM TRADING. Short-term trading involves the selling of securities held for a short time, ranging from several months to less than a day. The object of such short-term trading is to increase the potential for capital appreciation and/or income of the Fund in order to take advantage of what the Sub-Advisor believes are changes in market, industry or individual company conditions or outlook. Any such trading would increase the turnover rate of a Fund and its transaction costs.
VARIABLE AND FLOATING RATE SECURITIES. The Growth Opportunities Fund may acquire variable and floating rate securities, subject to the Fund's investment objective, policies and restrictions. A variable rate security is one whose terms provide for the readjustment of its interest rate on set dates and which, upon such readjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate security is one whose terms provide for the readjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value.
DERIVATIVES. A Fund 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 certain 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 is 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. However, some derivatives are used for leverage, which tends to magnify the effects of an instrument's price changes as market conditions change. Leverage involves the use of a small amount of money to control a large amount of financial assets, and can in some circumstances, lead to significant losses. A Fund Sub-Advisor will use derivatives only in circumstances where the Fund Sub-Advisor believes they offer the most economic means of improving the risk/reward profile of the Fund. Derivatives will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indexes that by themselves would not be purchased for the Fund. The use of derivatives for non-hedging purposes may be considered speculative.
INITIAL PUBLIC OFFERINGS ("IPOS"). The Emerging Growth Fund, Small Cap Growth Fund and Micro Cap Growth Fund may invest in IPOs. An IPO presents the risk that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transactions costs. IPO shares are subject to market risk and liquidity risk. When a Fund's asset base is small, a significant portion of the Fund's performance could be attributable to investments in IPOs, because such investments would have a magnified impact on the Fund. As the Fund's asset grow, the effect of the Fund's investments in IPOs on the Fund's performance probably will decline, which could reduce the Fund's performance. Because of the price volatility of IPO shares, a Fund may choose to hold IPO shares for a very short period of time. This may increase the turnover of a Fund and may lead to increased expenses to the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. There is no assurance that the Fund will be able to obtain allocable portions of IPO shares. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Fund's investments in IPO shares may include the securities of "unseasoned" companies (companies with less than three years of continuous operations), which present risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited products.
SENIOR SECURITIES. As a matter of current operating policy, the following activities will not be considered to be issuing senior securities with respect to the Funds:
1. Collateral arrangements in connection with any type of option, futures contract, forward contract or swap.
2. Collateral arrangements in connection with initial and variation margin.
3. A pledge, mortgage or hypothecation of a Fund's assets to secure its borrowings.
4. A pledge of a Fund's assets to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute.
MAJORITY. As used in this Statement of Additional Information, the term "majority" of the outstanding shares of the Trust (or of any Fund) means the lesser of (1) 67% or more of the outstanding shares of the Trust (or the applicable Fund) present at a meeting, if the holders of more than 50% of the outstanding shares of the Trust (or the applicable Fund) are present or represented at such meeting or (2) more than 50% of the outstanding shares of the Trust (or the applicable Fund).
RATING SERVICES
The ratings of nationally recognized statistical rating organizations represent their opinions as to the quality of the securities that they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality. Although these ratings are an initial criterion for selection of portfolio investments, each Fund Sub-Advisor also makes its own evaluation of these securities, subject to review by the Board of Trustees of the Trust. After purchase by a Fund, an obligation may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event would require a Fund to eliminate the obligation from its portfolio, but a Fund Sub-Advisor will consider such an event in
its determination of whether a Fund should continue to hold the obligation. A description of the ratings used herein and in the Funds' Prospectus is set forth in the Appendix to this Statement of Additional Information.
INVESTMENT LIMITATIONS
The Trust has adopted certain fundamental investment limitations designed to reduce the risk of an investment in the Funds. These limitations may not be changed with respect to any Fund without the affirmative vote of a majority of the outstanding shares of that Fund. The vote of a majority of the outstanding shares means the vote of the lesser of (1) 67% or more of the shares present or represented by proxy at the meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares.
THE FUNDAMENTAL LIMITATIONS APPLICABLE TO THE FUNDS ARE:
1. BORROWING MONEY. The Funds may not engage in borrowing except as permitted by the Investment Company Act of 1940, any rule, regulation or order under the Act or any SEC staff interpretation of the Act.
2. UNDERWRITING. (VALUE PLUS FUND, ENHANCED 30 FUND, LARGE CAP GROWTH FUND, GROWTH OPPORTUNITIES FUND, SMALL CAP GROWTH FUND AND MICRO CAP GROWTH FUND). The Funds may not underwrite securities issued by other persons, except to the extent that, in connection with the sale or disposition of portfolio securities, a Fund may be deemed to be an underwriter under certain federal securities laws or in connection with investments in other investment companies.
(EMERGING GROWTH FUND). The Fund may not underwrite securities issued by other persons, except to the extent that, in connection with the sale or disposition of portfolio securities, the Fund may be deemed to be an underwriter under certain federal securities laws.
3. LOANS. The Funds may not make loans to other persons except that a Fund
may (1) engage in repurchase agreements, (2) lend portfolio securities,
(3) purchase debt securities, (4) purchase commercial paper, and (5) enter
into any other lending arrangement permitted by the Investment Company Act
of 1940, any rule, regulation or order under the Act or any SEC staff
interpretation of the Act.
4. REAL ESTATE. The Funds may not purchase or sell real estate except that a Fund may (1) hold and sell real estate acquired as a result of the Fund's ownership of securities or other instruments (2) purchase or sell securities or other instruments backed by real estate or interests in real estate and (3) purchase or sell securities of entities or investment vehicles, including real estate investment trusts that invest, deal or otherwise engage in transactions in real estate or interests in real estate.
5. COMMODITIES. The Funds may not purchase or sell physical commodities except that a Fund may (1) hold and sell physical commodities acquired as a result of the Fund's ownership of securities or other instruments, (2) purchase or sell securities or other instruments backed by physical commodities, (3) purchase or sell options, and (4) purchase or sell futures contracts.
6. CONCENTRATION OF INVESTMENTS. The Funds may not purchase the securities of an issuer (other than securities issued or guaranteed by the United States Government, its agencies or its instrumentalities) if, as a result, more than 25% of the Fund's total assets would be invested in the securities of companies whose principal business activities are in the same industry.
7. SENIOR SECURITIES. The Funds may not issue senior securities except as permitted by the Investment Company Act of 1940, any rule, regulation or order under the Act or any SEC staff interpretation of the Act.
ADDITIONAL RESTRICTIONS. The Trust, on behalf of each Fund, has adopted the following additional restrictions as a matter of "operating policy." These restrictions are changeable by the Board of Trustees without shareholder vote.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE VALUE PLUS FUND AND THE ENHANCED 30 FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. BORROWING MONEY. A Fund will not borrow money (including through reverse repurchase agreements or forward roll transactions involving mortgage-backed securities or similar investment techniques entered into for leveraging purposes), except that the Fund may borrow for temporary or emergency purposes up to 10% of its total assets; provided, however, that no Fund may purchase any security while outstanding borrowings exceed 5%;
2. PLEDGING. A Fund will not pledge, mortgage or hypothecate for any purpose in excess of 10% of the Fund's total assets (taken at market value), provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, and reverse repurchase agreements are not considered a pledge of assets for purposes of this restriction;
3. MARGIN PURCHASES. A Fund will not 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;
4. SELLING SECURITIES. A Fund will not sell any security which it does not own unless by virtue of its ownership of other securities it has at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold and provided that if such right is conditional the sale is made upon the same conditions;
5. INVESTING FOR CONTROL. A Fund will not invest for the purpose of exercising control or management;
6. ILLIQUID SECURITIES. A Fund will not invest more than 15% of its net assets (taken at the greater of cost or market value) in securities that are illiquid or not readily marketable (defined as a security that cannot be sold in the ordinary course of business within seven days at approximately the value at which the Fund has valued the security) 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 and either (i) is rated in one of the two highest categories by at least two nationally recognized statistical rating organizations and the Fund's Board of Trustees has determined the commercial paper to be liquid; or (ii) is rated in one of the two highest categories by one nationally recognized statistical rating agency and the Fund's Board of Trustees has determined that the commercial paper is equivalent quality and is liquid;
7. RESTRICTED SECURITIES. A Fund will not invest more than 10% of its total assets in securities that are restricted from being sold to the public without registration under the 1933 Act (other than Rule 144A Securities deemed liquid by the Fund's Board of Trustees);
8. SECURITIES OF ONE ISSUER. A Fund will not purchase securities of any issuer if such purchase at the time thereof would cause the Fund to hold more than 10% of any class of securities of such issuer, for which purposes all indebtedness of an issuer shall be deemed a single class and all preferred stock of an issuer shall be deemed a single class, except that futures or option contracts shall not be subject to this restriction;
9. SHORT SALES. A Fund will not make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue and equal in amount to, the securities sold short, and unless not more than 10% of the Fund's net assets (taken at market value) is represented by such securities, or securities convertible into or exchangeable for such securities, at any one time (the Funds have no current intention to engage in short selling);
10. PURCHASE OF PUTS AND CALLS. A Fund will not purchase puts, calls, straddles, spreads and any combination thereof if by reason thereof the value of the Fund's aggregate investment in such classes of securities will exceed 5% of its total assets;
11. WRITING OF PUTS AND CALLS. A Fund will not write puts and calls on securities unless each of the following conditions are met: (a) the security underlying the put or call is within the investment policies of the Fund and the option is issued by the OCC, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate value of the obligations underlying the puts determined as of the date the options are sold shall not exceed 50% of the Fund's net assets; (c) the securities subject to the exercise of the call written by the Fund must be owned by the Fund at the time the call is sold and must continue to be owned by the Fund until the call has been exercised, has lapsed, or the Fund has purchased a closing call, and such purchase has been confirmed, thereby extinguishing the Fund's obligation to deliver securities pursuant to the call it has sold; and (d) at the time a put is written, the Fund establishes a segregated account with its custodian consisting of cash or liquid securities equal in value to the amount the Fund will be obligated to pay upon exercise of the put (this account must be maintained until the put is exercised, has expired, or the Fund has purchased a closing put, which is a put of the same series as the one previously written).
12. PUTS AND CALLS ON FUTURES. A Fund will not buy and sell puts and calls on securities, stock index futures or options on stock index futures, or financial futures or options on financial futures unless such options are written by other persons and: (a) the options or futures are offered through the facilities of a national securities association or are listed on a national securities or commodities exchange, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate premiums paid on all such options which are held at any time do not exceed 20% of the Fund's total net assets; and (c) the aggregate margin deposits required on all such futures or options thereon held at any time do not exceed 5% of the Fund's total assets.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE LARGE CAP GROWTH FUND, THE SMALL CAP GROWTH FUND AND THE MICRO CAP GROWTH FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. LARGE CAP GROWTH FUND 80% INVESTMENT POLICY. Under normal circumstances, the Fund will invest at least 80% of its assets (defined as net assets plus the amount of any borrowing for investment purposes) in a non-diversified portfolio of common stocks of large cap companies. A large cap company has a market capitalization of more than $10 billion.
2. SMALL CAP GROWTH FUND 80% INVESTMENT POLICY. Under normal circumstances, the Fund will invest at least 80% of its assets (defined as net assets plus the amount of any borrowing for investment purposes) in common stocks of small cap companies. A small cap company has a market capitalization of less than $1.5 billion.
3. MICRO CAP GROWTH FUND 80% INVESTMENT POLICY. Under normal circumstances, the Fund will invest at least 80% of its assets (defined as net assets plus the amount of any borrowing for investment purposes) in common stocks of micro cap companies. A micro cap company has a market capitalization of $30 to $300 million.
Shareholders of the applicable Fund will be provided with at least 60 days' prior notice of any change to either of these policies. The notice will be provided in a separate written document containing the following, or similar, statement, in boldface type: "Important Notice Regarding Change in Investment Policy." The statement will also appear on the envelope in which the notice is delivered, unless the notice is delivered separately from other communications to the shareholder.
THE FOLLOWING INVESTMENT LIMITATION FOR THE EMERGING GROWTH FUND IS NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. BORROWING MONEY. The Emerging Growth Fund intends to borrow money only as a temporary measure for extraordinary or emergency purposes. In addition, the Fund may engage in reverse repurchase agreements, forward roll transactions involving mortgage-backed securities or other investment techniques entered into for the purpose of leverage.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE GROWTH OPPORTUNITIES FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. ILLIQUID INVESTMENTS. The Fund will not purchase securities for which there are legal or contractual restrictions on resale or for which no readily available market exists (or engage in a repurchase agreement maturing in more than seven days) if, as a result thereof, more than 15% of the value of its net assets would be invested in such securities.
2. MARGIN PURCHASES. The Fund will not purchase securities or evidences of interest thereon on "margin." This limitation is not applicable to short-term credit obtained by the Fund for the clearance of purchases and sales or redemption of securities or to the extent necessary to engage in transactions described in the Prospectus and Statement of Additional Information involving margin purchases.
3. SHORT SALES. The Fund will not make short sales of securities.
With respect to the percentages adopted by the Trust as maximum limitations on the Funds' investment policies and restrictions, an excess above the fixed percentage (except for the percentage limitations relative to the borrowing of money or investing in illiquid securities) will not be a violation of the policy or restriction unless the excess results immediately and directly from the acquisition of any security or the action taken.
TRUSTEES AND OFFICERS
The following is a list of the Trustees and executive officers of the Trust, the length of time served, principal occupations for the past 5 years, number of funds overseen in the Touchstone Family of Funds and other directorships held.
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INTERESTED TRUSTEES(1):
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NAME POSITION TERM OF PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS OTHER
ADDRESS HELD WITH OFFICE NUMBER DIRECTORSHIPS
AGE TRUST AND OF FUNDS HELD(4)
LENGTH OVERSEEN
OF TIME IN THE
SERVED(2) TOUCHSTONE
FAMILY(3)
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Jill T. McGruder Trustee and Until Senior Vice President of The Western and 32 Director of
Touchstone President retirement Southern Life Insurance Company. President LaRosa's (a
Advisors, Inc at age 75 and a director of IFS Financial Services, restaurant chain).
221 East Fourth Street or until Inc. (a holding company). She is a
Cincinnati, OH she director of Capital Analysts Incorporated
Age: 49 resigns or (an investment advisor and broker-dealer),
is removed Integrated Fund Services, Inc. (the Trust's
administrator and transfer agent) and IFS
Trustee Fund Distributors, Inc. (a broker-dealer),
since 1999 Touchstone Advisors, Inc. (the Trust's
investment advisor) and Touchstone
Securities, Inc. (the Trust's
distributor). She is also President and a
director of IFS Agency Services, Inc. (an
insurance agency), W&S Financial Group
Distributors, Inc. and IFS Systems, Inc.
She is Senior Vice President and a director
of Fort Washington Brokerage Services, Inc.
(a broker-dealer). She is President of
Touchstone Tax-Free Trust, Touchstone
Investment Trust, Touchstone Variable
Series Trust and Touchstone Strategic
Trust. She was President of Touchstone
Advisors, Inc and Touchstone Securities,
Inc. until 2004.
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John F. Barrett Trustee Until Chairman of the Board, President and Chief 32 Director of The
The Western and retirement Executive Officer of The Western and Andersons (an
Southern Life at age 75 Southern Life Insurance Company , Western- agribusiness and
Insurance Company or until Southern Life Assurance Company and Western retailing
400 Broadway he resigns & Southern Financial Group, Inc.; Director company);
Cincinnati, OH or is and Chairman of Columbus Life Insurance Convergys
Age: 55 removed Company; Fort Washington Investment Corporation (a
Advisors, Inc., Integrity Life Insurance provider of
Trustee Company and National Integrity Life integrated
since 2002 Insurance Company; Director of Eagle Realty billing solutions
Group, Inc., Eagle Realty Investments, and
Inc.; Integrated Fund Services, Inc. and customer/employee
IFS Holdings, Inc.; Director, Chairman and care services)
CEO of WestAd, Inc.; President and Trustee and Fifth Third
of Western & Southern Foundation. Bancorp.
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INDEPENDENT
TRUSTEES:
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J. Leland Brewster II Trustee Until Retired Senior Partner of Frost Brown Todd 32 Director of
5155 Ivyfarm Road retirement LLC (a law firm). Consolidated
Cincinnati, OH in 2005 or Health Services,
Age: 75 until he Inc.
resigns or
is
removed
Trustee
Since 2000
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William O. Coleman Trustee Until Retired Vice President of The Procter & 32 Director of
c/o Touchstone retirement Gamble Company. A Trustee of The Procter & LCA-Vision (a
Advisors, Inc. at age 75 Gamble Profit Sharing Plan and The Procter laser vision
221 East Fourth Street or until & Gamble Employee Stock Ownership Plan correction
Cincinnati, OH he until 2000. company) and
Age: 75 resigns Millennium
or is Bancorp.
removed
Trustee
since 1999
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Phillip R. Cox Trustee Until President and Chief Executive Officer of 32 Director of the
105 East Fourth Street retirement Cox Financial Corp. (a financial services Federal Reserve
Cincinnati, OH at age 75 company). Bank of
Age: 56 or until Cleveland;
he Broadwing, Inc.
resigns (a communications
or is company); and
removed Cinergy
Corporation (a
utility company).
Trustee
since 1999
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H. Jerome Lerner Trustee Until Principal of HJL Enterprises (a privately 32 None
2828 Highland Avenue retirement held investment company); Chairman of Crane
Cincinnati, OH at age 75 Connectors (a manufacturer of electronic
Age: 65 or until connectors).
he
resigns
or is
removed
Trustee
since 1989
-----------------------------------------------------------------------------------------------------------------------------
Robert E. Trustee Until Retired Partner of KPMG LLP (a certified 32 Trustee of Good
Stautberg retirement public accounting firm). He is Vice Samaritan
4815 Drake Road at age 75 President of St. Xavier High School. Hospital,
Cincinnati, OH or until Bethesda Hospital
Age: 69 he and Tri-Health,
resigns Inc.
or is
removed
Trustee
since 1999
-----------------------------------------------------------------------------------------------------------------------------
John P. Zanotti Trustee Until CEO and Chairman of Avaton, Inc. (a 32 None
c/o Touchstone retirement wireless entertainment company). President
Advisors, Inc. at age 75 of Cincinnati Biomedical (a consulting
221 East Fourth Street or until company) and a Director of QMed (a health
Cincinnati, OH he care management company). CEO and Chairman
Age: 56 resigns of Astrum Digital Information (an
or is information monitoring company) from 2000
removed until 2001; President of Great American
Life Insurance Company from 1999 until
Trustee 2000; A Director of Chiquita Brands
since 2002 International, Inc. until 2000; Senior
Executive of American Financial Group, Inc.
(a financial services company) from 1996
until 1999.
-----------------------------------------------------------------------------------------------------------------------------
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(1) Ms. McGruder, as a director of Touchstone Advisors, Inc., the Trust's investment advisor, and Touchstone Securities, Inc., the Trust's distributor and an officer of affiliates of the advisor and distributor, is an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act. Mr. Barrett, as President and Chairman of The Western and Southern Life Insurance Company and Western-Southern Life Assurance Company, parent companies of Touchstone Advisors, Inc. and Touchstone Securities, Inc., Chairman of Fort Washington Investment Advisors, Inc., a Trust sub-advisor and an officer of other affiliates of the advisor and distributor is an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act.
(2) Each Trustee is elected to serve until the age of 75 or after five years of service, whichever is greater, or until he or she sooner resigns or is removed.
(3) The Touchstone Family of Funds consists of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
(4) Each Trustee is also a Trustee of Touchstone Tax-Free Trust, Touchstone Investment Trust and Touchstone Variable Series Trust.
-----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
OFFICERS:
--------------------------------------------------------------------------------------------------------------------------------
NAME POSITION TERM OF PRINCIPAL OCCUPATION(S) DURING PAST NUMBER OF OTHER
ADDRESS HELD WITH OFFICE AND 5 YEARS FUNDS OVERSEEN DIRECTORSHIPS
AGE TRUST(1) LENGTH OF IN THE HELD
TIME SERVED TOUCHSTONE
FAMILY(2)
--------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder President Until See biography above 32 Director of
Touchstone and Trustee resignation, LaRosa's (a
Advisors, Inc. removal or restaurant
221 E. Fourth Street disqualification chain).
Cincinnati, OH
Age: 49 President
since
2004
President
from
2000-2002
--------------------------------------------------------------------------------------------------------------------------------
Brian E. Hirsch Vice Until Vice President-Compliance of IFS 32 None
Touchstone President and resignation, Financial Services, Inc., Director
Advisors, Inc. Chief removal or of Compliance of Fort Washington
221 E. Fourth Street Compliance disqualification Brokerage Services, Inc.; Chief
Cincinnati, OH Officer Compliance Officer of Puglisi & Co.
Age: 47 Vice from May 2001 until August 2002;
President Vice President - Compliance of
since 2003 Palisade Capital Management from
June 1997 until January 2000.
--------------------------------------------------------------------------------------------------------------------------------
James R. Grifo Vice Until President of Touchstone Securities, 32 None
Touchstone President resignation, Inc. and Touchstone Advisors, Inc.
Securities, Inc. removal or Managing Director, Deutsche Asset
221 E. Fourth Street disqualification Management until 2003.
Cincinnati, OH
Age: 53 Vice
President
since 2004
--------------------------------------------------------------------------------------------------------------------------------
Terrie A. Wiedenheft Controller Until Senior Vice President, Chief 32 None
Touchstone and resignation, Financial Officer and Treasurer of
Advisors, Inc. Treasurer removal or Integrated Fund Services, Inc., IFS
221 E. Fourth Street disqualification Fund Distributors, Inc. and Fort
Cincinnati, OH Washington Brokerage Services, Inc.
Age: 42 Controller She is Chief Financial Officer of
since 2000 IFS Financial Services, Inc.,
Touchstone Advisors, Inc. and
Touchstone Securities, Inc. and
Treasurer Assistant Treasurer of Fort
since 2003 Washington Investment Advisors, Inc.
--------------------------------------------------------------------------------------------------------------------------------
Tina H. Bloom Secretary Until Vice President - Managing Attorney 32 None
Integrated Fund resignation, of Integrated Fund Services, Inc.
Services, Inc. removal or and IFS Fund Distributors, Inc.
221 E. Fourth Street disqualification
Cincinnati, OH
Age: 35 Secretary
since 1999
--------------------------------------------------------------------------------------------------------------------------------
|
(1) Each officer also holds the same office with Touchstone Investment Trust,
Touchstone Tax-Free Trust and Touchstone Variable Series Trust.
(2) The Touchstone Family of Funds consists of seven series of the Trust, five
series of Touchstone Tax-Free Trust, five series of Touchstone Investment
Trust and fifteen variable annuity series of Touchstone Variable Series
Trust.
TRUSTEE OWNERSHIP IN THE TOUCHSTONE FUNDS
The following table reflects the Trustees' beneficial ownership in the Trust and the Touchstone Family of Funds as of December 31, 2003:
AGGREGATE DOLLAR
DOLLAR RANGE OF RANGE OF EQUITY
EQUITY SECURITIES IN SECURITIES IN
TRUST THE TOUCHSTONE
FUNDS(1)
-------------------- ------------------
John F. Barrett $10,001 - $ 50,000 $10,001 - $ 50,000
J. Leland Brewster II $50,001 - $100,000 $50,001 - $100,000
William O. Coleman $10,001 - $ 50,000 $10,001 - $ 50,000
Phillip R. Cox None None
H. Jerome Lerner None Over $100,000
Jill T. McGruder $10,001 - $ 50,000 $50,001 - $100,000
Robert E. Stautberg $50,001 - $100,000 $50,001 - $100,000
John P. Zanotti $10,001 - $ 50,000 $10,001 - $ 50,000
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(1) The Touchstone Family of Funds consists of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
TRUSTEE COMPENSATION
The following table shows the compensation paid to the Trustees by the Trust and the aggregate compensation paid by the Touchstone Family of Funds during the fiscal year ended March 31, 2004.
COMPENSATION AGGREGATE COMPENSATION
NAME FROM TRUST(1) FROM THE TOUCHSTONE FUNDS(2)
---- ------------- ----------------------------
John F. Barrett $ 0 $ 0
J. Leland Brewster II $6,925 $28,300
William O. Coleman $7,175 $29,300
Philip R. Cox $7,675 $31,300
H. Jerome Lerner $7,675 $31,300
Jill T. McGruder $ 0 $ 0
Robert E. Stautberg $7,675 $31,300
John P. Zanotti $6,925 $28,300
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(1) Effective January 1, 2001, the Trustees who are not "interested persons" of the Trust, as defined in the 1940 Act (the "Independent Trustees"), are eligible to participate in the Touchstone Trustee Deferred Compensation Plan that allows the Independent Trustees to defer payment of a specific amount of their Trustee compensation, subject to a minimum quarterly reduction of $1,000. The total amount of deferred compensation accrued by the Independent Trustees from the Touchstone Funds during the fiscal year ended March 31, 2004 is as follows: J. Leland Brewster II - $4,799, Robert E. Stautberg - $5,000 and John P. Zanotti - $5,485.
(2) The Touchstone Family of Funds consists of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
Effective January 1, 2004, each Independent Trustee receives a quarterly retainer of $4,000 and a fee of $3,000 for each Board meeting attended in person and $300 for attendance by telephone. Each Committee member receives a fee of $1,000 for each committee meeting attended in person and $300 for attendance by telephone. The lead Trustee and Committee Chairmen receive an additional $500 quarterly retainer. All fees are split equally among the Trust, Touchstone Tax-Free Trust, Touchstone Investment Trust and Touchstone Variable Series Trust.
STANDING COMMITTEES OF THE BOARD
The Board of Trustees is responsible for overseeing the operations of the Trust in accordance with the provisions of the 1940 Act and other applicable laws and the Trust's Declaration of Trust. The Board has established the following committees to assist in its oversight functions. Each Committee is composed entirely of Independent Trustees.
AUDIT COMMITTEE. Messrs. Brewster, Lerner and Stautberg are members of the Audit Committee. The Audit Committee is responsible for overseeing the Trust's accounting and financial reporting policies, practices and internal controls. During the last fiscal year, the Audit Committee held four meetings.
VALUATION COMMITTEE. Messrs. Coleman, Cox and Zanotti are members of the Valuation Committee. The Valuation Committee is responsible for overseeing procedures for valuing securities held by the Trust and responding to any pricing issues that may arise. During the last fiscal year, the Valuation Committee held four meetings.
NOMINATING COMMITTEE. Messrs. Brewster, Coleman, Cox and Stautberg are members of the Nominating Committee. The Nominating Committee is responsible for selecting candidates to serve on the Board and its operating committees. During the last fiscal year, the Nominating Committee held one meeting. The Nominating Committee does not consider nominees recommended by shareholders.
THE INVESTMENT ADVISOR AND SUB-ADVISORS
THE INVESTMENT ADVISOR. Touchstone Advisors, Inc. (the "Advisor"), is the Funds' investment manager. The Advisor is a wholly-owned subsidiary of IFS Financial Services, Inc., which is a wholly-owned subsidiary of The Western and Southern Life Insurance Company. The Western and Southern Life Insurance Company is a wholly-owned subsidiary of Western & Southern Financial Group, Inc., which is a wholly-owned subsidiary of Western - Southern Mutual Holding Company. Ms. McGruder may be deemed to be an affiliate of the Advisor because she is a Director of the Advisor and an officer of affiliates of the Advisor. Mr. Barrett may be deemed to be an affiliate of the Advisor because he is President and Chairman of The Western and Southern Life Insurance Company and Western - Southern Life Assurance Company, parent companies of the Advisor and an officer of affiliates of the Advisor. Ms. McGruder and Mr. Barrett, by reason of such affiliations, may directly or indirectly receive benefits from the advisory fees paid to the Advisor.
Under the terms of the investment advisory agreement between the Trust and the Advisor, the Advisor appoints and supervises each Fund Sub-Advisor, reviews and evaluates the performance of the Fund Sub-Advisors and determines whether or not a Fund's Sub-Advisor should be replaced. The Advisor furnishes at its own expense all facilities and personnel necessary in connection with providing these services. Each Fund pays the Advisor a fee computed and accrued daily and paid monthly at an annual rate as shown below:
Emerging Growth Fund 0.80% of average daily net assets
Value Plus Fund 0.75% on the first $100 million of average daily net assets
0.70% from $100 million to $200 million of average daily net assets
0.65% from $200 million to $300 million of average daily net assets
0.60% thereafter
Enhanced 30 Fund 0.65% on the first $100 million of average daily net assets
0.60% from $100 million to $200 million of average daily net assets
0.55% from $200 million to $300 million of average daily net assets
0.50% thereafter
Large Cap Growth Fund 0.75% on the first $200 million of average daily net assets
0.70% from $200 million to $500 million of average daily net assets
0.50% thereafter
Growth Opportunities Fund 1.00% on the first $50 million of average daily net assets
.90% from $50 million to $100 million of average daily net assets
.80% from $100 million to $200 million of average daily net assets
.75% thereafter
Small Cap Growth Fund 1.25% of average daily net assets
Micro Cap Growth Fund 1.25% of average daily net assets
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Set forth below are the advisory fees incurred by the Funds during the last three fiscal years. The Advisor has contractually agreed to waive fees and reimburse certain expenses, as set forth in the footnotes below:
FISCAL YEAR ENDED
3-31- 3-31- 3-31-
2004 2003 2002
---- ---- ----
Emerging Growth Fund(1) $4,133,417 $2,176,150 $848,897
Value Plus Fund(2) 451,059 480,547 598,523
Growth Opportunities Fund 1,265,516 1,104,328 1,365,095
Enhanced 30 Fund(3) 67,854 54,485 48,307
Small Cap Growth Fund(4) 569,567 86,494 --
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(1) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor waived fees and/or reimbursed the Fund $431,162, $697,087 and $212,462 for the fiscal years ended March 31, 2004, 2003 and 2002, respectively.
(2) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor waived fees and/or reimbursed the Fund $157,051, $226,146 and $199,296 for the fiscal years ended March 31, 2004, 2003 and 2002, respectively.
(3) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor waived fees and/or reimbursed the Fund $154,978, $167,072 and $171,790 for the fiscal years ended March 31, 2004, 2003 and 2002, respectively.
(4) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor waived fees and/or reimbursed the Fund $125,840 and $97,022 for the fiscal periods ended March 31, 2004 and 2003, respectively.
Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor has been retained to provide certain management and supervisory services to the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund, the Small Cap Growth Fund and the Micro Cap Growth Fund in exchange for the payment of a sponsor fee by the Funds equal to an annual rate of 0.20% of a Fund's average daily net assets. The Advisor has agreed to waive its fees and reimburse expenses in order to limit each Fund's annual expenses as follows: Emerging Growth Fund - 1.50% for Class A shares, 2.25% for Class B and Class C shares; Value Plus Fund - 1.30% for Class A shares, 2.05% for Class B and Class C shares; Enhanced 30 Fund - 1.00% for Class A shares, 1.75% for Class B and Class C shares; Small Cap Growth Fund - 1.95% for Class A shares, 2.70% for Class B and Class C shares; Micro Cap Growth Fund - 1.95% for Class A shares and 2.70% for Class C shares. The fee waivers and expense limitations will remain in effect for all Funds except the Micro Cap Growth Fund until at least March 31, 2005. The fee waivers and expense limitations will remain in effect for the Micro Cap Growth Fund until at least March 31, 2006.
Set forth below are the advisory fees incurred by the Large Cap Growth Fund during its last three fiscal years. The Advisor and Navellier contractually agreed to waive fees and reimburse certain expenses, as set forth in the footnote below:
THREE
MONTHS FISCAL YEAR ENDED
ENDED 12-31 12-31- 12-31-
3-31-04(1) 2003(1) 2002(2) 2001(2)
---------- ------- ------- -------
Large Cap Growth Fund $131,585 $220,563 $135,879 $222,132
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(1) Pursuant to a written contract between the Advisor and the Trust, the Advisor waived fees and/or reimbursed the Fund $45,340 for the fiscal period ended March 31, 2004 and $86,843 for the fiscal year ended December 31, 2003 in order to reduce the operating expenses of the Fund.
(2) Pursuant to a written contract between Navellier and the Large Cap Growth Fund, Navellier paid $113,766 and $131,647 of the Fund's operating expenses for the fiscal years ended December 31, 2002 and 2001, respectively.
Pursuant to a written contract between the Advisor and the Trust, the Advisor has agreed to waive advisory fees and reimburse expenses in order to maintain expense limitations of the Large Cap Growth Fund as follows: 1.30% for Class A shares, 2.25% for Class B shares and 2.25% for Class C shares. These expense limitations will remain in effect until at least October 6, 2005.
Each Fund shall pay the expenses of its operation, including but not limited to
(i) charges and expenses for accounting, pricing and appraisal services, (ii)
the charges and expenses of auditors; (iii) the charges and expenses of its
custodian, transfer and dividend disbursing agent and administrative agent
appointed by the Trust with respect to a Fund; (iv) brokers' commissions, and
issue and transfer taxes chargeable to a Fund in connection with securities
transactions to which a Fund is a party; (v) insurance premiums, interest
charges, dues and fees for membership in trade associations and all taxes and
fees payable to federal, state or other governmental agencies; (vi) fees and
expenses involved in registering and maintaining registrations of the Funds with
the SEC, state or blue sky securities agencies and foreign countries; (vii) all
expenses of meetings of Trustees and of shareholders of the Trust and of
preparing, printing and distributing prospectuses, notices, proxy statements and
all reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of the Independent
Trustees of the Trust; and (x) interest on borrowed money, if any. The
compensation and expenses of any officer, Trustee or employee of the Trust who
is an affiliated person of the Advisor is paid by the Advisor.
By its terms, the Funds' investment advisory agreement will remain in force for an initial period of two years and from year to year thereafter, subject to annual approval by (a) the Board of Trustees or (b) a vote of the majority of a Fund's outstanding voting securities; provided that in either event continuance is also approved by a majority of the Independent Trustees, by a vote cast in person at a meeting called for the purpose of voting such approval.
In determining whether to approve the continuation of the investment advisory agreement for the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund, the Large Cap Growth Fund, the Growth Opportunities Fund and the Small Cap Growth Fund, the Advisor furnished information necessary for a majority of the Independent Trustees to make the determination that the continuance of the advisory agreement is in the best interests of the Funds and their shareholders. Specifically, the Board was provided (1) industry data comparing advisory fees and expense ratios of comparable investment companies, (2) comparative performance information and (3) the Advisor's revenues and costs of providing services to the Funds. The Board compared the advisory fees and total expense ratios for the Funds with the industry median advisory fees and expense ratios in their respective investment categories and found the advisory fees paid by the Funds were reasonable and appropriate under all facts and circumstances. The Board noted the Funds' performance results during the twelve months ended September 30, 2003 and noted that it reviews on a quarterly basis detailed information about the Funds' performance results, portfolio composition and investment strategies. The Board also considered the effect of each Fund's growth and size on its performance and expenses. The Board further noted that the Advisor has consistently waived advisory fees and reimbursed expenses for various Funds as necessary to reduce their operating expenses to targeted levels. The Board also took into consideration the financial condition and profitability of the Advisor and the direct and indirect benefits derived by the Advisor from its relationship with the Funds. The Board also considered the level and depth of knowledge of the Advisor. It discussed the Advisor's effectiveness in monitoring the performance of the Sub-Advisors and its timeliness in responding to performance issues. In evaluating the quality of services provided by the Advisor, the Board took into account its familiarity with the Advisor's senior management through Board meetings, conversations and reports during the preceding year. The Board took into account the Advisor's willingness to consider and implement organizational and operational changes designed to improve investment results. It noted the Advisor's efforts to strengthen operations by hiring additional qualified and experienced members to its senior management team. The Board also considered the Advisor's role in coordinating the activities of the Funds' other service providers, including its efforts to consolidate service providers and reduce costs to the Funds. The Board also considered the strategic planning process implemented by the Advisor and the results gained from this process. No single factor was considered to be determinative in the Board's decision to approve the Advisory Agreement. Rather, the Trustees concluded, in light of weighing and balancing all factors, that the continuation of the Advisory Agreement for the Funds was in the best interests of shareholders.
In determining whether to approve the Advisory Agreement for the Micro Cap Growth Fund, the Board of Trustees requested, and the Advisor furnished, information necessary for a majority of the Independent Trustees to make the determination that the Advisory Agreement is in the best interests of the Fund and its shareholders. Specifically, the Board was provided (1) industry data comparing advisory fees and expense ratios of similar investment companies, (2) performance information for similar investment companies and (3) the Advisor's estimated revenues and costs of providing services to the Fund. The Board compared the advisory fees and estimated total expense ratios for the Fund with the industry median advisory fees and expense ratios in its investment category and found the advisory fees to be paid by the Fund are reasonable and appropriate under all facts and circumstances. The Board noted that the Advisor has agreed to waive advisory fees and reimburse expenses for the Fund as necessary to reduce its operating expenses to targeted levels. The Board also took into consideration the financial condition and profitability of the Advisor and the direct and indirect benefits derived by the Advisor from its relationship with the Fund. The Board also considered the level and depth of knowledge of the Advisor.
In evaluating the quality of services provided by the Advisor, the Board took into account its familiarity with the Advisor's senior management through Board meetings, conversations and reports during the preceding year. The Board took into account the Advisor's willingness to consider and implement organizational and operational changes designed to improve investment results. It noted the Advisor's efforts to strengthen operations by hiring additional qualified and experienced members to the senior management team. The Board also considered the Advisor's role in coordinating the activities of the Fund's other service providers, including its efforts to consolidate service providers and reduce costs to the Fund. The Board also considered the strategic planning process implemented by the Advisor and the results gained from this process. No single factor was considered to be determinative in the Board's decision to approve the Advisory Agreement. Rather, the Trustees concluded, in light of weighing and balancing all factors, that the continuation of the Advisory Agreement is in the best interests of the Micro Cap Growth Fund and its shareholders.
The Independent Trustees met separately with their independent counsel to discuss their fiduciary responsibilities in general and also with respect to the approval of investment advisory agreements. In their discussion and review of the Investment Advisory Agreement, the Independent Trustees discussed the proposed investment advisory fees, the services to be provided by the Investment Advisor, the personnel and experience of the Investment Advisor and the oversight role of the Investment Advisor. Based on this review, the Independent Trustees also concluded that the proposed investment advisory fee is fair and reasonable for the Fund and that the Investment Advisory Agreement is in the best interests of the Micro Cap Growth Fund and its shareholders.
The Funds' investment advisory agreement may be terminated at any time, on sixty days' written notice, without the payment of any penalty, by the Board of Trustees, by a vote of the majority of a Fund's outstanding voting securities, or by the Advisor. The investment advisory agreement automatically terminates in the event of its assignment, as defined by the 1940 Act and the rules thereunder.
THE SUB-ADVISORS. The Advisor has retained one or more sub-advisors (the "Sub-Advisor") to serve as the discretionary portfolio manager(s) of each Fund. The Sub-Advisor selects the portfolio securities for investment by a Fund, purchases and sells securities of a Fund and places orders for the execution of such portfolio transactions, subject to the general supervision of the Board of Trustees and the Advisor. The Sub-Advisor receives a fee from the Advisor that is paid monthly at an annual rate of a Fund's average daily net assets as set forth below.
EMERGING GROWTH FUND (AS A % OF ASSETS ALLOCATED TO THE SUB-ADVISOR)
TCW Investment Management Company 0.50% of average daily net assets
Westfield Capital Management Company LLC 0.50% on the first $50 million of average net assets
0.45% on the next $100 million of net assets
0.40% thereafter
VALUE PLUS FUND
Fort Washington Investment Advisors, Inc. 0.45% on the first $100 million of average net assets
0.40% on the next $100 million of net assets
0.35% on the next $100 million of net assets
0.30% thereafter
LARGE CAP GROWTH FUND
Navellier & Associates, Inc. 0.45% of average daily net assets
ENHANCED 30 FUND*
Todd Investment Advisors, Inc. 0.40% on the first $100 million of average net assets
0.35% on the next $100 million of net assets
0.30% on the next $100 million of net assets
0.25% thereafter
GROWTH OPPORTUNITIES FUND
Mastrapasqua Asset Management, Inc. 0.60% on the first $50 million of average net assets
0.50% on the next $50 million of net assets
0.40% on the next $100 million of net assets
0.35% thereafter
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SMALL CAP GROWTH FUND (AS A % OF ASSETS ALLOCATED TO THE SUB-ADVISOR)** Bjurman, Barry & Associates 0.90% of average daily net assets Longwood Investment Advisors, Inc. 0.85% of average daily net assets
MICRO CAP GROWTH FUND
Bjurman, Barry & Associates 0.85% of average daily net assets
* Effective September 1, 2002, Todd Investment Advisors, Inc. has voluntarily agreed to waive a portion of its sub-advisory fee and will receive a sub-advisory fee of .25% of average daily net assets.
** The Advisor has allocated to Longwood Investment Advisors, Inc. responsibility for managing approximately 70% of the Small Cap Growth Fund's assets and has allocated to Bjurman, Barry & Associates responsibility for managing approximately 30% of the Fund's assets. These allocations may be larger or smaller at various times, but the Advisor will not reallocate the Fund's assets between Sub-Advisors to reduce these differences in size until the assets vary from the percentages above by approximately 10% or more of the Fund's average daily net assets for a period of 3 consecutive months. In such event, the Advisor may, but is not obligated to, reallocate assets among the Sub-Advisors to provide for a more equal distribution of the Fund's assets.
The services provided by the Sub-Advisors are paid for wholly by the Advisor. The compensation of any officer, director or employee of the Sub-Advisor who is rendering services to a Fund is paid by the Sub-Advisor.
The employment of each Sub-Advisor will remain in force for an initial two year period and from year to year thereafter, subject to annual approval by (a) the Board of Trustees or (b) a vote of the majority of a Fund's outstanding voting securities; provided that in either event continuance is also approved by a majority of the Independent Trustees, by a vote cast in person at a meeting called for the purpose of voting such approval. The employment of the Sub-Advisor may be terminated at any time, on sixty days' written notice, without the payment of any penalty, by the Board of Trustees, by a vote of a majority of a Fund's outstanding voting securities, by the Advisor, or by the Sub-Advisor. Each Sub-Advisory Agreement will automatically terminate in the event of its assignment, as defined by the 1940 Act and the rules thereunder. In determining whether to approve the continuation of the sub-advisory agreements for each Fund (except the Micro Cap Growth Fund), the Board considered the Funds' performance during the twelve months ended September 30, 2003 and noted that it reviews on a quarterly basis detailed information about the Funds' performance results, portfolio composition and investment strategies. The Board considered the Sub-Advisors' level of knowledge and investment style. It noted the Advisor's expertise and resources in selecting Sub-Advisors and monitoring their performance, investment style and risk adjusted performance. The Board was mindful of the Advisor's focus on Sub-Advisor performance and its ways of addressing underperformance. The Board also considered the Sub-Advisors' level of compliance. It noted that the Advisor's compliance monitoring processes includes quarterly reviews of compliance reports and annual compliance visits to each Sub-Advisor and that compliance issues are reported to the Board. In determining to approve the continuation of the Sub-Advisory Agreements, the Board did not identify any information that was a controlling factor, rather after considering all factors, the Board determined that the continuation of the Sub-Advisory Agreements for the Funds was in the best interests of shareholders.
In determining whether to approve the Micro Cap Growth Fund's sub-advisory agreement with Bjurman, Barry & Associates, the Board noted the Advisor's expertise and resources in selecting Sub-Advisors and monitoring their performance, investment style and risk adjusted performance. It noted that the Advisor had presented to the Board detailed information about the criteria it used in selecting the Fund's Sub-Advisor, including investment returns, risk-adjusted performance analysis, historical investment results, consistency of process, market capitalization range, style purity over time, clean compliance review results and management fit with the Advisor. It noted that the Advisor had reported to the Board that the Sub-Advisor uses original research in its investment process, is a proven and experienced investment specialist in its field and has a highly structured and disciplined investment management process. The Board noted that the Advisor's compliance monitoring processes includes quarterly reviews of compliance reports and annual compliance visits to Sub-Advisors and that compliance issues are reported quarterly to the Board.
The Independent Trustees met separately with their independent counsel to discuss their fiduciary responsibilities in general and also with respect to the approval of investment advisory agreements. In their discussion and review of the Investment Sub-Advisory Agreement, the Independent Trustees discussed the proposed investment sub-advisory fees, the services to be provided by Bjurman, Barry & Associates, the personnel and experience of the Sub-Advisor and the oversight role of the Advisor. Based on this review, the Independent Trustees also concluded that the proposed sub-advisory fee is fair and reasonable for the Fund and that the Sub-Advisory Agreement is in the best interests of the Micro Cap Growth Fund and its shareholders.
The SEC has granted an exemptive order that permits the Trust or the Advisor, under certain circumstances, to select or change non-affiliated Sub-Advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. Shareholders of a Fund will be notified of any changes in its Fund Sub-Advisor.
SUB-ADVISOR CONTROL. Listed below is a description of the persons or entities that control the sub-advisors.
WESTFIELD CAPITAL MANAGEMENT COMPANY LLC is a wholly-owned subsidiary of Boston Private Financial Holdings Company, Inc., a publicly traded company listed on the NASDAQ exchange.
TCW INVESTMENT MANAGEMENT COMPANY, LLC is a subsidiary of The TCW Group, Inc. The TCW Group, Inc. is a subsidiary of Societe Generale Asset Management S.A., which is owned by Societe Generale S.A.
FORT WASHINGTON INVESTMENT ADVISORS, INC. is a wholly-owned subsidiary of The Western and Southern Life Insurance Company. The Western and Southern Life Insurance Company is a wholly-owned subsidiary of Western & Southern Financial Group, Inc., which is a wholly-owned subsidiary of Western-Southern Mutual Holding Company. Ms. McGruder and Mr. Barrett may be deemed to be affiliates of Fort Washington Investment Advisors, Inc.
NAVELLIER & ASSOCIATES, INC. is wholly-owned by Louis G. Navellier.
TODD INVESTMENT ADVISORS, INC. is a wholly-owned subsidiary of Fort Washington Investment Advisors, Inc. Fort Washington Investment Advisors, Inc. is a wholly-owned subsidiary of The Western and Southern Life Insurance Company. The Western and Southern Life Insurance Company is a wholly-owned subsidiary of Western & Southern Financial Group, Inc., which is a wholly-owned subsidiary of Western-Southern Mutual Holding Company. Ms. McGruder and Mr. Barrett may be deemed to be affiliates of Todd Investment Advisors, Inc.
MASTRAPASQUA ASSET MANAGEMENT, INC. is wholly-owned by Frank Mastrapasqua.
BJURMAN, BARRY & ASSOCIATES is owned by the George A. Bjurman Living Trust and the Thomas Barry Living Trust.
LONGWOOD INVESTMENT ADVISORS, INC. is owned by John McNiff, Robert Davidson, Jennifer Pawloski, Kathleen Jordan and Eileen Madden.
The Funds have adopted the Sub-Advisors' policies and procedures for voting proxies relating to portfolio securities held by the Funds, including procedures used when a vote presents a conflict between the interests of a Fund's shareholders and those of the Sub-Advisor or its affiliates. Information about how the Funds voted proxies relating to their portfolio securities during the year ended June 30, 2004 is available without charge, upon request, by calling toll-free 1-800-543-0407 and on the SEC website at http://www.sec.gov. Listed below is a summary of the Sub-Advisor proxy voting procedures:
TCW INVESTMENT MANAGEMENT COMPANY, LLC. TCW has adopted proxy voting guidelines on issues involving governance, capital structure, mergers and restructuring, board of directors, anti-takeover provisions, compensation and other issues. When voting proxies, TCW's utmost concern is that all decisions be made solely in the interests of the Fund and with the goal of maximizing the value of the Fund's investments. The voting guidelines generally specify whether TCW will vote for or against a particular type of proposal. TCW's underlying philosophy is that its portfolio managers are best able to determine how best to further the Fund's interests and goals. The portfolio managers may, in their discretion, take into account the recommendations of TCW management, the Proxy Committee and an outside proxy voting service.
Consistent with the approaches described above, the following are examples of TCW's voting position on specific matters.
o TCW will vote for director nominees in uncontested elections.
o TCW will vote against proposals to authorize preferred stock if the Board has unlimited rights to set the terms and conditions.
o TCW will vote against proposals to ratify or adopt poison pill plans.
o TCW will vote against proposals to establish or increase super majority vote requirements.
o TCW will vote for executive and director compensation plans unless they are dilutive beyond pre-determined levels, in which case such votes will be determined on a case-by-case basis.
o TCW will vote for mergers and acquisitions.
If a potential conflict of interest arises, the primary means by which TCW will avoid a conflict is by casting such votes solely in the interests of the Fund and in the interests of maximizing the value of its portfolio holdings. If a conflict of interest arises and the proxy vote is predetermined, TCW will vote accordingly. If a conflict of interest arises and there is no predetermined vote, TCW will refer the vote to an outside service for its consideration in the event the client's relationship is determined to be material to TCW. If TCW identifies a conflict of interest between a portfolio manager and an issuer soliciting proxy votes from TCW clients, the Proxy Committee will cast the vote.
WESTFIELD CAPITAL MANAGEMENT COMPANY LLC. Westfield's policy is to vote all proxies in the best interest of the Fund in accordance with its fiduciary obligations and applicable law. Westfield has a Proxy Committee composed of individuals from the investment committee, operations staff and compliance department. The Proxy Committee is responsible for setting general policy as to proxies. Westfield has also contracted with The Investor Responsibility Research Center ("IRRC") to assist it in the proxy voting process by providing proxy voting research and maintaining documentation to substantiate the manner in which Westfield votes proxies. Westfield maintains written voting guidelines setting forth the voting positions determined by its Proxy Committee on those issues believed most likely to arise day to day. These issues include board-approved proposals (election of directors, executive compensation, capitalization, acquisitions, mergers, reorganizations and anti-takeover measures) and shareholder proposals. Westfield will vote proxies in accordance with these guidelines, subject to two exceptions: 1) if the portfolio manager believes that following the guidelines would not be in the Fund's best interests and 2) for clients with plan assets subject to ERISA, Westfield may accept instructions to vote proxies in accordance with AFL-CIO proxy voting guidelines except when voting in accordance with AFL-CIO guidelines would be inconsistent with ERISA. The following are examples of Westfield's voting position on specific matters.
o Westfield will withhold votes for the entire board of directors if the board does not have a majority of independent directors or the board does not have a nominating, audit and compensation committee composed solely of independent directors.
o Westfield will vote on a case-by-case basis board approved proposals relating to executive compensation. Westfield may vote against executive compensation proposals where compensation is excessive by reasonable corporate standards or where a company fails to provide transparent disclosure of executive compensation.
o Westfield will vote against board proposals to adopt anti-takeover measures such as a shareholder rights plan, supermajority voting provisions, adoption of fair price provisions, issuance of blank check preferred stock and the creation of a separate class of stock with disparate voting rights, except Westfield will vote on a case-by-case basis poison pill proposals and proposals to adopt fair price provisions.
If a conflict of interest should arise when voting proxies of an issuer that has a significant business relationship with Westfield, Westfield will vote proxies based solely on the investment merits of the proposal.
FORT WASHINGTON INVESTMENT ADVISORS, INC. Fort Washington's policy is to vote proxies in the best interests of a Fund at all times. Fort Washington has adopted procedures that it believes are reasonably designed to ensure that proxies are voted in the best interests of a Fund in accordance with its fiduciary duties and SEC rules governing investment advisers. Reflecting a basic investment philosophy that good management is shareholder focused, proxy votes will generally be cast in support of management on routine corporate matters and in support of any management proposal that is plainly in the interest of all shareholders. Specifically, proxy votes generally will be cast in favor of proposals that:
o maintain or strengthen the shared interests of stockholders and
management;
o increase shareholder value; and
o maintain or increase shareholder rights generally.
Proxy votes will generally be cast against proposals having the opposite effect of the above. Where Fort Washington perceives that a management proposal, if approved, would tend to limit or reduce the market value of the company's securities, it will generally vote against it. Fort Washington generally supports shareholder rights and recapitalization measures undertaken unilaterally by boards of directors properly exercising their responsibilities and authority, unless such measures could have the effect of reducing shareholder rights or potential shareholder value. In cases where shareholder proposals challenge such actions, Fort Washington's voting position will generally favor not interfering with the directors' proper function in the interest of all shareholders.
Fort Washington may delegate its responsibilities under its proxy voting procedures to a third party, provided that Fort Washington retains final authority and fiduciary responsibility for proxy voting. Fort Washington has retained IRRC to assist it in the proxy voting process and will use IRRC's proxy voting guidelines as a resource in its proxy voting.
Fort Washington will review each proxy to assess the extent, if any, to which there may be a material conflict between it and the interests of a Fund. If Fort Washington determines that a potential conflict may exist, it will be reported to the Proxy Voting Committee. The Proxy Voting Committee is authorized to resolve any conflict in a manner that is in the collective best interests of a Fund (excluding any Fund that may have a potential conflict). The Proxy Voting Committee may resolve a potential conflict in any of the following manners:
o If the proposal is specifically addressed in the proxy voting procedures, Fort Washington may vote the proxy in accordance with these policies, provided that such pre-determined policy involves little discretion on Fort Washington's part;
o Fort Washington may engage an independent third party to determine how the proxy should be voted;
o Fort Washington may establish an ethical wall or other informational barriers between the person involved in the potential conflict and the persons making the voting decision in order to insulate the potential conflict from the decision maker.
TODD INVESTMENT ADVISORS, INC. Todd will vote proxies solely in the best long-term interests of the Fund. Todd has adopted guidelines on key issues such as election of directors, stock incentive plans, expensing of options, severance agreements, takeover provisions, and social and environmental issues. Todd employs Institutional Shareholder Services ("ISS") to help it analyze particular issues. The following are examples of Todd's position on specific matters.
o Todd will generally vote for proposals seeking to end the staggered election of directors and prefers that all directors be elected annually.
o Todd will generally support proposals requiring a majority of independent directors on the board.
o Todd prefers to see the separation of Chairman and CEO positions.
o Todd prefers that all incumbent directors own company stock.
o Todd prefers that all stock incentive plans be limited to restricted stock or other truly long-term incentive plans, but recognizes that short-term incentive plans do have a place in providing key executives with a balanced compensation program.
o Todd supports proposals requiring the expensing of options.
If a conflict of interest should arise, Todd will inform its Executive Committee of the conflict and notify the shareholder why Todd's vote may differ from the shareholder's request. Todd will consider a shareholder's request but will vote only for what it believes will best advance the long-term interests of shareholders.
MASTRAPASQUA ASSET MANAGEMENT, INC. Mastrapasqua's proxy voting decisions will be made solely in the best interests of the Fund. In voting proxies, Mastrapasqua is required to consider those factors that may affect the value of the Fund's investment and may not subordinate the interest of the Fund to unrelated objectives. Mastrapasqua has adopted guidelines for voting proxies with respect to routine issues, such as board of directors, proxy contest defenses, auditors, acquisitions and mergers, shareholder rights, capital structure, executive and director compensation and social and environmental issues, and its compliance officer will vote routine
issues according to these guidelines. Non-routine issues will be voted according to recommendations received from the research department. The following are examples of Mastrapasqua's policies on specific matters:
o Mastrapasqua will evaluate directors fairly and objectively, rewarding them for significant contributions and holding them ultimately accountable to shareholders for corporate performance. Mastrapasqua will vote for directors on a case-by-case basis.
o Mastrapasqua will vote against proposals to eliminate cumulative voting.
o Mastrapasqua will vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification.
o Mastrapasqua will vote against proposals that provide that directors may be removed only for cause and for proposals that permit shareholders to elect directors to fill vacancies.
o Votes on mergers and acquisitions are considered on a case-by-case basis, taking into account the impact of the merger on shareholder value, the anticipated financial and operating benefits, the offering price, the financial viability of the combined companies as a single entity, whether the deal was made in good faith, the changes in corporate governance and their impact on shareholder rights and the impact on community stakeholders and employees in both workforces.
If a material conflict should arise between Mastrapasqua's interest and that of the Fund, Mastrapasqua will vote the proxies in accordance with the recommendation of the research analyst and portfolio manager. A written record will be maintained describing the conflict of interest, the resolution of the conflict and an explanation of how the vote taken was in the Fund's best interest.
BJURMAN, BARRY & ASSOCIATES. Bjurman uses a third party service provider, ISS, to vote all proxies for the Fund. The proxy voting guidelines adopted by Bjurman are provided by ISS. The voting process involves an assessment that results in voting in agreement with company management and/or varying ISS recommendations. Management and ISS recommendations may be identical. In the event Bjurman votes against ISS recommendations, documentation must be prepared to describe the basis for such a decision. Bjurman has adopted proxy voting recommendations on issues involving board of directors, proxy contest defenses, auditors, tender offer defenses, miscellaneous governance provisions, capital structure, executive and director compensation, mergers and corporate restructuring, mutual fund proxies and social and environmental issues. The following are examples of Bjurman's policies on specific matters:
o Votes on director nominations will be made on a case-by-case basis examining factors such as long-term corporate performance relative to a market index, composition of board and keyboard committees, nominee's attendance at meetings, nominee's investment in the company, whether a retired CEO sits on the board and whether the chairman is also serving as CEO.
o Bjurman will vote against proposals that provide that directors may be removed only for cause and for proposals giving shareholders the ability to remove directors with or without cause.
o Bjurman will vote for shareholder proposals that ask a company to submit its poison pills for shareholder ratification.
o Bjurman will vote on a case-by-case basis proposals to increase the number of shares of common stock authorized for issue and will vote against proposed common stock authorizations that increase the existing authorization by more than 100% unless a clear need for the excess shares is presented by the company.
Bjurman's proxy voting policy does not demonstrate a conflict of interest regarding the Fund's best interests since votes are in accordance with a pre-determined policy based upon the recommendations of ISS. The proxy voting guidelines are not exhaustive and do not include all potential voting issues. Because proxy issues and the circumstances of individual companies are so varied, there may be instances when Bjurman may not vote in strict adherence to these guidelines.
LONGWOOD INVESTMENT ADVISORS, INC. Longwood's proxy voting policy and procedures are designed to ensure that Longwood votes proxies in the best interest of the Fund and to prevent and detect fraudulent, deceptive or manipulative acts by Longwood and its advisory affiliates. Longwood's policy is to vote proxies in the interest of maximizing shareholder value. To that end, Longwood will vote in a way that it believes, consistent with its fiduciary duty, will cause the value of the issue to increase the most or decline the least. Longwood has contracted with IRRC to assist it in the proxy voting process. Accordingly, IRRC shall be a source of proxy voting research and also maintain the documentation to substantiate the manner in which Longwood votes proxies. In general, Longwood will support management if management's position appears reasonable, is not detrimental to the long-term equity ownership of the corporation and reflects consideration of the impact of societal values and attitudes on the long-term viability of the corporation. The position of management on any resolution will typically not be supported if it:
o Would enrich management excessively.
o Would entrench incumbent officers or members of the board of directors.
o Would not reflect consideration of short and long-term costs and gains, including effects on the basic human rights of its employees and goodwill both in the U.S. and foreign countries in which the company operates.
o Would result in unreasonable costs.
o Would disadvantage the corporation relative to other corporations.
o Would oppose a proposal to have the shareholders approve the selection of an independent auditor.
o Would not support equal and fair employment practices for all employees.
If Longwood detects a conflict of interest with respect to voting of the Fund's proxies, such conflict will be addressed by IRRC, or another independent third party, to vote proxies that involve such conflict. Any vote cast by IRRC is binding and may not be overridden by Longwood.
NAVELLIER & ASSOCIATES, INC. Navellier's proxy voting policies and procedures are designed to ensure that proxies are voted in an appropriate manner. In the absence of specific voting guidelines from the Fund, Navellier will vote proxies in a manner that is in the best interests of the Fund, which may result in different voting results for proxies for the same issuer. Navellier shall consider only those factors that relate to the Fund's investment or dictated by the Fund's written instructions, including how its vote will economically impact and affect the value of the Fund's investment (keeping in mind that, after conducting an appropriate cost-benefit analysis, not voting at all on a presented proposal may be in the best interest of the Fund). Navellier has adopted specific voting policies for voting proxies with respect to routine issues, such as board of directors, reclassification of common stock and independent auditors. Navellier has adopted specific voting policies for voting non-routine issues, such as mergers and anti-greenmail provisions. The following are examples of Navellier's policies on specific matters involving routine and non-routine issues:
o Navellier will generally vote for the election of directors (where no corporate governance issues are implicated).
o Navellier will generally vote for proposals that maintain or increase the rights of shareholders.
o Navellier will generally vote for management proposals for merger or reorganization if the transaction appears to offer fair value.
If the proxy includes a routine item that implicates corporate governance changes, a non-routine item where no specific policy applies or a conflict of interest where no specific policy applies, Navellier may engage ISS to determine how the proxies should be voted.
Touchstone Securities, Inc. ("Touchstone"), 221 East Fourth Street, Cincinnati, Ohio 45202, is the principal distributor of the Trust and, as such, the exclusive agent for distribution of shares of the Funds. Touchstone is an affiliate of the Advisor by reason of common ownership. Touchstone is obligated to sell the shares on a best efforts basis only against purchase orders for the shares. Shares of the Funds are offered to the public on a continuous basis.
Touchstone currently allows concessions to dealers who sell shares of the Funds. Touchstone receives that portion of the sales charge that is not reallowed to the dealers who sell shares of a Fund. Touchstone retains the entire sales charge on all direct initial investments in a Fund and on all investments in accounts with no designated dealer of record.
For the fiscal period ended March 31, 2004, the aggregate underwriting commissions on sales of the Trust's shares were $2,328,684 of which Touchstone paid $1,871,231 to unaffiliated broker-dealers in the selling network, earned $140,617 as a broker-dealer in the selling network and retained $316,836 in underwriting commissions.
For the fiscal period ended March 31, 2003, the aggregate underwriting commissions on sales of the Trust's shares were $1,501,520 of which Touchstone paid $1,200,478 to unaffiliated broker-dealers in the selling network, earned $89,601 as a broker-dealer in the selling network and retained $211,441 in underwriting commissions.
For the fiscal year ended March 31, 2002, the aggregate underwriting commissions on sales of the Trust's shares were $1,989,963 of which Touchstone paid $1,589,175 to unaffiliated broker-dealers in the selling network, earned $113,826 as a broker-dealer in the selling network and retained $286,962 in underwriting commissions.
Prior to October 6, 2003, shares of the Large Cap Growth Fund were distributed by Navellier Securities Corp. During the fiscal years ended December 31, 2002 and 2001, the Large Cap Growth Fund did not pay any underwriting commissions to Navellier Securities Corp. During the period October 6, 2003 until December 31, 2003, the aggregate underwriting commissions on sales of the Large Cap Growth Fund's shares were $86,868, of which Touchstone paid $72,079 to unaffiliated broker-dealers in the selling network, earned $2,246 as a broker-dealer in the selling network and retained $12,543 in underwriting commissions. Touchstone retains the contingent deferred sales charge on redemptions of shares of the Funds that are subject to a contingent deferred sales charge. For the fiscal period ended March 31, 2004, Touchstone collected $142,079, $8,470, $14,836, $5,930, $10,788 and $3,061 of contingent deferred sales charges on redemptions of Class B and Class C shares of the Emerging Growth Fund, Enhanced 30 Fund, Growth Opportunities Fund, Large Cap Growth Fund, Small Cap Growth Fund and Value Plus Fund, respectively.
For the fiscal year ended March 31, 2003, Touchstone collected $113,872, $8,535, $21,126, $1,268 and $1,009 of contingent deferred sales charges on redemptions of Class B and Class C shares of the Emerging Growth Fund, the Enhanced 30 Fund, the Growth Opportunities Fund, the Small Cap Growth Fund and the Value Plus Fund, respectively. For the period October 6, 2003 to December 31, 2003, Touchstone collected $2,396 of contingent deferred sales charges on redemptions of Class B and Class C shares of the Large Cap Growth Fund.
For the fiscal year ended March 31, 2002, Touchstone collected $8,376, $17,296, $541 and $246 of contingent deferred sales charges on redemptions of Class B and Class C shares of the Emerging Growth Fund, the Growth Opportunities Fund, the Enhanced 30 Fund and the Value Plus Fund, respectively.
Ms. McGruder may be deemed to be an affiliate of Touchstone because she is a Director of Touchstone and an officer of affiliates of Touchstone. Mr. Barrett may be deemed to be an affiliate of Touchstone because he is President and Chairman of The Western and Southern Life Insurance Company and Western-Southern Life Assurance Company, parent companies of Touchstone, and an officer of affiliates of Touchstone. Ms. McGruder and Mr. Barrett, by reason of such affiliations, may directly or indirectly receive benefits from the underwriting fees paid to Touchstone.
The Funds may compensate dealers, including Touchstone and its affiliates, based on the average balance of all accounts in the Funds for which the dealer is designated as the party responsible for the account. See "Distribution Plans" below.
DISTRIBUTION PLANS
CLASS A SHARES. The Funds have adopted a plan of distribution (the "Class A Plan") pursuant to Rule 12b-1 under the 1940 Act which permits a Fund to pay for expenses incurred in the distribution and promotion of its shares, including but not limited to, the printing of prospectuses, statements of additional information and reports used for sales purposes, advertisements, expenses of preparation and printing of sales literature, promotion, marketing and sales expenses, and other distribution-related expenses, including any distribution fees paid to securities dealers or other firms who have executed a distribution or service agreement with Touchstone. The Class A Plan expressly limits payment of the distribution expenses listed above in any fiscal year to a maximum of .25% of the average daily net assets of Class A shares of a Fund. Unreimbursed expenses will not be carried over from year to year.
For the fiscal year ended March 31, 2004, the aggregate distribution-related expenditures of the Growth Opportunities Fund, the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the Small Cap Growth Fund under the Class A Plan were $272,657, $741,286, $144,422, $19,392 and $79,916, respectively. Payments were for advertising, printing and mailing, asset growth and retention to broker-dealers and other expenses.
For the fiscal year ended December 31, 2003 and the fiscal period ended March 31, 2004, the aggregate distribution-related expenditures of the Large Cap Growth Fund under the Class A Plan were $70,325 and $47,387, respectively. Payments were for advertising, printing and mailing, asset growth and retention to broker-dealers and other expenses.
CLASS B SHARES. Each Fund (except the Micro Cap Growth Fund) has also adopted a plan of distribution (the "Class B Plan") with respect to the Class B shares of a Fund. The Class B Plan provides for two categories of payments. First, the Class B Plan provides for the payment to Touchstone of an account maintenance fee, in an amount equal to an annual rate of .25% of the average daily net assets of the Class B shares, which may be paid to other dealers based on the average value of Class B shares owned by clients of such dealers. In addition, a Fund may pay up to an additional .75% per annum of the daily net assets of the Class B shares for expenses incurred in the distribution and promotion of the shares, including prospectus costs for prospective shareholders, costs of responding to prospective shareholder inquiries, payments to
brokers and dealers for selling and assisting in the distribution of Class B shares, costs of advertising and promotion and any other expenses related to the distribution of the Class B shares. Unreimbursed expenditures will not be carried over from year to year. A Fund may make payments to dealers and other persons in an amount up to .75% per annum of the average value of Class B shares owned by their clients, in addition to the .25% account maintenance fee described above.
For the fiscal year ended March 31, 2004, the aggregate distribution-related expenditures of the Growth Opportunities Fund, the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the Small Cap Growth Fund under the Class B Plan were $31,944, $470,182, $6,045, $11,658 and $47,850, respectively. Payments were for advertising, printing and mailing, asset growth and retention to broker-dealers and other expenses.
For the fiscal year ended December 31, 2003 and the fiscal period ended March 31, 2004, the aggregate distribution-related expenditures of the Large Cap Growth Fund under the Class B Plan were $1,873 and $3,521, respectively. Payments were for advertising, printing and mailing, asset growth and retention to broker-dealers and other expenses.
CLASS C SHARES. The Funds have also adopted a plan of distribution (the "Class C Plan") with respect to the Class C shares of a Fund. The Class C Plan provides for two categories of payments. First, the Class C Plan provides for the payment to Touchstone of an account maintenance fee, in an amount equal to an annual rate of .25% of the average daily net assets of the Class C shares, which may be paid to other dealers based on the average value of Class C shares owned by clients of such dealers. In addition, a Fund may pay up to an additional .75% per annum of the daily net assets of the Class C shares for expenses incurred in the distribution and promotion of the shares, including prospectus costs for prospective shareholders, costs of responding to prospective shareholder inquiries, payments to brokers and dealers for selling and assisting in the distribution of Class C shares, costs of advertising and promotion and any other expenses related to the distribution of the Class C shares. Unreimbursed expenditures will not be carried over from year to year. The Funds may make payments to dealers and other persons in an amount up to .75% per annum of the average value of Class C shares owned by their clients, in addition to the .25% account maintenance fee described above.
For the fiscal year ended March 31, 2004, the aggregate distribution-related expenditures of the Growth Opportunities Fund, the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the Small Cap Growth Fund under the Class C Plan were $271,431, $1,731,146, $17,677, $15,834 and $88,140, respectively. Payments were for advertising, printing and mailing, asset growth and retention to broker-dealers and other expenses.
For the fiscal year ended December 31, 2003 and the fiscal period ended March 31, 2004, the aggregate distribution-related expenditures of the Large Cap Growth Fund under the Class C Plan were $4,177 and $8,954, respectively. Payments were for advertising, printing and mailing, asset growth and retention to broker-dealers and other expenses.
GENERAL INFORMATION. Agreements implementing the Plans (the "Implementation Agreements"), including agreements with dealers wherein such dealers agree for a fee to act as agents for the sale of the Funds' shares, are in writing and have been approved by the Board of Trustees. All payments made pursuant to the Plans are made in accordance with written agreements.
The continuance of the Plans and the Implementation Agreements must be specifically approved at least annually by a vote of the Trust's Board of Trustees and by a vote of the Independent Trustees who have no direct or indirect financial interest in the Plans or any Implementation Agreement at a meeting called for the purpose of voting on such continuance. A Plan may be terminated at any time by a vote of a majority of the Independent Trustees or by a vote of the holders of a majority of the outstanding shares of a Fund or the applicable class of a Fund. In the event a Plan is terminated in accordance with its terms, the affected Fund (or class) will not be required to make any payments for expenses incurred by Touchstone after the termination date. The Implementation Agreement terminates automatically in the event of its assignment and may be terminated at any time by a vote of a majority of the Independent Trustees or by a vote of the holders of a majority of the outstanding shares of a Fund (or the applicable class) on not more than 60 days' written notice to any other party to the Implementation Agreement. The Plans may not be amended to increase materially the amount to be spent for distribution without shareholder approval. All material amendments to the Plans must be approved by a vote of the Trust's Board of Trustees and by a vote of the Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their business judgment and in light of their fiduciary duties as Trustees, that there is a reasonable likelihood that the Plans will benefit the Funds and their shareholders. The Board of Trustees believes that expenditure of the Funds' assets for distribution expenses under the Plans should assist in the growth of the Funds which will benefit each Fund and its shareholders through increased economies of scale, greater investment flexibility, greater portfolio diversification and less chance of disruption of planned investment strategies. The Plans will be renewed only if the Trustees make a similar determination for each subsequent year of the Plans. There can be no assurance that the benefits anticipated from the expenditure of the Funds' assets for distribution will be realized. While the Plans are in effect, all amounts spent by the Funds pursuant to the Plans and the purposes for which such expenditures were made must be reported quarterly to the Board of Trustees for its review. Distribution expenses attributable to the sale of more than one class of shares of a Fund will be allocated at least annually to each class of shares based upon the ratio in which the sales of each class of shares bears to the sales of all the shares of the Fund. In addition, the selection and nomination of those Trustees who are not interested persons of the Trust are committed to the discretion of the Independent Trustees during such period.
Jill T. McGruder and John F. Barrett, as interested persons of the Trust, may be deemed to have a financial interest in the operation of the Plans and the Implementation Agreements.
Decisions to buy and sell securities for the Funds and the placing of the Funds' securities transactions and negotiation of commission rates where applicable are made by the Sub-Advisors and are subject to review by the Advisor and the Board of Trustees. In the purchase and sale of portfolio securities, the Sub-Advisor's primary objective will be to obtain the most favorable price and execution for a Fund, taking into account such factors as the overall direct net economic result to the Fund (including commissions, which may not be the lowest available but ordinarily should not be higher than the generally prevailing competitive range), the financial strength and stability of the broker, the efficiency with which the transaction will be effected, the ability to effect the transaction at all where a large block is involved and the availability of the broker or dealer to stand ready to execute possibly difficult transactions in the future.
Set forth below are the brokerage commissions paid by the Funds during their three most recent fiscal periods:
-------------------------------------------------------------------------------- NAME OF FUND PERIOD ENDED AMOUNT OF COMMISSIONS -------------------------------------------------------------------------------- Growth Opportunities Fund 3-31-04 $ 201,825 -------------------------------------------------------------------------------- Growth Opportunities Fund 3-31-03 $ 177,061 -------------------------------------------------------------------------------- Growth Opportunities Fund 3-31-02 $ 229,827 -------------------------------------------------------------------------------- Enhanced 30 Fund 3-31-04 $ 5,112 -------------------------------------------------------------------------------- Enhanced 30 Fund 3-31-03 $ 12,631 -------------------------------------------------------------------------------- Enhanced 30 Fund 3-31-02 $ 6,342 -------------------------------------------------------------------------------- Emerging Growth Fund 3-31-04 $ 1,928,861 -------------------------------------------------------------------------------- Emerging Growth Fund 3-31-03 $ 1,154,702 -------------------------------------------------------------------------------- Emerging Growth Fund 3-31-02 $ 484,748 -------------------------------------------------------------------------------- Value Plus Fund 3-31-04 $ 80,331 -------------------------------------------------------------------------------- Value Plus Fund 3-31-03 $ 164,914 -------------------------------------------------------------------------------- Value Plus Fund 3-31-02 $ 166,029 -------------------------------------------------------------------------------- Small Cap Growth Fund 3-31-04 $ 546,008 -------------------------------------------------------------------------------- Small Cap Growth Fund 3-31-03 $ 112,858 -------------------------------------------------------------------------------- Large Cap Growth Fund* 3-31-04 $ 94,172 -------------------------------------------------------------------------------- |
* From October 1, 2003 to March 31, 2004.
The higher commissions paid by the Enhanced 30 Fund during the fiscal year ended March 31, 2003 are due to higher turnover rates. The higher commissions paid by the Emerging Growth Fund and Small Cap Growth Fund during the fiscal year ended March 31, 2004 are due to increased assets.
Each Sub-Advisor is specifically authorized to pay a broker who provides research services to the Sub-Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker would have charged for effecting such transaction, in recognition of such additional research services rendered by the broker or dealer, but only if the Sub-Advisor determines in good faith that the excess commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer viewed in terms of the particular transaction or the Sub-Advisor's overall responsibilities with respect to discretionary accounts that it manages, and that the Fund derives or will derive a reasonably significant benefit from such research services.
During the fiscal period ended March 31, 2004, the amount of brokerage transactions and related commissions for the Funds directed to brokers due to research services provided were as follows:
BROKERAGE BROKERAGE
TRANSACTIONS COMMISSIONS
DIRECTED TO FROM
RESEARCH RESEARCH
------------ -----------
Growth Opportunities Fund $ 94,307,262 $ 136,555
Emerging Growth Fund $103,627,464 $ 182,042
Value Plus Fund $ 13,871,529 $ 25,967
Small Cap Growth Fund $ 6,756,396 $ 26,320
Large Cap Growth Fund* $ 33,558,933 $ 56,849
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*From October 1, 2003 to March 31, 2004.
Research services include securities and economic analyses, reports on issuers' financial conditions and future business prospects, newsletters and opinions relating to interest trends, general advice on the relative merits of possible investment securities for the Funds and statistical services and information with respect to the availability of securities or purchasers or sellers of securities. Although this information is useful to the Funds and the Sub-Advisors, it is not possible to place a dollar value on it. Research services furnished by brokers through whom a Fund effects securities transactions may be used by the Sub-Advisor in servicing all of its accounts and not all such services may be used by the Sub-Advisor in connection with a Fund.
The Funds have no obligation to deal with any broker or dealer in the execution of securities transactions. However, the Funds may effect securities transactions that are executed on a national securities exchange or transactions in the over-the-counter market conducted on an agency basis. A Fund will not effect any brokerage transactions in its portfolio securities with an affiliated broker if such transactions would be unfair or unreasonable to its shareholders. Over-the-counter transactions will be placed either directly with principal market makers or with broker-dealers. Although the Funds do not anticipate any ongoing arrangements with other brokerage firms, brokerage business may be transacted from time to time with other firms. Affiliated broker-dealers of the Trust will not receive reciprocal brokerage business as a result of the brokerage business transacted by the Funds with other brokers. In order to reduce total operating expenses, the Funds may apply a portion of their brokerage commission dollars to offset custody expenses through a Commission Share Program offered by Brown Brothers Harriman & Co., the Trust's Custodian.
Deutsche Bank may be deemed to be an affiliate of the Trust because it is an affiliate of Deutsche Investment Management Americas Inc., a sub-advisor for Touchstone Variable Series Trust. Listed below is information about the brokerage commissions paid to Deutsche Bank during the fiscal periods ended March 31, 2004 and 2003.
MARCH 31, 2004 FISCAL YEAR
Amount Percentage Percentage
of of Aggregate of Aggregate
Commissions Commissions Paid Transactions Effected
----------- ---------------- ---------------------
Emerging Growth Fund $24,536 .27% .54%
Growth Opportunities Fund $ 2,040 .01% .01%
Small Cap Growth Fund $ 7,202 .32% .47%
Value Plus Fund $ 914 .14% .01%
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MARCH 31, 2003 FISCAL PERIOD
Amount Percentage Percentage
of of Aggregate of Aggregate
Commissions Commissions Paid Transactions Effected
----------- ---------------- ---------------------
Emerging Growth Fund $ 992 .09% .06%
Growth Opportunities Fund $13,210 7.5% 10%
Small Cap Growth Fund $ 2,786 2.5% 2.8%
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Consistent with the conduct rules of the National Association of Securities Dealers, Inc., and such other policies as the Board of Trustees may determine, the Fund Sub-Advisors may consider sales of shares of the Trust as a factor in the selection of broker-dealers to execute portfolio transactions. The Fund Sub-Advisors will make such allocations if commissions are comparable to those charged by nonaffiliated, qualified broker-dealers for similar services.
In certain instances there may be securities that are suitable for a Fund as well as for one or more of the respective Fund Sub-Advisor's other clients. Investment decisions for a Fund and for the Fund Sub-Advisor's other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment advisor, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as a Fund is concerned. However, it is believed that the ability of a Fund to participate in volume transactions will produce better executions for the Fund.
During the fiscal year ended March 31, 2004, the Funds acquired common stock of the Trust's regular broker-dealers as follows:
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NUMBER OF SHARES AT MARKET VALUE
FUND BROKER-DEALER 3-31-04 AT 3-31-04
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Growth Opportunities Fund Merrill Lynch & Co. Inc. 74,000 $4,407,440
Growth Opportunities Fund Morgan Stanley 45,000 $2,578,500
Value Plus Fund Lehman Brothers Holdings 11,250 $ 932,288
Value Plus Fund JP Morgan Chase 35,560 $1,491,742
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The Trust, the Advisor, the Sub-Advisors and Touchstone have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act that permits Fund personnel to invest in securities for their own accounts and may permit personnel to invest in securities that may be purchased by a Fund. The Code of Ethics adopted by each of the Trust, Advisor, the Sub-Advisor and Touchstone is on public file with, and is available from, the SEC.
A Fund's portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the Fund. High turnover may result in a Fund recognizing greater amounts of income and capital gains, which would increase the amount of commissions. A 100% turnover rate would occur if all of the Fund's portfolio securities were replaced once within a one-year period. The rate of portfolio turnover will depend upon market and other conditions, and will not be a limiting factor when the Sub-Advisor believes that portfolio changes are appropriate. A Fund may engage in active trading to achieve its investment goals and, as a result, may have substantial portfolio turnover.
The share price or net asset value ("NAV") and the public offering price (NAV plus applicable sales load) of shares of the Funds are determined as of the close of the regular session of trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time), on each day the Trust is open for business. The Trust is open for business on every day except Saturdays, Sundays and the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. The Trust may also be open for business on other days in which there is sufficient trading in a Fund's portfolio securities that its NAV might be materially affected. Securities held by a Fund may be primarily listed on foreign exchanges or traded in foreign markets that are open on days (such as Saturdays and U.S. holidays) when the New York Stock Exchange is not open for business. As a result the NAV of a Fund may be significantly affected by trading on days when the Trust is not open for business. For a description of the methods used to determine the share price and the public offering price, see "Pricing of Fund Shares" in the Prospectuses.
The Emerging Growth Fund, Value Plus Fund, Enhanced 30 Fund, Large Cap Growth
Fund and Growth Opportunities Fund offer three classes of shares: Class A, Class
B and Class C shares. The Micro Cap Growth Fund offers two classes of shares:
Class A and Class C shares. The Small Cap Growth Fund offers four classes of
shares: Class A, Class B, Class C and Class I shares. Each class represents an
interest in the same portfolio of investments and has the same rights, but
differs primarily in sales charges, distribution expense amounts and shareholder
features. Before choosing a class, you should consider the following factors, as
well as any other relevant facts and circumstances:
The decision as to which class of shares is more beneficial to you depends on the amount of your investment, the intended length of your investment and the quality and scope of the value-added services provided by financial advisors who may work with a particular sales load structure as compensation for their services. If you qualify for reduced front-end sales charges or, in the case of purchases of $1 million or more, no initial sales charge, you may find Class A shares attractive. Moreover, Class A shares are subject to lower ongoing expenses than Class B or Class C shares over the term of the investment. As an alternative, Class B and Class C shares are sold without an initial sales charge so the entire purchase price is immediately invested in a Fund. Any investment return on these investments may be partially or wholly offset by the higher annual expenses. However, because a Fund's future returns cannot be predicted, there can be no assurance that this would be the case. If you participate in an asset allocation program offered by a selected financial advisor and your initial investment in the Small Cap Growth Fund or Micro Cap Growth Fund is $10,000 or more, you may find Class I shares attractive since Class I shares are sold without a sales charge or 12b-1 distribution fee. However, you must pay an annual fee and meet the minimum investment requirements in order to participate in the asset allocation program.
When determining which class of shares to purchase, you may want to consider the services provided by your financial advisor and the compensation provided to these financial advisors under each share class. Touchstone works with many financial advisors throughout the country that may provide assistance to you through ongoing education, asset allocation programs, personalized financial planning reviews or other services vital to your long-term success. Touchstone believes that these value-added services can greatly benefit you through market cycles and will work with your chosen financial advisor.
Finally, you should consider the effect of the contingent deferred sales charge ("CDSC") and any conversion rights of each class in the context of your investment timeline. For example, Class C shares are generally subject to a significantly lower CDSC upon redemption than Class B shares, however, unlike Class B shares, they do not convert to Class A shares after a stated period of time. Class C shares, therefore, are subject to a 1.00% annual 12b-1 fee for an indefinite period of time, while Class B shares will convert to Class A shares after approximately eight years and will be subject to only a .25% annual 12b-1 fee. Thus, Class B shares may be more attractive than Class C shares if you have a longer-term investment outlook. On the other hand, if you are unsure of the length of time you intend to invest or the conversion feature is not attractive to you, you may wish to elect Class C shares.
Below is a chart comparing the sales charges, 12b-1 fees and conversion features for each class of shares:
CLASS SALES CHARGE 12B-1 FEE CONVERSION FEATURE
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A Maximum of 5.75% initial sales charge 0.25% None
reduced for purchases of $50,000 and
over; shares sold without an initial sales
charge may be subject to a 1.00% CDSC
during 1st year if a commission was paid
to a dealer
B Maximum 5.00% CDSC during 1st year, 1.00% Class B Shares automatically
which decreases incrementally and is convert to Class A shares
0 after 6 years after approximately 8 years
C 1.00% CDSC during 1st year 1.00% None
I None None None
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If you are investing $1 million or more, it is generally more beneficial for you to buy Class A shares because there is no front-end sales charge and the annual expenses are lower.
CLASS A SHARES
Class A shares are sold at NAV plus an initial sales charge. In some cases, reduced initial sales charges for the purchase of Class A shares may be available, as described below. Investments of $1 million or more are not subject to a sales charge at the time of purchase but may be subject to a CDSC of 1.00% on redemptions made within 1 year after purchase if a commission was paid by Touchstone to a participating unaffiliated dealer. Class A shares are also subject to an annual 12b-1 distribution fee of up to .25% of a Fund's average daily net assets allocable to Class A shares.
The following table illustrates the current initial sales charge breakpoints for the purchase of Class A shares:
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Invested Amount Invested
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Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.50 4.71 3.75
$100,000 but less than $250,000 3.50 3.63 2.75
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.25 2.30 1.75
$1,000,000 or more None None
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The following table shows the initial sales charge breakpoints for the purchase of Class A shares of the Large Cap Growth Fund and the Growth Opportunities Fund for accounts opened before August 1, 1999:
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Invested Amount Invested
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Less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50 3.63 3.30
$250,000 but less than $500,000 2.50 2.56 2.30
$500,000 but less than $1,000,000 2.00 2.04 1.80
$1,000,000 or more None None
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The following table shows the initial sales charge breakpoints for the purchase of Class A shares of the Emerging Growth Fund and the Value Plus Fund for accounts opened before May 1, 2000:
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Invested Amount Invested
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Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.50 4.71 3.75
$100,000 but less than $250,000 3.50 3.63 2.75
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 2.00 2.04 1.60
$1,000,000 or more None None
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For initial purchases of Class A shares of $1 million or more and subsequent purchases further increasing the size of the account, participating unaffiliated dealers will receive first year compensation of up to 1.00% of such purchases from Touchstone. In determining a dealer's eligibility for such commission, purchases of Class A shares of the Funds may be aggregated with concurrent purchases of Class A shares of other Touchstone Funds. Dealers should contact Touchstone for more information on the calculation of the dealer's commission in the case of combined purchases.
An exchange from other Touchstone Funds will not qualify for payment of the dealer's commission unless the exchange is from a Touchstone Fund with assets as to which a dealer's commission or similar payment has not been previously paid. No commission will be paid if the purchase represents the reinvestment of a redemption from a Fund made during the previous twelve months. Redemptions of Class A shares may result in the imposition of a CDSC if the dealer's commission described in this paragraph was paid in connection with the purchase of such shares. See "CDSC for Certain Redemptions of Class A Shares" below.
WAIVER OF CLASS A SALES CHARGE. There is no front-end sales charge if you invest $1 million or more in Class A shares of a Fund. If you redeem shares that you purchased as part of the $1 million purchase within one year, you may pay a contingent deferred sales charge (CDSC), a sales charge you pay when you redeem your shares, of 1% on the shares redeemed. There is no front-end sales charge on exchanges between Funds or dividends reinvested in a Fund. In addition, there is no front-end sales charge on the following purchases:
o Purchases by registered representatives or other employees (and their immediate family members*) of broker-dealers, banks or other financial institutions having agreements with Touchstone Securities, Inc. ("Touchstone").
o Purchases by any director, officer or other employee (and their immediate family members*) of The Western & Southern Financial Group or any of its affiliates or any portfolio advisor or service provider to the Trust.
o Purchases in accounts as to which a broker-dealer or other financial intermediary charges an asset management fee economically comparable to a sales charge, provided the broker-dealer or other financial intermediary has an agreement with Touchstone.
o Purchases by a trust department of any financial institution in its capacity as trustee to any trust.
o Purchases through Processing Organizations described in the Prospectus.
o Purchases by an employee benefit plan having more than 25 eligible employees or a minimum of $250,000 invested in the Funds.
o Purchases by an employee benefit plan that is provided administrative services by a third-party administrator that has entered into a special service arrangement with Touchstone.
*Immediate family members are defined as the spouse, parents, siblings, domestic partner, natural or adopted children, mother-in-law, father-in- law, brother-in-law and sister-in-law of a director, officer or employee. The term "employee" is deemed to include current and retired employees.
Exemptions must be qualified in advance by Touchstone. Purchases at NAV may be made for investment only, and the shares may not be resold except through redemption by or on behalf of the Trust. At the option of the Trust, the front-end sales charge may be included on purchases by such persons in the future.
WAIVER OF CLASS A SALES CHARGE IN LARGE CAP GROWTH FUND FOR FORMER NAVELLIER SHAREHOLDERS. Effective October 6, 2003, sales charges do not apply to shares of the Large Cap Growth Fund purchased by former shareholders of the Navellier Performance Large Cap Growth Portfolio who are purchasing additional shares for their account or opening new accounts in the Large Cap Growth Fund.
REDUCED CLASS A SALES CHARGE. You may purchase shares at a reduced sales charge through programs such as aggregation, letter of intent and right of accumulation.
o Aggregation. In order to qualify for a reduced sales charge through the aggregation program, you must inform your financial advisor or Touchstone of any other investments that you, your spouse and your children under the age of 21 have in the Touchstone Funds. This includes, for example, investments held in a retirement account, an employee benefit plan or with a financial advisor other than the one handling your current purchase or by a trust (or other fiduciary arrangement) solely for the benefit of these individuals. Individual purchases by trustees or other fiduciaries may also be aggregated if the investments are: (1) for a single trust estate or fiduciary account, including an employee benefit plan other than those described above; (2) made for two or more employee benefit plans of a single employer or of affiliated employers as defined in the 1940 Act, other than employee benefit plans described above; or (3) for a common trust fund or other pooled account not specifically formed for the purpose of accumulating Fund shares. Purchases made for nominee or street name accounts (securities held in the name of a dealer or another nominee such as a bank trust department instead of the customer) may not be aggregated with those made for other accounts and may not be aggregated with other nominee or street name accounts unless otherwise qualified as described above. Touchstone will credit the combined value (at the current offering price) of all of your eligible accounts to determine if your current purchase qualifies for a reduced sales charge.
o Letter of Intent. A purchaser may use a letter of intent to qualify for a reduced sales charge if you plan to invest at least $50,000 (excluding any reinvestment of dividends and capital gains distributions) during the next 13 months in Class A shares of any Touchstone Fund sold with a front-end sales charge. A letter of intent is a letter you sign whereby, based upon your representation to purchase at least $50,000 in Class A shares of the Touchstone Funds over the next thirteen months, the Fund agrees to provide you the reduced sales charge indicated in the above chart. The minimum initial investment under a letter of intent is $10,000. You are not obligated to purchase additional shares if you complete a letter of intent. However, if you do not buy enough shares to qualify for the projected level of sales charge by the end of the 13-month period (or when you sell your shares, if earlier), your sales charges will be recalculated to reflect your actual purchase level. During the term of the letter of intent, shares representing 5% of your intended purchase will be held in escrow. If you do not purchase enough shares during the 13-month period to qualify for the projected reduced sales charge, the additional sales charge will be deducted from your escrow account. If you have purchased Class A shares of any Touchstone Fund within 90 days prior to signing a letter of intent, they may be included as part of your intended purchase. A purchaser includes an individual and his immediate family members, purchasing shares for his or their own account; or a trustee or other fiduciary purchasing shares for a single fiduciary account although more than one beneficiary is involved; or employees of a common employer, provided that economies of scale are realized through remittances from a single source and quarterly confirmation of such purchases; or an organized group, provided that the purchases are made through a central administration, or a single dealer, or by other means which result in economy of sales effort or expense.
o Right of Accumulation. A purchaser of Class A shares of a Fund has the right to combine the cost or current NAV (whichever is higher) of his existing Class A shares of the load funds distributed by Touchstone with the amount of his current purchases in order to take advantage of the reduced sales charges set forth in this Prospectus. The purchaser or his dealer must notify the transfer agent that an investment qualifies for a reduced sales charge. The reduced charge will be granted upon confirmation of the purchaser's holdings by the transfer agent. A purchaser includes an individual and his immediate family members, purchasing shares for his or their own account; or a trustee or other fiduciary purchasing shares for a single fiduciary account although more than one beneficiary is involved; or employees of a common employer, provided that economies of scale are realized through remittances from a single source and quarterly confirmation of such purchases; or an organized group, provided that the purchases are made through a central administration, or a single dealer, or by other means which result in economy of sales effort or expense.
CDSC FOR CERTAIN REDEMPTIONS OF CLASS A SHARES. A CDSC is imposed upon certain redemptions of Class A shares of the Funds (or shares into which such Class A shares were exchanged) purchased at NAV in amounts totaling $1 million or more, if the dealer's commission described above was paid by Touchstone and the shares are redeemed within one year from the date of purchase. The CDSC will be paid to Touchstone and will be equal to the commission percentage paid at the time of purchase as applied to the lesser of (1) the NAV at the time of purchase of the Class A shares being redeemed, or (2) the NAV of such Class A shares at the time of redemption. If a purchase of Class A shares is subject to the CDSC, you will be notified on the confirmation you receive for your purchase. Redemptions of such Class A shares of the Funds held for at least one year will not be subject to the CDSC.
CLASS B SHARES
Class B shares are sold at NAV without an initial sales charge. Class B shares are subject to a CDSC if you redeem Class B shares within 6 years of their purchase. The CDSC will be a percentage of the dollar amount of shares redeemed and will be assessed on an amount equal to the lesser of (1) the NAV at the time of purchase of the Class B shares being redeemed, or (2) the NAV of such Class B shares being redeemed. A CDSC will not be imposed upon redemptions of Class B shares held for at least six years. The amount of sales charge will depend on how long you have held your shares, as set forth in the following table:
YEAR SINCE PURCHASE CDSC AS A % OF AMOUNT PAYMENT MADE SUBJECT TO CHARGE ========================================================= First 5.00% Second 4.00% Third 3.00% Fourth 2.00% Fifth 1.00% Sixth 1.00% Seventh and thereafter* None |
* Class B shares will automatically convert to Class A shares after they have been held for approximately 8 years.
Class B shares are subject to an annual 12b-1 fee of up to 1.00% of a Fund's average daily net assets allocable to Class B shares. Touchstone intends to pay a commission of 4.00% of the purchase amount to your broker at the time you purchase Class B shares.
CLASS C SHARES
Class C shares are sold at NAV, without an initial sales charge and are subject to a CDSC of 1.00% on redemptions of Class C shares made within one year of their purchase. The CDSC will be a percentage of the dollar amount of shares redeemed and will be assessed on an amount equal to the lesser of (1) the NAV at the time of purchase of the Class C shares being redeemed, or (2) the NAV of such Class C shares being redeemed. A CDSC will not be imposed upon redemptions of Class C shares held for at least one year. Class C shares are subject to an annual 12b-1 fee of up to 1.00% of a Fund's average daily net assets allocable to Class C shares. Touchstone intends to pay a commission of 1.00% of the purchase amount to your broker at the time you purchase Class C shares.
CLASS I SHARES
Class I shares are sold at NAV, without an initial sales charge and are not subject to a 12b-1 fee or CDSC, but are subject to higher initial investment requirements than other classes of shares of the Fund. Class I shares are only offered through certain broker-dealers or financial institutions that have distribution agreements with Touchstone. These agreements are generally limited to discretionary managed, asset allocation, or wrap products offered by broker-dealers and financial institutions and may be subject to fees by the participating broker-dealer or financial institution. Class I shares may not be exchanged for any other Touchstone Funds.
ADDITIONAL INFORMATION ON THE CDSC
The CDSC is waived under the following circumstances:
o Any partial or complete redemption following death or disability (as defined in the Internal Revenue Code) of a shareholder (including one who owns the shares with his or her spouse as a joint tenant with rights of survivorship) from an account in which the deceased or disabled is named. Touchstone may require documentation prior to waiver of the charge, including death certificates, physicians' certificates, etc.
o Redemptions from a systematic withdrawal plan. If the systematic withdrawal plan is based on a fixed dollar amount or number of shares, systematic withdrawal redemptions are limited to no more than 10% of your account value or number of shares per year, as of the date the transfer agent receives your request. If the systematic withdrawal plan is based on a fixed percentage of your account value, each redemption is limited to an amount that would not exceed 10% of your annual account value at the time of withdrawal.
o Redemptions from retirement plans qualified under Section 401 of the Internal Revenue Code. The CDSC will be waived for benefit payments made by Touchstone directly to plan participants. Benefit payments will include, but are not limited to, payments resulting from death, disability, retirement, separation from service, required minimum distributions (as described under IRC Section 401(a)(9)), in-service distributions, hardships, loans and qualified domestic relations orders. The CDSC waiver will not apply in the event of termination of the plan or transfer of the plan to another financial institution.
All sales charges imposed on redemptions are paid to Touchstone. In determining whether the CDSC is payable, it is assumed that shares not subject to the CDSC are the first redeemed followed by other shares held for the longest period of time. The CDSC will not be imposed upon shares representing reinvested dividends or capital gains distributions, or upon amounts representing share appreciation.
The following example will illustrate the operation of the CDSC. Assume that you open an account and purchase 1,000 shares at $10 per share and that six months later the NAV per share is $12 and, during such time, you have acquired 50 additional shares through reinvestment of distributions. If at such time you should redeem 450 shares (proceeds of $5,400), 50 shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 400 shares, the charge is applied only to the original cost of $10 per share and not to the increase in NAV of $2 per share. Therefore, $4,000 of the $5,400 redemption proceeds will pay the charge. At the rate of 5.00%, the CDSC would be $200 for redemptions of Class B shares. At the rate of 1.00%, the CDSC would be $40 for redemptions of Class C shares. In determining whether an amount is available for redemption without incurring a deferred sales charge, the purchase payments made for all shares in your account are aggregated.
The following example will illustrate the operation of the CDSC for Class B shares. Assume that you open an account and purchase 1,000 shares at $10 per share and that twenty-eight months later the NAV per share is $14 and, during such time, you have acquired (a) 150 additional shares through reinvestment of distributions and (b) 500 shares through purchases at $11 per share during the second year. If at such time you should redeem 1,450 shares (proceeds of $20,300), 150 shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 1,300 shares, the charge is applied only to the (a) original cost of $10 per share for the first 1,000 shares and not to the increase in NAV of $4 per share and (b) to the original cost of $11 per share for the next 300 shares and not to the increase in NAV of $3 per share. Therefore, $18,200 of the $20,300 redemption proceeds will pay the charge. The redemption of the first 1,000 shares is in the third year of the CDSC schedule and will be charged at the rate of 3.00%, or $300. The redemption of the next 300 shares is in the second year of the CDSC schedule and will be charged at the rate of 4.00%, or $132. After this transaction is completed, the account has 200 shares remaining with an initial purchase value of $11 per share and these shares are in the second year of the CDSC schedule.
Additional information with respect to purchases and exchanges in the Funds is set forth below.
WAIVER OF MINIMUM INVESTMENT REQUIREMENTS. The minimum and subsequent investment requirements for purchases in the Funds may not apply to:
1. Any director, officer or other employee (and their immediate family members) of The Western and Southern Life Insurance Company or any of its affiliates or any portfolio advisor or service provider to the Trust.
2. Any employee benefit plan that is provided administrative services by a third-party administrator that has entered into a special service arrangement with Touchstone.
EXCHANGES. Exchanges may be subject to certain limitations and are subject to the Touchstone Funds' policies concerning excessive trading practices, which are policies designed to protect Funds and their shareholders from the harmful effect of frequent exchanges.
The Funds may restrict or refuse purchases or exchanges by market timers and may restrict or refuse purchases or exchanges by a shareholder who fails to comply with the restrictions set forth below. You may be considered a market timer if you have (i) requested an exchange or redemption out of any of the Touchstone Funds within two weeks of an earlier purchase or exchange request out of any Fund, or (ii) made more than two exchanges within a rolling 90 day period.
REDEMPTION IN KIND. Under unusual circumstances, when the Board of Trustees deems it in the best interests of a Fund's shareholders, the Fund may make payment for shares repurchased or redeemed in whole or in part in securities of the Fund taken at current value. Should payment be made in securities, the redeeming shareholder will generally incur brokerage costs in converting such securities to cash. Portfolio securities that are issued in an in-kind redemption will be readily marketable. The Trust has filed an irrevocable election with the SEC under Rule 18f-1 of the 1940 Act wherein the Funds are committed to pay redemptions in cash, rather than in kind, to any shareholder of record of a Fund who redeems during any ninety day period, the lesser of $250,000 or 1% of a Fund's NAV at the beginning of such period.
The Trust intends to qualify annually and to elect that each Fund be treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies); and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and its net tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund
must distribute during each calendar year an amount equal to the sum of: (1) at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year; (2) at least 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses, as prescribed by
the Code) for the one-year period ending on October 31 of the calendar year; and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by the Fund in
October, November or December with a record date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
A Fund's net realized capital gains from securities transactions will be distributed only after reducing such gains by the amount of any available capital loss carryforwards. Capital losses may be carried forward to offset any capital gains for eight years, after which any undeducted capital loss remaining is lost as a deduction. As of March 31, 2004, the Growth Opportunities Fund, Enhanced 30 Fund, Value Plus Fund and Large Cap Growth Fund had the following capital loss carryforwards for federal income tax purposes:
AMOUNT EXPIRATION DATE
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Growth Opportunities Fund $ 2,005,441 March 31, 2009
$22,448,509 March 31, 2010
$21,975,058 March 31, 2011
$17,098,132 March 31, 2012
Enhanced 30 Fund $ 99,480 March 31, 2009
$ 24,780 March 31, 2010
$ 414,728 March 31, 2011
$ 1,025,778 March 31, 2012
Value Plus Fund $ 209,088 March 31, 2009
$ 5,826,294 March 31, 2011
$ 8,129,338 March 31, 2012
Large Cap Growth Fund* $ 1,492,562 March 31, 2008
$17,152,661 March 31, 2009
$14,651,841 March 31, 2010
$19,675,611 March 31, 2011
$ 3,322,314 March 31, 2012
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*A portion of these capital loss carryforwards may be limited under tax regulations.
Each Fund shareholder will receive, if appropriate, various written notices at the end of the calendar year as to the federal income status of his dividends and distributions that were received from the Fund during the year. Shareholders should consult their tax advisors as to any state and local taxes that may apply to these dividends and distributions.
FOREIGN TAXES. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance since the amount of each applicable Fund's assets to be invested in various countries will vary. If the Fund is liable for foreign taxes, and if more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, it may make an election pursuant to which certain foreign taxes paid by it would be treated as having been paid directly by shareholders of the entities, such as the corresponding Fund, which have invested in the Fund. Pursuant to such election, the amount of foreign taxes paid will be included in the income of the corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt shareholders) may, subject to certain limitations, claim either a credit or deduction for the taxes. Each such Fund shareholder will be notified after the close of the Fund's taxable year whether the foreign taxes paid will "pass through" for that year and, if so, such notification will designate (a) the shareholder's portion of the foreign taxes paid to each such country and (b) the portion which represents income derived from sources within each such country. The amount of foreign taxes for which a shareholder may claim a credit in any year will generally be subject to a separate limitation for "passive income," which includes, among other items of income, dividends, interest and certain foreign currency gains. Because capital gains realized by the Fund on the sale of foreign securities will be treated as U.S.-source income, the available credit of foreign taxes paid with respect to such gains may be restricted by this limitation.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company taxable income will be taxable to U.S. shareholders, other than corporations, at the qualified dividend income rate of 15%, or 5% for lower income levels and may qualify for the corporate dividends-received deduction, to the extent derived from qualified dividend income. Distributions of net capital gains, if any, designated as capital gain dividends are taxable as long-term capital gains, regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends-received deduction. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a cost basis in each such share equal to the NAV of a share of the Fund on the reinvestment date. Shareholders will be notified annually as to the U.S. federal tax status of distributions.
SALE OF SHARES. Any gain or loss realized by a shareholder upon the sale or other disposition of any shares of a Fund, or upon receipt of a distribution in complete liquidation of a Fund, generally will be a capital gain or loss which will be long-term or short-term, generally depending upon the shareholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced (including shares acquired pursuant to a dividend reinvestment plan) within a period of 61 days beginning 30 days before and ending 30 days after disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares.
TIMING OF INVESTMENT. At the time of a shareholder's purchase of a Fund's shares, a portion of the purchase price may be attributable to realized or unrealized appreciation in the Fund's portfolio or undistributed taxable income of the Fund. Consequently, subsequent distributions by the Fund with respect to these shares from such appreciation or income may be taxable to such shareholder even if the NAV of the shareholder's shares is, as a result of the distributions, reduced below the shareholder's cost for such shares and the distributions economically represent a return of a portion of the investment.
FOREIGN WITHHOLDING TAXES. Income received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING. A Fund may be required to withhold U.S. federal income tax on all taxable distributions and sales payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The current backup-withholding rate is 28%. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign shareholder of an investment in a Fund may be different from those described herein. Foreign shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in a Fund.
OTHER TAXATION. Shareholders may be subject to state and local taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in a Fund.
UNCASHED DISTRIBUTION CHECKS. If you have chosen to receive your distributions in cash and the U.S. Postal Service cannot deliver your checks or if your checks remain uncashed for 90 days, your dividends may be reinvested in your account at the them current NAV and any future distributions will automatically be reinvested. No interest will accrue on amounts represented by uncashed distribution checks.
From time to time, the Funds may advertise average annual total return. Average annual total return quotations will be computed by finding the average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending redeemable value, according to the following formula:
n P (1 + T) = ERV Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all dividends and distributions and the deduction of the current maximum sales charge from the initial $1,000 payment. If a Fund has been in existence less than one, five or ten years, the time period since the date of the initial public offering of shares will be substituted for the periods stated.
THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUNDS FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Growth Opportunities Fund (Class A) ----------------------------------- 1 Year 34.08% 5 Years -0.18% Since inception (9-29-95) 10.04% Growth Opportunities Fund (Class B) ----------------------------------- 1 Year 38.70% Since inception (5-1-01) -9.88% Growth Opportunities Fund (Class C) ----------------------------------- 1 Year 42.89% Since inception (8-2-99) -1.09% Enhanced 30 Fund (Class A) -------------------------- 1 Year 28.56% Since inception (5-1-00) -3.55% Enhanced 30 Fund (Class B) -------------------------- 1 Year 31.37% Since inception (5-1-01) -2.53% Enhanced 30 Fund (Class C) -------------------------- 1 Year 35.38% Since inception (5-16-00) -2.67% Emerging Growth Fund (Class A) ------------------------------ 1 Year 47.42% 5 Years 17.05% Since inception (10-3-94) 15.82% |
Emerging Growth Fund (Class B) ------------------------------ 1 Year 55.86% Since inception (5-1-01) 6.75% Emerging Growth Fund (Class C) ------------------------------ 1 Year 59.68% 5 Years 17.61% Since inception (10-3-94)* 15.61% Value Plus Fund (Class A) ------------------------- 1 Year 29.23% 5 Years 0.47% Since inception (5-1-98) 1.76% Value Plus Fund (Class B) ------------------------- 1 Year 32.04% Since inception (5-1-01) -3.93% Value Plus Fund (Class C) ------------------------- 1 Year 35.89% 5 Years 1.03% Since inception (5-1-98)* 1.87% Small Cap Growth Fund (Class A) ------------------------------- 1 Year 58.31% Since inception (10-21-02) 35.47% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 62.99% Since inception (10-21-02) 37.85% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 67.26% Since inception (10-21-02) 40.31% Large Cap Growth Fund (Class A) ------------------------------- 1 Year 30.74% 5 Years -0.23% Since inception (12-19-97) 8.16% Large Cap Growth Fund (Class B) ------------------------------- Since inception (10-6-03) 6.59% Large Cap Growth Fund (Class C) ------------------------------- Since inception (10-6-03) 10.59% |
* Date reflects inception of the predecessor. The predecessor was a series of Select Advisors Trust C that was reorganized into Touchstone Series Trust, the Funds' previous Trust, on December 31, 1998.
Each Fund may also advertise total return (a "nonstandardized quotation") that is calculated differently from average annual total return. A nonstandardized quotation of total return may be a cumulative return which measures the percentage change in the value of an account between the beginning and end of a period, assuming no activity in the account other than reinvestment of dividends and capital gains distributions. This computation does not include the effect of the applicable sales charge, which, if included, would reduce total return.
THE TOTAL RETURNS OF THE FUNDS AS CALCULATED IN THIS MANNER FOR EACH OF THE FISCAL PERIODS SINCE INCEPTION ARE AS FOLLOWS:
GROWTH OPPORTUNITIES FUND ENHANCED 30 FUND SMALL CAP GROWTH FUND(1)
Period Ended Class A Class B Class C Class A Class B Class C Class A Class B Class C
--------------------------------------------------------------------------------------------------------------------
March 31, 1996 +14.50%(2)
March 31, 1997 +11.82%
March 31, 1998 +36.73%
March 31, 1999 +29.89%
March 31, 2000 +88.88% +76.52%(3)
March 31, 2001 -38.42% -38.89% -11.80%(4) -12.35%(5)
March 31, 2002 -8.96% -21.81%(6) -9.93% 3.86% -3.60%(6) 3.00%
March 31, 2003 -30.14% -31.78% -31.55% -26.19% -26.70% -26.32% -2.20% -2.50% -2.60%
March 31, 2004 42.20% 42.70% 42.89% 36.41% 35.37% 35.38% 68.02% 66.99% 67.26%
|
(1) From date of initial public offering on October 21, 2002
(2) From date of initial public offering on September 29, 1995
(3) From date of initial public offering on August 2, 1999
(4) From date of initial public offering on May 1, 2000
(5) From date of initial public offering on May 16, 2000
(6) From date of initial public offering on May 1, 2001
EMERGING GROWTH FUND VALUE PLUS FUND
Period Ended Class A(1) Class B(3) Class C(1) Class A(2) Class B(3) Class C(2)
-------------------------------------------------------------------------------------------------
December 31, 1994 2.72% 2.52%
December 31, 1995 22.56% 21.15%
December 31, 1996 10.56% 9.67%
December 31, 1997 32.20% 30.67%
December 31, 1998 2.65% 1.95% 4.29% 2.60%
December 31, 1999 45.85% 44.86% 15.51% 14.24%
December 31, 2000 25.92% 24.58% 1.91% 1.87%
March 31, 2001 -4.95% -5.91% -0.74% -0.89%
March 31, 2002 22.72% 11.35% 22.09% 2.34% -5.01% 1.60%
March 31, 2003 -27.90% -30.34% -30.27% -28.59% -29.05% -29.08%
March 31, 2004 56.44% 59.86% 59.68% 37.04% 36.04% 35.89%
|
(1) From date of initial public offering on October 3, 1994. Date of Class C
offering reflects inception of the predecessor series.
(2) From date of initial public offering on May 1, 1998. Date of Class C
offering reflects inception of the predecessor series.
(3) From date of initial public offering on May 1, 2001
LARGE CAP GROWTH FUND
Period Ended Class A Class B Class C ------------------------------------------------------------ December 31, 1997 2.56%(1) December 31, 1998 41.17% December 31, 1999 63.03% December 31, 2000 -7.66% December 31, 2001 -23.47% December 31, 2002 -26.70% December 31, 2003 35.60% 6.80%(1) 6.80%(1) March 31, 2004 38.70% 11.59% 11.59% |
(1) Class A shares began their public offering on December 19, 1997. Class B and Class C shares began their public offering on October 6, 2003.
A nonstandardized quotation may also indicate average annual compounded rates of return without including the effect of the applicable sales charge or over periods other than those specified for average annual total return.
THE AVERAGE ANNUAL COMPOUNDED RATES OF RETURN FOR THE FUNDS (EXCLUDING SALES CHARGES) FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Growth Opportunities Fund (Class A) ----------------------------------- 1 Year 42.20% 3 Years -3.30% 5 Years 1.02% Since inception (9-29-95) 10.81% Growth Opportunities Fund (Class B) ----------------------------------- 1 Year 42.70% Since inception (5-1-01) -8.93% Growth Opportunities Fund (Class C) ----------------------------------- 1 Year 42.89% 3 Years -4.14% Since inception (8-2-99) -1.09% Enhanced 30 Fund (Class A) -------------------------- 1 Year 36.41% 3 Years 1.50% Since inception (5-1-00) -2.06% |
Enhanced 30 Fund (Class B) -------------------------- 1 Year 35.37% Since inception (5-1-01) -1.51% Enhanced 30 Fund (Class C) -------------------------- 1 Year 35.38% 3 Years 0.91% Since inception (5-16-00) -2.67% Emerging Growth Fund (Class A) ------------------------------ 1 Year 56.44% 3 Years 11.45% 5 Years 18.44% Since inception (10-3-94) 16.54% Emerging Growth Fund (Class B) ------------------------------ 1 Year 59.86% Since inception (5-1-01) 7.65% Emerging Growth Fund (Class C) ------------------------------ 1 Year 59.68% 3 Years 10.78% 5 Years 17.61% Since inception (10-3-94)* 15.61% Value Plus Fund (Class A) ------------------------- 1 Year 37.04% 3 Years 0.05% 5 Years 1.67% Since inception (5-1-98) 2.79% Value Plus Fund (Class B) ------------------------- 1 Year 36.04% Since inception (5-1-01) -2.93% Value Plus Fund (Class C) ------------------------- 1 Year 35.89% 3 Years -0.70% 5 Years 1.03% Since inception (5-1-98)* 1.87% Small Cap Growth Fund (Class A) ------------------------------- 1 Year 68.02% Since inception (10-21-02) 41.15% |
Small Cap Growth Fund (Class B) ------------------------------- 1 Year 66.99% Since inception (10-21-02) 40.25% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 67.26% Since inception (10-21-02) 40.31% Large Cap Growth Fund (Class A) ------------------------------- 1 Year 38.70% 3 Years 3.42% 5 Years 0.96% Since inception (12-19-97) 9.18% Large Cap Growth Fund (Class B) ------------------------------- Since inception (10-6-03) 11.59% Large Cap Growth Fund (Class C) ------------------------------- Since inception (10-6-03) 11.59% |
* Date reflects inception of the predecessor.
A nonstandardized quotation of total return will always be accompanied by the Fund's average annual total return as described above.
The Funds may advertise average annual total return after taxes on distributions. Average annual total return after taxes on distributions will be computed by finding the average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending value, according to the following formula:
n
P(1+T) =ATV
D
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions).
n = number of years.
ATV = ending value of a hypothetical $1,000 payment made at the
D beginning of the 1-, 5-, or 10-year periods at the end of the 1-,
5-, or 10-year periods (or fractional portion), after taxes on fund
distributions but not after taxes on redemption.
The calculation of average annual total return after taxes on distributions assumes the reinvestment of all dividends and distributions, less the taxes due on such distributions. The calculation also assumes the deduction of the current maximum sales charge from the initial $1,000 payment. If a Fund (or class) has been in existence less than one, five or ten years, the time period since the date of the initial public offering of shares will be substituted for the periods stated.
THE AVERAGE ANNUAL RETURNS OF THE FUNDS AFTER TAXES ON DISTRIBUTIONS FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Growth Opportunities Fund (Class A) ----------------------------------- 1 Year 34.08% 5 Years -0.29% Since inception (9-29-95) 9.24% Growth Opportunities Fund (Class B) ----------------------------------- 1 Year 38.70% Since inception (5-1-01) -9.88% Growth Opportunities Fund (Class C) ----------------------------------- 1 Year 42.89% Since inception (8-2-99) -1.21% Enhanced 30 Fund (Class A) -------------------------- 1 Year 28.45% Since inception (5-1-00) -3.77% Enhanced 30 Fund (Class B) -------------------------- 1 Year 31.34% Since inception (5-1-01) -2.58% Enhanced 30 Fund (Class C) -------------------------- 1 Year 35.34% Since inception (5-16-00) -2.71% Emerging Growth Fund (Class A) ------------------------------ 1 Year 47.42% 5 Years 14.49% Since inception (10-3-94) 13.21% Emerging Growth Fund (Class B) ------------------------------ 1 Year 55.86% Since inception (5-1-01) 6.52% Emerging Growth Fund (Class C) ------------------------------ 1 Year 59.68% 5 Years 14.92% Since inception (10-3-94)* 13.07% Value Plus Fund (Class A) ------------------------- 1 Year 29.10% 5 Years -0.23% Since inception (5-1-98) 1.15% |
Value Plus Fund (Class B) ------------------------- 1 Year 31.96% Since inception (5-1-01) -4.03% Value Plus Fund (Class C) ------------------------- 1 Year 35.83% 5 Years 0.43% Since inception (5-1-98)* 1.36% Small Cap Growth Fund (Class A) ------------------------------- 1 Year 57.06% Since inception (10-21-02) 34.72% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 61.66% Since inception (10-21-02) 37.07% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 65.93% Since inception (10-21-02) 39.53% Large Cap Growth Fund (Class A) ------------------------------- 1 Year 30.74% 5 Years -0.25% Since inception (12-19-97) 8.14% Large Cap Growth Fund (Class B) ------------------------------- Since inception (10-6-03) 6.59% Large Cap Growth Fund (Class C) ------------------------------- Since inception (10-6-03) 10.59% |
*Date reflects inception of the predecessor.
The Funds may advertise average annual total return after taxes on distributions and redemption. Average annual total return after taxes on distributions and redemption will be computed by finding the average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending value, according to the following formula:
n
P(1+T) =ATV
DR
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions and
redemption).
n = number of years.
ATV = ending value of a hypothetical $1,000 payment made at the beginning of
DR the 1-, 5-, or 10-year DR periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion), after taxes on fund distributions and
redemption.
|
The calculation of average annual total return after taxes on distributions and redemption assumes the reinvestment of all dividends and distributions, less the taxes due on such distributions. The calculation also assumes the deduction of the current maximum sales charge from the initial $1,000 payment. If the Fund (or class) has been in existence less than one, five or ten years, the time period since the date of the initial public offering of shares will be substituted for the periods stated.
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUNDS AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Growth Opportunities Fund (Class A) ----------------------------------- 1 Year 22.15% 5 Years -0.20% Since inception (9-29-95) 8.56% Growth Opportunities Fund (Class B) ----------------------------------- 1 Year 25.16% Since inception (5-1-01) -8.27% Growth Opportunities Fund (Class C) ----------------------------------- 1 Year 27.88% Since inception (8-2-99) -0.97% Enhanced 30 Fund (Class A) -------------------------- 1 Year 18.70% Since inception (5-1-00) -3.12% Enhanced 30 Fund (Class B) -------------------------- 1 Year 20.44% Since inception (5-1-01) -2.17% Enhanced 30 Fund (Class C) -------------------------- 1 Year 23.05% Since inception (5-16-00) -2.28% Emerging Growth Fund (Class A) ------------------------------ 1 Year 30.82% 5 Years 13.30% Since inception (10-3-94) 12.39% |
Emerging Growth Fund (Class B) ------------------------------ 1 Year 36.31% Since inception (5-1-01) 5.64% Emerging Growth Fund (Class C) ------------------------------ 1 Year 38.79% 5 Years 13.72% Since inception (10-3-94)* 12.29% Value Plus Fund (Class A) ------------------------- 1 Year 19.15% 5 Years 0.13% Since inception (5-1-98) 1.27% Value Plus Fund (Class B) ------------------------- 1 Year 20.91% Since inception (5-1-01) -3.38% Value Plus Fund (Class C) ------------------------- 1 Year 23.41% 5 Years 0.68% Since inception (5-1-98)* 1.43% Small Cap Growth Fund (Class A) ------------------------------- 1 Year 37.90% Since inception (10-21-02) 29.98% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 40.94% Since inception (10-21-02) 32.02% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 43.72% Since inception (10-21-02) 34.15% Large Cap Growth Fund (Class A) ------------------------------- 1 Year 19.98% 5 Years -0.20% Since inception (12-19-97) 7.12% Large Cap Growth Fund (Class B) ------------------------------- Since inception (10-6-03) 4.28% Large Cap Growth Fund (Class C) ------------------------------- Since inception (10-6-03) 6.88% |
* Date reflects inception of the predecessor.
From time to time, the Funds may advertise their yield. A yield quotation is based on a 30-day (or one month) period and is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula:
Where:
a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period
Solely for the purpose of computing yield, dividend income is recognized by accruing 1/360 of the stated dividend rate of the security each day that a Fund owns the security. Generally, interest earned (for the purpose of "a" above) on debt obligations is computed by reference to the yield to maturity of each obligation held based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day prior to the start of the 30-day (or one month) period for which yield is being calculated, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest).
Performance quotations are based on historical earnings and are not intended to indicate future performance. Average annual total return and yield are computed separately for Class A, Class B and Class C shares of the Funds. The yield of Class A shares is expected to be higher than the yield of Class B and Class C shares due to the higher distribution fees imposed on Class B and Class C shares.
To help investors better evaluate how an investment in a Fund might satisfy their investment objective, advertisements regarding a Fund may discuss various measures of Fund performance, including current performance ratings and/or rankings appearing in financial magazines, newspapers and publications which track mutual fund performance. Advertisements may also compare Fund performance to performance as reported by other investments, indices and averages.
When advertising current ratings or rankings, the Funds may use the following publications to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis measures total return and average current yield for the mutual fund industry and ranks individual mutual fund performance over specified time periods assuming reinvestment of all distributions, exclusive of sales charges.
Morningstar, Inc., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars and ratings are effective for two weeks.
In addition, a Fund may also use comparative performance information of relevant indices, including the following:
The Dow Jones Industrial Average is a measurement of general market price movement for 30 widely held stocks.
The S&P 500 Index is a widely recognized unmanaged index that measures the stock performance of 500 large and medium sized companies and is often used to indicate the performance of the overall stock market.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
In assessing such comparisons of performance an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to a Fund's portfolio, that the averages are generally unmanaged and that the items included in the calculations of such averages may not be identical to the formula used by the Funds to calculate their performance. In addition, there can be no assurance that a Fund will continue this performance as compared to such other averages.
PRINCIPAL SECURITY HOLDERS
As of July 9, 2004, the following shareholders held over 5% of the outstanding shares of a Fund (or class):
------------------------------------------------------------------------------------------------
FUND SHAREHOLDER % OF CLASS
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Fifth Third Bank - RPS 24.65%
Class A MD 1090BB
Cincinnati, OH
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Western and Southern Life Insurance Company 7.89%
Class A 400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Charles Schwab & Company, Inc. 14.04%
Class A Mutual Funds
101 Montgomery Street
San Francisco, CA
------------------------------------------------------------------------------------------------
|
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Merrill Lynch, Pierce Fenner & Smith 8.71%
Class A Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Western and Southern Financial Group 5.01%
Class A 400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Merrill Lynch, Pierce Fenner & Smith 18.00%
Class B Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Large Cap Growth Fund - Merrill Lynch, Pierce Fenner & Smith 35.85%
Class C Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Growth Opportunities Fund - Class A Fidelity Investments Institutional 24.41%
100 Magellan Way
Covington, KY
------------------------------------------------------------------------------------------------
Growth Opportunities Fund - Class A Fifth Third Bank - RPS 5.85%
MD 1090BB
Cincinnati, OH
------------------------------------------------------------------------------------------------
Growth Opportunities Fund - Class A NFSC FEBO a Customer 5.36%
P.O. Box 370 New York, NY
------------------------------------------------------------------------------------------------
Growth Opportunities Fund - Class A NFSC FEBO a Customer 6.40%
1 Wall Street, Floor 12
New York, NY
------------------------------------------------------------------------------------------------
Emerging Growth Fund-Class A Merrill Lynch, Pierce Fenner & Smith 14.90%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Emerging Growth Fund-Class B Merrill Lynch, Pierce Fenner & Smith 15.39%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Emerging Growth Fund-Class C Merrill Lynch, Pierce Fenner & Smith 38.58%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class A The Western & Southern Life Insurance Company 18.19%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class A The Western & Southern Financial Group* 50.13%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
|
------------------------------------------------------------------------------------------------
Enhanced 30 Fund - Class B Merrill Lynch, Pierce Fenner & Smith 9.31%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Enhanced 30 Fund - Class C Merrill Lynch, Pierce Fenner & Smith 28.19%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Enhanced 30 Fund - Class C MCB Trust Services Cust FBO A Customer 13.30%
700 17th Street, Suite 300
Denver, CO
------------------------------------------------------------------------------------------------
Value Plus Fund-Class A Fifth Third Bank - RPS 19.39%
MD 1090BB
Cincinnati, OH
------------------------------------------------------------------------------------------------
Value Plus Fund-Class A NFSC FEBO A Customer 6.24%
Bank of New York, Custodian
1Wall Street
New York, NY
------------------------------------------------------------------------------------------------
Value Plus Fund-Class A The Western & Southern Financial Group 19.54%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Value Plus Fund-Class A The Western & Southern Life Insurance 17.04%
Company
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Value Plus Fund-Class B Donaldson Lufkin Jenrette 6.03%
P.O. Box 2052
Jersey City, NJ
------------------------------------------------------------------------------------------------
Value Plus Fund - Class B Merrill Lynch, Pierce Fenner & Smith 5.18%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Value Plus Fund - Class B Stifel Nicolaus Co. Inc. 5.13%
501 North Broadway
St. Louis, MO
------------------------------------------------------------------------------------------------
Value Plus Fund - Class C Merrill Lynch, Pierce Fenner & Smith 9.28%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Value Plus Fund-Class C The Western & Southern Life Insurance 15.40%
Company
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Value Plus Fund-Class C The Western & Southern Financial Group 10.84%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A Western & Southern Life Insurance Co. 12.22%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
|
------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A Merrill Lynch, Pierce Fenner & Smith 7.43%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A The Western & Southern Financial Group 6.98%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A SEI Private Trust Company 5.86%
One Freedom Valley Drive
Oaks, PA
------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class B Merrill Lynch, Pierce Fenner & Smith 12.92%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class C Merrill Lynch, Pierce Fenner & Smith 48.58%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Small Cap Growth Fund -Class I Charles Schwab & Company, Inc. 16.36%
Mutual Funds
101 Montgomery Street
San Francisco, CA
------------------------------------------------------------------------------------------------
Small Cap Growth Fund -Class I Prudential Investment Management SE 83.28%
194 Wood Avenue South
Iselin, NJ
------------------------------------------------------------------------------------------------
Micro Cap Growth Fund-Class A Western & Southern Life Insurance Co. 74.79%
400 Broadway
Cincinnati, OH
------------------------------------------------------------------------------------------------
Micro Cap Growth Fund-Class C AG Edwards Sons Inc. FBO A Customer 5.47%
One North Jefferson
St. Louis, MO
------------------------------------------------------------------------------------------------
Micro Growth Fund-Class C Merrill Lynch, Pierce Fenner & Smith 10.08%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
------------------------------------------------------------------------------------------------
Micro Growth Fund-Class C Randy W. Zundel TTEE 5.47%
1851 Chokecherry Drive
Bountiful, UT
------------------------------------------------------------------------------------------------
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*May be deemed to control a Fund (or class) by virtue of the fact that it owned of record more than 25% of the outstanding shares as of July 9, 2004.
As of July 9, 2004, the Trustees and officers of the Trust as a group owned of record or beneficially less than 1% of the outstanding shares of the Trust and of each Fund (or class thereof).
Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109, serves as the Trust's custodian. Brown Brothers Harriman acts as the Trust's depository, safe keeps its portfolio securities, collects all income and other payments with respect thereto, disburses funds as instructed and maintains records in connection with its duties.
The firm of Ernst & Young LLP, 312 Walnut Street, Cincinnati, Ohio 45202, has been selected as independent auditors for the Trust for fiscal year ending March 31, 2005. Ernst & Young LLP will perform an audit of the Trust's financial statements for its fiscal year end and advise the Trust as to certain accounting matters.
TRANSFER AGENT. The Trust's transfer agent, Integrated Fund Services, Inc. ("Integrated"), 221 East Fourth Street, Cincinnati, Ohio 45202, maintains the records of each shareholder's account, answers shareholders' inquiries concerning their accounts, processes purchases and redemptions of the Funds' shares, acts as dividend and distribution disbursing agent and performs other shareholder service functions. For providing transfer agent and shareholder services to the Trust, Integrated receives a monthly per account fee from each Fund, plus out of-pocket expenses. Integrated is an affiliate of the Advisor by reason of common ownership.
ACCOUNTING AND PRICING AGENT. Integrated provides accounting and pricing services to the Trust. For calculating daily NAV per share and maintaining all necessary books and records to enable Integrated to perform its duties, each Fund pays Integrated a fee based on the asset size of the Fund, plus out-of-pocket expenses. The Funds also pay the costs of outside pricing services.
Prior to March 17, 2002, Investors Bank & Trust Company provided accounting and administrative services to the Emerging Growth Fund and the Value Plus Fund. Set forth below are the accounting service fees paid by the Funds during their last three fiscal periods:
3-31-04 3-31-03 3-31-02
------- ------- --------
Emerging Growth Fund $68,000 $66,234 $196,006*
Value Plus Fund $45,000 52,782 147,233*
3-31-04 3-31-03 3-31-02
------- ------- --------
Enhanced 30 Fund $39,000 $45,750 $ 47,000
Growth Opportunities Fund $51,396 56,750 59,000
Small Cap Growth Fund $41,500 19,169
3-31-04 12-31-03 12-31-02
------- ------- --------
Large Cap Growth Fund $ 9,128** $23,724 $ --
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* Represents a unified fee that includes accounting, administration and custody fees. ** From period January 1, 2004 to March 31, 2004.
ADMINISTRATIVE AGENT. Integrated also provides administrative services to the Funds. These administrative services include supplying non-investment related statistical and research data, internal regulatory compliance services, executive and administrative services, supervising the preparation of tax returns, reports to shareholders of the Funds, reports to and filings with the SEC and state securities commissions, and materials for meetings of the Board of Trustees. For the performance of these administrative services, Integrated receives a monthly fee from each Fund based on its average daily net assets, plus out-of-pocket expenses. The fees paid for administrative services by the Funds for the fiscal year ended March 31, 2003 are set forth below. The administrative fees paid by the Emerging Growth Fund and Value Plus Fund during prior fiscal years are reflected in the accounting and pricing fee chart above. The Enhanced 30 Fund and the Growth Opportunities Fund did not begin paying administrative fees until August 1, 2002.
3-31-04 3-31-03
-------- --------
Emerging Growth Fund $230,008 $151,466
Value Plus Fund 33,077 37,217
Enhanced 30 Fund 5,778 3,025
Growth Opportunities Fund 74,709 41,073
Small Cap Growth Fund 25,060 3,806
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Prior to October 6, 2003, Navellier provided administrative services to the Large Cap Growth Fund. In addition, Navellier had an agreement with FBR National Bank & Trust to perform some or all administrative services and these services were paid by Navellier out of its administrative service fee. Effective October 6, 2003, Integrated provides administrative services to the Large Cap Growth Fund. Set forth below are the administrative fees paid by the Large Cap Growth Fund during the stated fiscal periods:
3 Months Ended 3-31-04 12-31-03 12-31-02 12-31-01 ------------- -------- -------- -------- $9,649 $39,924 $40,440 $66,111 |
The Funds' financial statements as of March 31, 2004 appear in the Trust's Annual Report, which is incorporated by reference herein. The Trust's financial statements were audited by Ernst & Young LLP.
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's, S&P and Fitch, which represent their opinions as to the quality of the securities which they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality.
MOODY'S BOND RATINGS
Aaa Bonds that are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that 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 fluctuations of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A Bonds that 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 sometime in
the future.
Baa Bonds that 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 that 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 that 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 that 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.
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Ca Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C Bonds that 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.
S&P'S BOND RATINGS
AAA Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from higher rated issues only in a small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the highest
rated categories.
BBB Bonds rated BBB are 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 bonds in this category than in higher
rated categories.
BB, B, CCC, CC and C. Bonds rated BB, B, CCC, CC, and C are regarded, on
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balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of this obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, they are outweighed by large uncertainties of major risk exposures to adverse conditions.
D Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
NR Not rated.
FITCH RATINGS:
AAA - "AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events."
AA - "AA ratings denote a very low expectation of credit risk. They indicate strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events."
A - "A ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings."
BBB - "BBB ratings indicate that there is currently a low expectation of credit risk. Capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category."
BB - "BB ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade."
B - "B ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment."
CCC, CC, C - "Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default."
DDD, DD and D - "Securities are not meeting current obligations and are extremely speculative. 'DDD' designates the highest potential for recovery of amounts outstanding on any securities involved. For U.S. corporates, for example, 'DD' indicates expected recovery of 50%-90% of such outstanding, and 'D' the lowest recovery potential, i.e. below 50%."
UNRATED. Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the effect of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa-1, A-1, Baa-1, Ba-1 and B-1.
S&P'S COMMERCIAL PAPER RATINGS
A. S& P's commercial paper rating is a current opinion of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from "A" for the highest-quality obligations to "D" for the lowest. These categories are as follows:
A-1 This designation indicates that the degree of safety regarding timely 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 an adequate capacity for timely payment. The are, however, more vulnerable to the adverse effects of 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 S&P believes such payments will be made during such grace period.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by 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; well-established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory 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, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.
MOODY'S CORPORATE NOTE RATINGS
MIG-1 "Notes which are rated MIG-1 are judged to be of the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing."
MIG-2 "Notes which are rated MIG-2 are judged to be of high quality. Margins of protection are ample although not so large as in the preceding group."
S&P'S CORPORATE NOTE RATINGS
SP-1 "Debt rated SP-1 has very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation."
SP-2 "Debt rated SP-2 has satisfactory capacity to pay principal and interest."
SP-3 "Debt rated SP-3 has speculative capacity to pay principal and interest."
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TOUCHSTONE STRATEGIC TRUST
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2004
Small Cap Growth Fund - Class I
This Statement of Additional Information is not a prospectus. It should be read together with the August 1, 2004 Prospectus for Class I shares of the Small Cap Growth Fund. The Fund's financial statements are contained in the Trust's Annual Report, which is incorporated by reference into this Statement of Additional Information. You may receive a copy of the Fund's Prospectus or the Trust's most recent Annual Report by writing the Trust at 221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202-4133, by calling the Trust nationwide toll-free 800-543-0407, in Cincinnati 362-4921, or by visiting our website at touchstoneinvestments.com.
STATEMENT OF ADDITIONAL INFORMATION
TOUCHSTONE STRATEGIC TRUST
221 EAST FOURTH STREET, SUITE 300
CINCINNATI, OHIO 45202-4133
TABLE OF CONTENTS
PAGE
THE TRUST....................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS................................4
INVESTMENT LIMITATIONS..................................................... 21
TRUSTEES AND OFFICERS.......................................................23
THE INVESTMENT ADVISOR AND SUB-ADVISORS.....................................27
PROXY VOTING PROCEDURES ....................................................31
THE DISTRIBUTOR.............................................................33
SECURITIES TRANSACTIONS.....................................................34
CODE OF ETHICS..............................................................36
PORTFOLIO TURNOVER..........................................................36
CALCULATION OF SHARE PRICE..................................................36
CHOOSING A SHARE CLASS......................................................36
PURCHASES AND REDEMPTIONS IN KIND....1......................................43
TAXES.......................................................................44
HISTORICAL PERFORMANCE INFORMATION..........................................46
PRINCIPAL SECURITY HOLDERS..................................................51
CUSTODIAN...................................................................51
AUDITORS....................................................................51
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENT...............................52
FINANCIAL STATEMENTS........................................................52
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Touchstone Strategic Trust (the "Trust"), formerly Countrywide Strategic Trust, an open-end, diversified management investment company, was organized as a Massachusetts business trust on November 18, 1982. The Trust currently offers seven series of shares to investors: the Large Cap Growth Fund (formerly the Equity Fund), the Growth Opportunities Fund (formerly the Growth/Value Fund), the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund, the Small Cap Growth Fund and the Micro Cap Growth Fund. This Statement of Additional Information contains information about Class I shares of the Small Cap Growth Fund (the "Fund"). Information about other series of the Trust and other classes of shares of the Fund is contained in a separate Statement of Additional Information. The Fund has its own investment goal and policies.
Shares of the Fund have equal voting rights and liquidation rights. The Fund shall vote separately on matters submitted to a vote of the shareholders except in matters where a vote of all series of the Trust in the aggregate is required by the Investment Company Act of 1940, as amended (the "1940 Act") or otherwise. When matters are submitted to shareholders for a vote, each shareholder is entitled to one vote for each full share owned and fractional votes for fractional shares owned. The Trust does not normally hold annual meetings of shareholders. The Trustees shall promptly call and give notice of a meeting of shareholders for the purpose of voting upon the removal of any Trustee when requested to do so in writing by shareholders holding 10% or more of the Trust's outstanding shares. The Trust will comply with the provisions of Section 16(c) of the 1940 Act in order to facilitate communications among shareholders.
Each share of the Fund represents an equal proportionate interest in the assets and liabilities belonging to the Fund with each other share of the Fund and is entitled to such dividends and distributions out of the income belonging to the Fund as are declared by the Trust. The shares do not have cumulative voting rights or any preemptive or conversion rights, and the Trustees have the authority from time to time to divide or combine the shares of the Fund into a greater or lesser number of shares so long as the proportionate beneficial interest in the assets belonging to the Fund and the rights of shares of any other Fund are in no way affected. In case of any liquidation of the Fund, the holders of shares of the Fund will be entitled to receive as a class a distribution out of the assets, net of the liabilities, belonging to the Fund. Expenses attributable to the Fund are borne by the Fund. Any general expenses of the Trust not readily identifiable as belonging to the Fund are allocated by or under the direction of the Trustees in such manner as the Trustees determine to be fair and equitable. Generally, the Trustees allocate such expenses on the basis of relative net assets or number of shareholders. No shareholder is liable to further calls or to assessment by the Trust without his express consent.
Class A, Class B, Class C and Class I shares of the Fund represent an interest in the same assets of the Fund, have the same rights and are identical in all material respects except that (i) each class of shares may bear different (or no) distribution fees; (ii) each class of shares is subject to different (or no) sales charges; (iii) certain other class specific expenses will be borne solely by the class to which such expenses are attributable, including transfer agent fees attributable to a specific class of shares, printing and postage expenses related to preparing and distributing materials to current shareholders of a specific class, registration fees incurred by a specific class of shares, the expenses of administrative personnel and services required to support the shareholders of a specific class, litigation or other legal expenses relating to a class of shares, Trustees' fees or expenses incurred as a result of issues relating to a specific class of shares and accounting fees and expenses relating to a specific class of shares; (iv) certain classes offer different features and services to shareholders; and (v) each class has exclusive voting rights with respect to matters relating to its own distribution arrangements. The Board of Trustees may classify and reclassify the shares of the Fund into additional classes of shares at a future date.
Under Massachusetts law, under certain circumstances, shareholders of a Massachusetts business trust could be deemed to have the same type of personal liability for the obligations of the Trust as does a partner of a partnership. However, numerous investment companies registered under the 1940 Act have been formed as Massachusetts business trusts and the Trust is not aware of an instance where such result has occurred. In addition, the Trust Agreement 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. The Trust Agreement also provides for the indemnification out of the Trust property for all losses and expenses of any shareholder held personally liable for the obligations of the Trust. Moreover, it provides that the Trust will, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon. As a result, and particularly because the Trust assets are readily marketable and ordinarily substantially exceed liabilities, management believes that the risk of shareholder liability is slight and limited to circumstances in which the Trust itself would be unable to meet its obligations. Management believes that, in view of the above, the risk of personal liability is remote.
The Fund has its own investment goal, strategies and related risks. There can be no assurance that the Fund's investment goal will be met. The investment goal and practices of the Fund are nonfundamental policies that may be changed by the Board of Trustees without shareholder approval, except in those instances where shareholder approval is expressly required. If there is a change in the Fund's investment goal, shareholders should consider whether the Fund remains an appropriate investment in light of their current financial position and needs. The investment restrictions of the Fund are fundamental and can only be changed by vote of a majority of the Fund's outstanding shares.
A more detailed discussion of some of the terms used and investment policies described in the Prospectus (see "Investment Strategies and Risks") appears below:
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 that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities that have not been registered under the 1933 Act are referred to as "private placements" or "restricted securities" and are purchased directly from the issuer or in the secondary market. Investment companies do not typically hold a significant amount of these restricted securities or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and an investment company 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. An investment company might also have to register such restricted securities in order to dispose of them, which would result in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which allows a broader institutional trading market for securities otherwise subject to restriction on their resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the 1933 Act on resales of certain securities to qualified institutional buyers. The 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.
The Fund Sub-Advisors will monitor the liquidity of Rule 144A securities in the
Fund's portfolio under the supervision of the Board of Trustees. In reaching
liquidity decisions, the Fund Sub-Advisors will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers wishing to purchase or
sell the security; (3) dealer undertakings to make a market in the security and
(4) 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).
The Fund may not invest more than 15% of its net assets in securities that are illiquid or otherwise not readily marketable. If a security becomes illiquid after purchase by the Fund, the Fund will normally sell the security unless it would not be in the best interests of shareholders to do so.
The Fund may purchase securities in the United States that are not registered for sale under federal securities laws but which can be resold to institutions under SEC Rule 144A or under an exemption from such laws. Provided that a dealer or institutional trading market in such securities exists, these restricted securities or Rule 144A securities are treated as exempt from the Fund's limit on illiquid securities. The Board of Trustees of the Trust, with advice and information from the Fund Sub-Advisors, will determine the liquidity of restricted securities or Rule 144A securities by looking at factors such as trading activity and the availability of reliable price information and, through reports from the Fund Sub-Advisors, the Board of Trustees of the Trust will monitor trading activity in restricted securities. If institutional trading in restricted securities or Rule 144A securities were to decline, the Fund's illiquidity could increase and the Fund could be adversely affected.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the 1933 Act. Section 4(2) commercial
paper is restricted as to disposition under federal securities laws and is
generally sold to institutional investors who agree that they are purchasing the
paper for investment purposes and not with a view to public distribution. Any
resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors through or
with the assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Fund Sub-Advisors
believe that Section 4(2) commercial paper and possibly certain other restricted
securities that meet the criteria for liquidity established by the Trustees are
quite liquid. The Fund intends therefore, to treat the restricted securities
that meet the criteria for liquidity established by the Trustees, including
Section 4(2) commercial paper, as determined by a Fund Sub-Advisor, as liquid
and not subject to the investment limitation applicable to illiquid securities.
In addition, because Section 4(2) commercial paper is liquid, the Fund does not
intend to subject such paper to the limitation applicable to restricted
securities.
The Fund will not invest more than 10% of its total assets in restricted securities (excluding Rule 144A securities).
FOREIGN SECURITIES
Investing in securities issued by foreign companies and governments involves considerations and potential risks not typically associated with investing in obligations issued by the U.S. Government and domestic corporations. Less information may be available about foreign companies than domestic companies and foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic companies. The values of foreign investments are affected by changes in currency rates or exchange control regulations, restrictions or prohibitions on the repatriation of foreign currencies, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad) or changed circumstances in dealings between nations. Costs are also incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions and custody fees are generally higher than those charged in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in enforcing contractual obligations and could be subject to extended clearance and settlement periods.
EMERGING MARKET COUNTRIES. Emerging market countries are countries other than Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. When the Fund invests in securities of a company in an emerging market country, it invests in securities issued by a company that (i) has its principal trading market for its stock in an emerging market country, or (ii) derives at least 50% of its revenues or profits from corporations within emerging market countries or has at least 50% of its assets located in emerging market countries.
Investments in securities of issuers based in underdeveloped countries entail all of the risks of investing in foreign issuers outlined in this section to a heightened degree. These heightened risks include: (i) expropriation, confiscatory taxation, nationalization, and less social, political and economic stability; (ii) the smaller size of the market for such securities and a low or nonexistent volume of trading, resulting in a lack of liquidity and in price volatility; (iii) certain national policies which may restrict the Fund's investment opportunities including restrictions on investing in issuers in industries deemed sensitive to relevant national interests; and (iv) the absence of developed capital markets and legal structures governing private or foreign investment and private property and the possibility that recent favorable economic and political developments could be slowed or reversed by unanticipated events.
CURRENCY EXCHANGE RATES. The Fund's share value may change significantly when the currencies, other than the U.S. dollar, in which the Fund's investments are denominated strengthen or weaken against the U.S. dollar. Currency exchange rates generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries as seen from an international perspective. Currency exchange rates can also be affected unpredictably by intervention by U.S. or foreign governments or central banks or by currency controls or political developments in the United States or abroad.
ADRS, ADSS, EDRS AND CDRS. ADRs and ADSs are U.S. dollar-denominated receipts typically issued by domestic banks or trust companies that represent the deposit with those entities of securities of a foreign issuer. They are publicly traded on exchanges or over-the-counter in the United States. European Depositary Receipts ("EDRs"), which are sometimes referred to as Continental Depositary Receipts ("CDRs"), may also be purchased by the Fund. EDRs and CDRs are generally issued by foreign banks and evidence ownership of either foreign or domestic securities. Certain institutions issuing ADRs, ADSs or EDRs may not be sponsored by the issuer of the underlying foreign securities. A non-sponsored depository may not provide the same shareholder information that a sponsored depository is required to provide under its contractual arrangements with the issuer of the underlying foreign securities.
OPTIONS
The Fund may write (sell), to a limited extent, only covered call and put options ("covered options") in an attempt to increase income. However, the Fund may forgo the benefits of appreciation on securities sold or may pay more than the market price on securities acquired pursuant to call and put options written by the Fund.
When the Fund writes a covered call option, it gives the purchaser of the option the right to buy the underlying security at the price specified in the option (the "exercise price") by exercising the option at any time during the option period. If the option expires unexercised, the Fund will realize income in an amount equal to the premium received for writing the option. If the option is exercised, a decision over which the Fund has no control, the Fund must sell the underlying security to the option holder at the exercise price. By writing a covered call option, the Fund foregoes, in exchange for the premium less the commission ("net premium"), the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price.
When the Fund writes a covered put option, it gives the purchaser of the option the right to sell the underlying security to the Fund at the specified exercise price at any time during the option period. If the option expires unexercised, the Fund will realize income in the amount of the premium received for writing the option. If the put option is exercised, a decision over which the Fund has no control, the Fund must purchase the underlying security from the option holder at the exercise price. By writing a covered put option, the Fund, in exchange for the net premium received, accepts the risk of a decline in the market value of the underlying security below the exercise price.
The Fund may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written. This transaction is called a "closing purchase transaction." Where the Fund cannot effect a closing purchase transaction, it may be forced to incur brokerage commissions or dealer spreads in selling securities it receives or it may be forced to hold underlying securities until an option is exercised or expires.
When the Fund writes an option, an amount equal to the net premium received by the Fund is included in the liability section of the Fund's Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked to market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires on its stipulated expiration date or if the Fund enters into a closing purchase transaction, the Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold), and the deferred credit related to such option will be eliminated. If a call option is exercised, the Fund will realize a gain or loss from the sale of the underlying security and the proceeds of the sale will be increased by the premium originally received. The writing of covered call options may be deemed to involve the pledge of the securities against which the option is being written.
When the Fund writes a call option, it will "cover" its obligation by segregating the underlying security on the books of the Fund's custodian or by placing liquid securities in a segregated account at the Fund's custodian. When the Fund writes a put option, it will "cover" its obligation by placing liquid securities in a segregated account at the Fund's custodian.
The Fund may purchase call and put options on any securities in which it may invest. The Fund would normally purchase a call option in anticipation of an increase in the market value of such securities. The purchase of a call option would entitle the Fund, in exchange for the premium paid, to purchase a security at a specified price during the option period. The Fund would ordinarily have a gain if the value of the securities increased above the exercise price sufficiently to cover the premium and would have a loss if the value of the securities remained at or below the exercise price during the option period.
The Fund would normally purchase put options in anticipation of a decline in the market value of securities in its portfolio ("protective puts") or securities of the type in which it is permitted to invest. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell a security, which may or may not be held in the Fund's portfolio, at a specified price during the option period. The purchase of protective puts is designed merely to offset or hedge against a decline in the market value of the Fund's portfolio securities. Put options also may be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price of securities which the Fund does not own. The Fund would ordinarily recognize a gain if the value of the securities decreased below the exercise price sufficiently to cover the premium and would recognize a loss if the value of the securities remained at or above the exercise price. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of underlying portfolio securities.
The Fund has adopted certain other nonfundamental policies concerning option transactions that are discussed below. The Fund's activities in options may also be restricted by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot be reflected in the option markets. It is impossible to predict the volume of trading that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue.
OPTIONS ON STOCKS. The Fund may write or purchase options on stocks. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying stock at the exercise price at any time during the option period. Similarly, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy the underlying stock at the exercise price at any time during the option period. A covered call option whereby the Fund owns the underlying stock sold by the Fund exposes the Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying stock or to possible continued holding of a stock which might otherwise have been sold to protect against depreciation in the market price of the stock. A covered put option sold by the Fund exposes the Fund during the term of the option to a decline in price of the underlying stock.
To close out a position when writing covered options, the Fund may make a "closing purchase transaction" which involves purchasing an option on the same stock with the same exercise price and expiration date as the option which it has previously written on the stock. The Fund will realize a profit or loss for a closing purchase transaction if the amount paid to purchase an option is less or more, as the case may be, than the amount received from the sale thereof. To close out a position as a purchaser of an option, the Fund may make a "closing sale transaction" which involves liquidating the Fund's position by selling the option previously purchased.
OPTIONS ON SECURITIES INDEXES. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the index. Such options will be used for the purposes described above under "Options on Securities" or, to the extent allowed by law, as a substitute for investment in individual securities.
Options on securities indexes entail risks in addition to the risks of options on securities. The absence of a liquid secondary market to close out options positions on securities indexes is more likely to occur, although the Fund generally will only purchase or write such an option if a Fund Sub-Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in such options may be interrupted if trading in certain securities included in the index is interrupted. The Fund will not purchase such options unless the Fund Sub-Advisor believes the market is sufficiently developed such that the risk of trading in such options is no greater than the risk of trading in options on securities.
Price movements in the Fund's portfolio may not correlate precisely with movements in the level of an index and, therefore, the use of options on indexes cannot serve as a complete hedge. Because options on securities indexes require settlement in cash, a Fund Sub-Advisor may be forced to liquidate portfolio securities to meet settlement obligations.
When the Fund writes a put or call option on a securities index it will cover the position by placing liquid securities in a segregated asset account with the Fund's custodian.
Options on securities indexes are generally similar to options on stock except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, 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
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in securities index options prior to expiration by entering into a closing transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of the index rather than the price of a particular security, whether the Fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of securities prices in the market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in price of a particular security. Accordingly, successful use by the Fund of options on security indexes will be subject to the Fund Sub-Advisor's ability to predict correctly movement in the direction of that securities market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual securities.
RELATED INVESTMENT POLICIES. The Fund may purchase and write put and call options on securities indexes listed on domestic and foreign exchanges. A securities index fluctuates with changes in the market values of the securities included in the index.
OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies are used for hedging purposes in a manner similar to that in which futures contracts on foreign currencies, or forward contracts, are utilized. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Fund may purchase put options on the foreign currency. If the value of the currency does decline, the Fund will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the Fund may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of hedging purposes. For example, where the Fund anticipates a decline in the dollar value of foreign currency denominated securities due to adverse fluctuations in exchange rates, it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the options will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Fund to hedge such increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to purchase or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements in exchange rates.
The Fund may write covered call options on foreign currencies. A call option written on a foreign currency by the Fund is "covered" if the Fund owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call option is also covered if the Fund has a call on the same foreign currency and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash and liquid securities in a segregated account with its custodian.
The Fund also may write call options on foreign currencies that are not covered for cross-hedging purposes. A call option on a foreign currency is for cross-hedging purposes if it is not covered, but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Fund owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Fund collateralizes the option by maintaining in a segregated account with its custodian, cash or liquid securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked to market daily.
RELATED INVESTMENT POLICIES. The Fund may write covered put and call options and purchase put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of portfolio securities and against increases in the dollar cost of securities to be acquired. The Fund may use options on currency to cross-hedge, which involves writing or purchasing options on one currency to hedge against changes in exchange rates for a different, but related currency. As with other types 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 Fund 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 be used to hedge against fluctuations in exchange rates although, in the event of exchange rate movements adverse to the Fund's position, it may not forfeit the entire amount of the premium plus related transaction costs. In addition, the Fund may purchase call options on currency when its Sub-Advisor anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange will exist for any particular option, or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying currency or dispose of assets held in a segregated account until the options expire. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying currency. The Fund pays brokerage commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies are traded over-the-counter and involve liquidity and credit risks that may not be present in the case of exchange-traded currency options. The Fund's ability to terminate over-the-counter options ("OTC Options") will be more limited than the exchange-traded options. It is also possible that broker-dealers participating in OTC Options transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, the Fund will treat purchased OTC Options and assets used to cover written OTC Options as illiquid securities. With respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the repurchase formula.
FORWARD CURRENCY CONTRACTS. Because, when investing in foreign securities, the Fund buys and sells securities denominated in currencies other than the U.S. dollar and receives interest, dividends and sale proceeds in currencies other than the U.S. dollar, the Fund from time to time may enter into forward currency transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. dollar. The Fund either enters into these transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or uses forward currency contracts to purchase or sell foreign currencies.
A forward currency contract is an obligation by the Fund to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract. Forward currency contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward currency contract generally has no deposit requirement and is traded at a net price without commission. The Fund maintains with its custodian a segregated account of liquid securities in an amount at least equal to its obligations under each forward currency contract. Neither spot transactions nor forward currency contracts eliminate fluctuations in the prices of the Fund's securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline.
The Fund may enter into foreign currency hedging transactions in an attempt to protect against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in foreign currency exchange rates that would adversely affect a portfolio position or an anticipated investment position. Since consideration of the prospect for currency parities will be incorporated into a Fund Sub-Advisor's long-term investment decisions, the Fund will not routinely enter into foreign currency hedging transactions with respect to security transactions; however, the Fund Sub-Advisors believe that it is important to have the flexibility to enter into foreign currency hedging transactions when they determine that the transactions would be in the Fund's best interest. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of such securities between the date the forward currency contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate forward currency contracts. In such event the Fund's ability to utilize forward currency contracts may be restricted. Forward currency contracts may reduce the potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts. The use of forward currency contracts may not eliminate fluctuations in the underlying U.S. dollar equivalent value of the prices of or rates of return on the Fund's foreign currency denominated portfolio securities and the use of such techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward currency contract and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge generally will not be precise. In addition, the Fund may not always be able to enter into forward currency contracts at attractive prices and this will limit the Fund's ability to use such contract to hedge or cross-hedge its assets. Also, with regard to the Fund's use of cross-hedges, there can be no assurance that historical correlations between the movement of certain foreign currencies relative to the U.S. dollar will continue. Thus, at any time poor correlation may exist between movements in the exchange rates of the foreign currencies underlying the Fund's cross-hedges and the movements in the exchange rates of the foreign currencies in which the Fund's assets that are the subject of such cross-hedges are denominated.
FIXED-INCOME AND OTHER DEBT SECURITIES
Fixed-income and other debt instrument securities include all bonds, debentures and U.S. Government securities. The market value of fixed-income obligations of the Fund will be affected by general changes in interest rates that will result in increases or decreases in the value of the obligations held by the Fund. The market value of the obligations held by the Fund can be expected to vary inversely to changes in prevailing interest rates. As a result, shareholders should anticipate that the market value of the obligations held by the Fund generally would increase when prevailing interest rates are declining and generally will decrease when prevailing interest rates are rising. Shareholders also should recognize that, in periods of declining interest rates, the Fund's yield will tend to be somewhat higher than prevailing market rates and, in periods of rising interest rates, the Fund's yield will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to the Fund from the continuous sale of its shares will tend to be invested in instruments producing lower yields than the balance of its portfolio, thereby reducing the Fund's current yield. In periods of rising interest rates, the opposite can be expected to occur. In addition, securities in which the Fund may invest may not yield as high a level of current income as might be achieved by investing in securities with less liquidity, less creditworthiness or longer maturities.
Ratings made available by Standard & Poor's Rating Service ("S&P"), Moody's Investors Services, Inc. ("Moody's") and Fitch Ratings ("Fitch") are relative and subjective and are not absolute standards of quality. Although these ratings are initial criteria for selection of portfolio investments, a Fund Sub-Advisor also will make its own evaluation of these securities. Among the factors that will be considered are the long-term ability of the issuers to pay principal and interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities" below.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts. For a description of commercial paper ratings, see the Appendix.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. Certificates of deposit are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers' acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. The Fund will not invest more than 15% of its net assets in time deposits maturing in more than seven days.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued or guaranteed by the U.S. Government, its agencies, authorities or instrumentalities. Some U.S. Government securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in their interest rates, maturities and times of issuance, are supported by the full faith and credit of the United States. Others are supported by: (i) the right of the issuer to borrow from the U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S. Government to purchase the agency's obligations, such as securities of the FNMA; or (iii) only the credit of the issuer, such as securities of the Student Loan Marketing Association. No assurance can be given that the U.S. Government will provide financial support in the future to U.S. Government agencies, authorities or instrumentalities that are not supported by the full faith and credit of the United States.
Securities guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities include: (i) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government or any of its agencies, authorities or instrumentalities; and (ii) participation interests in loans made to foreign governments or other entities that are so guaranteed. The secondary market for certain of these participation interests is limited and, therefore, may be regarded as illiquid.
ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt obligations that are issued or purchased at a significant discount from face value. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity or the particular interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. Zero coupon securities do not require the periodic payment of interest. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash. These investments may experience greater volatility in market value than U.S. Government securities that make regular payments of interest. The Fund accrues income on these investments for tax and accounting purposes, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the Fund's distribution obligations, in which case the Fund will forego the purchase of additional income producing assets with these funds. Zero coupon securities include STRIPS, that is, securities underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. They also include Coupons Under Book Entry System ("CUBES"), which are component parts of U.S. Treasury bonds and represent scheduled interest and principal payments on the bonds.
CUSTODIAL RECEIPTS. Custodial receipts or certificates, such as Certificates of Accrual on Treasury Securities ("CATS"), Treasury Investors Growth Receipts ("TIGRs") and Financial Corporation certificates ("FICO Strips"), are securities underwritten by securities dealers or banks that evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. The underwriters of these certificates or receipts purchase a U.S. Government security and deposit the security in an irrevocable trust or custodial account with a custodian bank, which then issues receipts or certificates that evidence ownership of the periodic unmatured coupon payments and the final principal payment on the U.S. Government security. Custodial receipts evidencing specific coupon or principal payments have the same general attributes as zero coupon U.S. Government securities, described above. Although typically under the terms of a custodial receipt the Fund is authorized to assert its rights directly against the issuer of the underlying obligation, the Fund may be required to assert through the custodian bank such rights as may exist against the underlying issuer. Thus, if the underlying issuer fails to pay principal and/or interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the issuer. In addition, if the trust or custodial account in which the underlying security has been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying security would be reduced in respect of any taxes paid.
BORROWING AND LENDING
BORROWING. The Fund may borrow money from banks (including its custodian bank) or from other lenders to the extent permitted under applicable law, for temporary or emergency purposes and to meet redemptions and may pledge its assets to secure such borrowings. The 1940 Act requires the Fund to maintain asset coverage of at least 300% for all such borrowings, and should such asset coverage at any time fall below 300%, the Fund would be required to reduce its borrowings within three days to the extent necessary to meet the requirements of the 1940 Act. To reduce its borrowings, the Fund might be required to sell securities at a time when it would be disadvantageous to do so. In addition, because interest on money borrowed is a Fund expense that it would not otherwise incur, the Fund may have less net investment income during periods when its borrowings are substantial. The interest paid by the Fund on borrowings may be more or less than the yield on the securities purchased with borrowed funds, depending on prevailing market conditions.
The Fund will not make any borrowing that would cause its outstanding borrowings to exceed one-third of the value of its total assets. As a matter of current operating policy, the Fund intends to borrow money only as a temporary measure for extraordinary or emergency purposes. This operating policy is not fundamental and may be changed by the Board without shareholder approval.
LENDING. By lending its securities, the Fund can increase its income by continuing to receive interest on the loaned securities as well as by either investing the cash collateral in short-term securities or obtaining yield in the form of interest paid by the borrower when U.S. Government obligations are used as collateral. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund will adhere to the following conditions whenever its securities are loaned: (i) the Fund must receive at least 100 percent cash collateral or equivalent securities from the borrower; (ii) the borrower must increase this collateral whenever the market value of the securities including accrued interest rises above the level of the collateral; (iii) the Fund must be able to terminate the loan at any time; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (v) the Fund may pay only reasonable custodian fees in connection with the loan; and (vi) voting rights on the loaned securities may pass to the borrower; provided, however, that if a material event adversely affecting the investment occurs, the Board of Trustees must terminate the loan and regain the right to vote the securities.
OTHER INVESTMENT POLICIES
SWAP AGREEMENTS. To help enhance the value of its portfolio or manage its exposure to different types of investments, the Fund may enter into interest rate or currency swap agreements and may purchase and sell interest rate "caps," "floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make regular payments equal to a floating interest rate on a specified amount (the "notional principal amount") in return for payments equal to a fixed interest rate on the same amount for a specified period. If a swap agreement provides for payment in different currencies, the parties may also agree to exchange the notional principal amount.
In a cap or floor, one party agrees, usually in return for a fee, to make payments under particular circumstances. For example, the purchaser of an interest rate cap has the right to receive payments to the extent a specified interest rate exceeds an agreed level; the purchaser of an interest rate floor has the right to receive payments to the extent a specified interest rate falls below an agreed level. A collar entitles the purchaser to receive payments to the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile; depending on how they are used, they may have a considerable impact on the Fund's performance. Swap agreements involve risks depending upon the other party's creditworthiness and ability to perform, as judged by the Fund's Sub-Advisors, as well as the Fund's ability to terminate its swap agreements or reduce its exposure through offsetting transactions. All swap agreements are considered as illiquid securities and, therefore, will be limited, along with all of the Fund's other illiquid securities, to 15% of the Fund's net assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed advantageous at a particular time, the Fund may purchase securities on a when-issued or delayed-delivery basis, in which case delivery of the securities occurs beyond the normal settlement period; payment for or delivery of the securities would be made prior to the reciprocal delivery or payment by the other party to the transaction. The Fund will enter into when-issued or delayed-delivery transactions for the purpose of acquiring securities and not for the purpose of leverage. When-issued securities purchased by the Fund may include securities purchased on a "when, as and if issued" basis under which the issuance of the securities depends on the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose the Fund to risk because the securities may experience fluctuations in value prior to their actual delivery. The Fund does not accrue income with respect to a when-issued or delayed-delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed-delivery basis can involve the additional risk that the yield available in the market when the delivery takes place may be higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which the Fund purchases a security and simultaneously commits to resell that security to the seller at an agreed upon time and price, thereby determining the yield during the term of the agreement. In the event of a bankruptcy or other default of the seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying security and losses. To minimize these possibilities, the Fund intends to enter into repurchase agreements only with its Custodian, with banks having assets in excess of $10 billion and with broker-dealers who are recognized as primary dealers in U.S. Government obligations by the Federal Reserve Bank of New York. The Fund will enter into repurchase agreements that are collateralized by U.S. Government obligations. Collateral for repurchase agreements is held in safekeeping in the customer-only account of the Fund's Custodian at the Federal Reserve Bank. At the time the Fund enters into a repurchase agreement, the value of the collateral, including accrued interest, will equal or exceed the value of the repurchase agreement and, in the case of a repurchase agreement exceeding one day, the seller agrees to maintain sufficient collateral so that the value of the underlying collateral, including accrued interest, will at all times equal or exceed the value of the repurchase agreement.
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS. In a reverse repurchase agreement the Fund agrees to sell portfolio securities to financial institutions such as banks and broker-dealers and to repurchase them at a mutually agreed date and price. Forward roll transactions are equivalent to reverse repurchase agreements but involve mortgage-backed securities and involve a repurchase of a substantially similar security. At the time the Fund enters into a reverse repurchase agreement or forward roll transaction it will place in a segregated custodial account cash or liquid securities having a value equal to the repurchase price, including accrued interest. Reverse repurchase agreements and forward roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase price of the securities.
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when the
Fund's Sub-Advisor believes that pursuing the Fund's basic investment strategy
may be inconsistent with the best interests of its shareholders, the Fund may
invest its assets without limit in the following money market instruments:
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (including those purchased in the form of custodial receipts),
repurchase agreements, certificates of deposit, master notes, time deposits and
bankers' acceptances issued by banks or savings and loan associations having
assets of at least $500 million as of the end of their most recent fiscal year
and high quality commercial paper.
The Fund also may hold a portion of its assets in money market instruments or cash in amounts designed to pay expenses, to meet anticipated redemptions or pending investments in accordance with its objectives and policies. Any temporary investments may be purchased on a when-issued basis.
CONVERTIBLE SECURITIES. Convertible securities may offer higher income than the common stocks into which they are convertible and include fixed-income debt securities, which may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. Prior to their conversion, convertible securities may have characteristics similar to both non-convertible debt securities and equity securities. While convertible securities generally offer lower yields than non-convertible debt securities of similar quality, their prices may reflect changes in the value of the underlying common stock. Convertible securities entail less credit risk than the issuer's common stock.
ASSET COVERAGE. To assure that the Fund's use of futures and related options, as well as when-issued and delayed-delivery transactions, forward currency contracts and swap transactions, are not used to achieve investment leverage, the Fund will cover such transactions, as required under applicable SEC interpretations, either by owning the underlying securities or by establishing a segregated account with its custodian containing liquid securities in an amount at all times equal to or exceeding the Fund's commitment with respect to these instruments or contracts.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at a specified price and are valid for a specific time period. Rights are similar to warrants, but normally have a short duration and are distributed by the issuer to its shareholders. The Fund may purchase warrants and rights, provided that the Fund presently does not intend to invest more than 5% of its net assets at the time of purchase in warrants and rights other than those that have been acquired in units or attached to other securities.
SHORT-TERM TRADING. Short-term trading involves the selling of securities held for a short time, ranging from several months to less than a day. The object of such short-term trading is to increase the potential for capital appreciation and/or income of the Fund in order to take advantage of what the Sub-Advisor believes are changes in market, industry or individual company conditions or outlook. Any such trading would increase the turnover rate of the Fund and its transaction costs.
DERIVATIVES. The Fund 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. There are, in fact, many different types of derivatives and many different ways to use them. There is a range of risks associated with those uses. Futures and options are commonly used for traditional hedging purposes to attempt to protect the 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. However, some derivatives are used for leverage, which tends to magnify the effects of an instrument's price changes as market conditions change. Leverage involves the use of a small amount of money to control a large amount of financial assets, and can in some circumstances, lead to significant losses. The Fund's Sub-Advisor will use derivatives only in circumstances where the Sub-Advisor believes they offer the most economic means of improving the risk/reward profile of the Fund. Derivatives will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indexes that by themselves would not be purchased for the Fund. The use of derivatives for non-hedging purposes may be considered speculative.
INITIAL PUBLIC OFFERINGS ("IPOS"). An IPO presents the risk that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer.
The purchase of IPO shares may involve high transactions costs. IPO shares are subject to market risk and liquidity risk. When the Fund's asset base is small, a significant portion of the Fund's performance could be attributable to investments in IPOs, because such investments would have a magnified impact on the Fund. As the Fund's assets grow, the effect of the Fund's investments in IPOs on the Fund's performance probably will decline, which could reduce the Fund's performance. Because of the price volatility of IPO shares, the Fund may choose to hold IPO shares for a very short period of time. This may increase the turnover of the Fund and may lead to increased Fund expenses, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. There is no assurance that the Fund will be able to obtain allocable portions of IPO shares. The limited number of shares available for trading in some IPOs may make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders.
The Fund's investments in IPO shares may include the securities of "unseasoned" companies (companies with less than three years of continuous operations), which present risks considerably greater than common stocks of more established companies. These companies may have limited operating histories and their prospects for profitability may be uncertain. These companies may be involved in new and evolving businesses and may be vulnerable to competition and changes in technology, markets and economic conditions. They may be more dependent on key managers and third parties and may have limited product.
The following investment limitations are "fundamental policies" of the Fund and may not be changed without the approval of a "majority of the outstanding voting securities" of the Fund. "Majority of the outstanding voting securities" under the 1940 Act, and as used in this Statement of Additional Information and the Prospectus, means, the lesser of (i) 67% or more of the outstanding voting securities of the Fund present at a meeting if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy or (ii) more than 50% of the outstanding voting securities of the Fund.
THE FUNDAMENTAL LIMITATIONS APPLICABLE TO THE FUND ARE:
1. BORROWING MONEY. The Fund may not engage in borrowing except as permitted by the Investment Company Act of 1940, any rule, regulation or order under the Act or any SEC staff interpretation of the Act.
2. UNDERWRITING. The Fund may not underwrite securities issued by other persons, except to the extent that, in connection with the sale or disposition of portfolio securities, the Fund may be deemed to be an underwriter under certain federal securities laws or in connection with investments in other investment companies.
3. LOANS. The Fund may not make loans to other persons except that the Fund may (1) engage in repurchase agreements, (2) lend portfolio securities, (3) purchase debt securities, (4) purchase commercial paper, and (5) enter into any other lending arrangement permitted by the Investment Company Act of 1940, any rule, regulation or order under the Act or any SEC staff interpretation of the Act.
4. REAL ESTATE. The Fund may not purchase or sell real estate except that the Fund may (1) hold and sell real estate acquired as a result of the Fund's ownership of securities or other instruments (2) purchase or sell securities or other instruments backed by real estate or interests in real estate and (3) purchase or sell securities of entities or investment vehicles, including real estate investment trusts, that invest, deal or otherwise engage in transactions in real estate or interests in real estate.
5. COMMODITIES. The Fund will not purchase or sell physical commodities
except that the Fund may (1) hold and sell physical commodities acquired
as a result of the Fund's ownership of securities or other instruments,
(2) purchase or sell securities or other instruments backed by physical
commodities, (3) purchase or sell options, and (4) purchase or sell
futures contracts.
6. CONCENTRATION OF INVESTMENTS. The Fund may not purchase the securities of an issuer (other than securities issued or guaranteed by the United States Government, its agencies or its instrumentalities) if, as a result, more than 25% of the Fund's total assets would be invested in the securities of companies whose principal business activities are in the same industry.
7. SENIOR SECURITIES. The Fund may not issue senior securities except as permitted by the Investment Company Act of 1940, any rule, regulation or order under the Act or any SEC staff interpretation of the Act.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE FUND ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. SENIOR SECURITIES. The following activities will not be considered to be issuing senior securities with respect to the Fund:
1. Collateral arrangements in connection with any type of option, futures contract, forward contract or swap.
2. Collateral arrangements in connection with initial and variation margin.
3. A pledge, mortgage or hypothecation of the Fund's assets to secure its borrowings.
4. A pledge of the Fund's assets to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute.
2. 80% INVESTMENT POLICY. Under normal circumstances, the Fund will invest at least 80% of its assets (defined as net assets plus the amount of any borrowing for investment purposes) in common stocks of small cap companies. A small cap company has a market capitalization of less than $1.5 billion. Shareholders will be provided with at least 60 days' prior notice of any change in this policy. The notice will be provided in a separate written document containing the following, or similar, statement, in boldface type: "Important Notice Regarding Change in Investment Policy." The statement will also appear on the envelope in which the notice is delivered, unless the notice is delivered separately from other communications to the shareholder.
With respect to the percentages adopted by the Trust as maximum limitations on the Fund's investment policies and restrictions, an excess above the fixed percentage (except for the percentage limitations relative to the borrowing of money or investing in illiquid securities) will not be a violation of the policy or restriction unless the excess results immediately and directly from the acquisition of any security or the action taken.
The following is a list of the Trustees and executive officers of the Trust, the length of time served, principal occupations for the past 5 years, number of funds overseen in the Touchstone Family of Funds and other directorships held.
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INTERESTED TRUSTEES(1):
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NAME POSITION TERM OF PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS OTHER
ADDRESS HELD WITH OFFICE NUMBER DIRECTORSHIPS
AGE TRUST AND OF FUNDS HELD(4)
LENGTH OVERSEEN
OF TIME IN THE
SERVED(2) TOUCHSTONE
FAMILY(3)
---------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder Trustee and Until Senior Vice President of The Western and 32 Director of
Touchstone President retirement Southern Life Insurance Company. President LaRosa's (a
Advisors, Inc at age 75 and a director of IFS Financial Services, restaurant chain).
221 East Fourth Street or until Inc. (a holding company). She is a
Cincinnati, OH she director of Capital Analysts Incorporated
Age: 49 resigns or (an investment advisor and broker-dealer),
is removed Integrated Fund Services, Inc. (the Trust's
administrator and transfer agent) and IFS
Trustee Fund Distributors, Inc. (a broker-dealer),
since 1999 Touchstone Advisors, Inc. (the Trust's
investment advisor) and Touchstone
Securities, Inc. (the Trust's
distributor). She is also President and a
director of IFS Agency Services, Inc. (an
insurance agency), W&S Financial Group
Distributors, Inc. and IFS Systems, Inc.
She is Senior Vice President and a director
of Fort Washington Brokerage Services, Inc.
(a broker-dealer). She is President of
Touchstone Tax-Free Trust, Touchstone
Investment Trust, Touchstone Variable
Series Trust and Touchstone Strategic
Trust. She was President of Touchstone
Advisors, Inc and Touchstone Securities,
Inc. until 2004.
---------------------------------------------------------------------------------------------------------------------------------
John F. Barrett Trustee Until Chairman of the Board, President and Chief 32 Director of The
The Western and retirement Executive Officer of The Western and Andersons (an
Southern Life at age 75 Southern Life Insurance Company , Western- agribusiness and
Insurance Company or until Southern Life Assurance Company and The retailing
400 Broadway he resigns Western & Southern Financial Group, Inc.; company);
Cincinnati, OH or is Director and Chairman of Columbus Life Convergys
Age: 55 removed Insurance Company; Fort Washington Corporation (a
Investment Advisors, Inc., Integrity Life provider of
Trustee Insurance Company and National Integrity integrated
since 2002 Life Insurance Company; Director of Eagle billing solutions
Realty Group, Inc., Eagle Realty and
Investments, Inc.; Integrated Fund customer/employee
Services, Inc. and IFS Holdings, Inc.; care services)
Director, Chairman and CEO of WestAd, Inc.; and Fifth Third
President and Trustee of Western & Southern Bancorp.
Foundation.
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INDEPENDENT
TRUSTEES:
---------------------------------------------------------------------------------------------------------------------------------
J. Leland Brewster II Trustee Until Retired Senior Partner of Frost Brown Todd 32 Director of
5155 Ivyfarm Road retirement LLC (a law firm). Consolidated
Cincinnati, OH in 2005 or Health Services,
Age: 75 until he Inc.
resigns or
is
removed
Trustee
Since 2000
---------------------------------------------------------------------------------------------------------------------------------
William O. Coleman Trustee Until Retired Vice President of The Procter & 32 Director of
c/o Touchstone retirement Gamble Company. A Trustee of The Procter & LCA-Vision (a
Advisors, Inc. at age 75 Gamble Profit Sharing Plan and The Procter laser vision
221 East Fourth Street or until & Gamble Employee Stock Ownership Plan correction
Cincinnati, OH he until 2000. company) and
Age: 75 resigns Millennium
or is Bancorp.
removed
Trustee
since 1999
---------------------------------------------------------------------------------------------------------------------------------
Phillip R. Cox Trustee Until President and Chief Executive Officer of 32 Director of the
105 East Fourth Street retirement Cox Financial Corp. (a financial services Federal Reserve
Cincinnati, OH at age 75 company). Bank of
Age: 56 or until Cleveland;
he Broadwing, Inc.
resigns (a communications
or is company); and
removed Cinergy
Corporation (a
Trustee utility company).
since 1999
---------------------------------------------------------------------------------------------------------------------------------
H. Jerome Lerner Trustee Until Principal of HJL Enterprises (a privately 32 None
2828 Highland Avenue retirement held investment company); Chairman of Crane
Cincinnati, OH at age 75 Connectors (a manufacturer of electronic
Age: 65 or until connectors).
he
resigns
or is
removed
Trustee
since 1989
---------------------------------------------------------------------------------------------------------------------------------
Robert E. Trustee Until Retired Partner of KPMG LLP (a certified 32 Trustee of Good
Stautberg retirement public accounting firm). He is Vice Samaritan
4815 Drake Road at age 75 President of St. Xavier High School. Hospital,
Cincinnati, OH or until Bethesda Hospital
Age: 69 he and Tri-Health,
resigns Inc.
or is
removed
Trustee
since 1999
---------------------------------------------------------------------------------------------------------------------------------
John P. Zanotti Trustee Until CEO and Chairman of Avaton, Inc. (a 32 None
c/o Touchstone retirement wireless entertainment company). President
Advisors, Inc. at age 75 of Cincinnati Biomedical (a consulting
221 East Fourth Street or until company) and a Director of QMed (a health
Cincinnati, OH he care management company). CEO and Chairman
Age: 56 resigns of Astrum Digital Information (an
or is information monitoring company) from 2000
removed until 2001; President of Great American
Life Insurance Company from 1999 until
Trustee 2000; A Director of Chiquita Brands
since 2002 International, Inc. until 2000; Senior
Executive of American Financial Group, Inc.
(a financial services company) from 1996
until 1999.
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1 Ms. McGruder, as a director of Touchstone Advisors, Inc., the Trust's investment advisor, and Touchstone Securities, Inc., the Trust's distributor and an officer of affiliates of the advisor and distributor, is an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act. Mr. Barrett, as President and Chairman of The Western and Southern Life Insurance Company and Western-Southern Life Assurance Company, parent companies of Touchstone Advisors, Inc. and Touchstone Securities, Inc., Chairman of Fort Washington Investment Advisors, Inc., a Trust sub-advisor and an officer of other affiliates of the advisor and distributor, is an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act.
2 Each Trustee is elected to serve until the age of 75 or after five years of service, whichever is greater, or until he or she sooner resigns or is removed.
3 The Touchstone Family of Funds consists of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
4 Each Trustee is also a Trustee of Touchstone Tax-Free Trust, Touchstone Investment Trust and Touchstone Variable Series Trust.
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PRINCIPAL OFFICERS:
------------------------------------------------------------------------------------------------------------------------------------
NAME POSITION TERM OF PRINCIPAL OCCUPATION(S) DURING PAST NUMBER OF OTHER
ADDRESS HELD WITH OFFICE AND 5 YEARS FUNDS OVERSEEN DIRECTORSHIPS
AGE TRUST(1) LENGTH OF IN THE HELD
TIME SERVED TOUCHSTONE
FAMILY(2)
------------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder President Until See biography above. 32 Director of
Touchstone and Trustee resignation, LaRosa's (a
Advisors, Inc. removal or restaurant
221 E. Fourth Street disqualification chain).
Cincinnati, OH
Age: 49 President
since 2004
President
from 200-2002
------------------------------------------------------------------------------------------------------------------------------------
Brian E. Hirsch Vice Until Vice President-Compliance of IFS 32 None
Touchstone President resignation, Financial Services, Inc., Director of
Advisors, Inc. and Chief removal or Compliance of Fort Washington
221 E. Fourth Street Compliance disqualification Brokerage Services, Inc.; Chief
Cincinnati, OH Officer Compliance Officer of Puglisi & Co.
Age: 47 Vice from May 2001 until August 2002; Vice
President President - Compliance of Palisade
since 2003 Capital Management from June 1997
until January 2000.
------------------------------------------------------------------------------------------------------------------------------------
James R. Grifo Vice Until President of Touchstone Securities, 32 None
Touchstone President resignation, Inc. and Touchstone Advisors, Inc.
Securities, Inc. removal or Managing Director, Deutsche Asset
221 E. Fourth Street disqualification Management until 2003.
Cincinnati, OH
Age: 53 Vice
President
since 2004
------------------------------------------------------------------------------------------------------------------------------------
Terrie A. Wiedenheft Controller Until Senior Vice President, Chief 32 None
Touchstone and resignation, Financial Officer and Treasurer of
Advisors, Inc. Treasurer removal or Integrated Fund Services, Inc., IFS
221 E. Fourth Street disqualification Fund Distributors, Inc. and Fort
Cincinnati, OH Washington Brokerage Services, Inc.
Age: 42 Controller She is Chief Financial Officer of IFS
since 2000 Financial Services, Inc., Touchstone
Advisors, Inc. and Touchstone
Treasurer Securities, Inc. and Assistant
since 2003 Treasurer of Fort Washington
Investment Advisors, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Tina H. Bloom Secretary Until Vice President - Managing Attorney of 32 None
Integrated Fund resignation, Integrated Fund Services, Inc. and
Services, Inc. removal or IFS Fund Distributors, Inc.
221 E. Fourth Street disqualification
Cincinnati, OH
Age: 35 Secretary
since 1999
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1 Each officer also holds the same office with Touchstone Investment Trust, Touchstone Tax-Free Trust and Touchstone Variable Series Trust.
2 The Touchstone Family of Funds consist of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
TRUSTEE OWNERSHIP IN THE TOUCHSTONE FUNDS
The following table reflects the Trustees' beneficial ownership in the Trust and the Touchstone Funds as of December 31, 2003:
AGGREGATE DOLLAR
DOLLAR RANGE OF RANGE OF EQUITY
EQUITY SECURITIES IN SECURITIES IN
TRUST THE TOUCHSTONE
FUNDS(1)
-------------------- ---------------
John F. Barrett $10,001 - $ 50,000 $10,001 - $ 50,000
J. Leland Brewster II $50,000 - $100,000 $50,000 - $100,000
William O. Coleman $10,001 - $ 50,000 $10,001 - $ 50,000
Phillip R. Cox None None
H. Jerome Lerner None Over $100,000
Jill T. McGruder $10,001 - $ 50,000 $50,001 - $100,000
Robert E. Stautberg $50,001 - $100,000 $50,001 - $100,000
John P. Zanotti $10,001 - $ 50,000 $10,001 - $ 50,000
|
1 The Touchstone Family of Funds consists of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
TRUSTEE COMPENSATION
The following table shows the compensation paid to the Trustees by the Trust and the aggregate compensation paid by the Touchstone Family of Funds during the fiscal year ended March 31, 2004.
AGGREGATE
COMPENSATION
FROM
COMPENSATION THE TOUCHSTONE
NAME FROM TRUST(1) FUNDS(2)
---- ------------- --------------
John F. Barrett $ 0 $ 0
J. Leland Brewster II $ 6,925 $28,300
William O. Coleman $ 7,175 $29,300
Philip R. Cox $ 7,675 $31,300
H. Jerome Lerner $ 7,675 $31,300
Jill T. McGruder $ 0 $ 0
Robert E. Stautberg $ 7,675 $31,300
John P. Zanotti $ 6,925 $28,300
|
1 Effective January 1, 2001, the Trustees who are not "interested persons" of the Trust, as defined in the 1940 Act (the "Independent Trustees"), are eligible to participate in the Touchstone Trustee Deferred Compensation Plan that allows the Independent Trustees to defer payment of a specific amount of their Trustee compensation, subject to a minimum quarterly reduction of $1,000. The total amount of deferred compensation accrued by the Independent Trustees from the Touchstone Funds during the fiscal year ended March 31, 2004 is as follows: J. Leland Brewster II - $4,799, Robert E. Stautberg - $5,000 and John P. Zanotti - $5,485.
2 The Touchstone Family of Funds consist of seven series of the Trust, five series of Touchstone Tax-Free Trust, five series of Touchstone Investment Trust and fifteen variable annuity series of Touchstone Variable Series Trust.
Effective January 1, 2004, each Independent Trustee receives a quarterly retainer of $4,000 and a fee of $3,000 for each Board meeting attended in person and $300 for attendance by telephone. Each Committee member receives a fee of $1,000 for each committee meeting attended in person and $300 for attendance by telephone. The lead Trustee and Committee Chairmen receive an additional $500 quarterly retainer. All fees are split equally among the Trust, Touchstone Tax-Free Trust, Touchstone Investment Trust and Touchstone Variable Series Trust.
STANDING COMMITTEES OF THE BOARD
The Board of Trustees is responsible for overseeing the operations of the Trust in accordance with the provisions of the 1940 Act and other applicable laws and the Trust's Declaration of Trust. The Board has established the following committees to assist in its oversight functions. Each Committee is composed entirely of Independent Trustees.
AUDIT COMMITTEE. Messrs. Brewster, Lerner and Stautberg are members of the Audit Committee. The Audit Committee is responsible for overseeing the Trust's accounting and financial reporting policies, practices and internal controls. During the fiscal year ended March 31, 2004, the Audit Committee held four meetings.
VALUATION COMMITTEE. Messrs. Coleman, Cox and Zanotti are members of the Valuation Committee. The Valuation Committee is responsible for overseeing procedures for valuing securities held by the Trust and responding to any pricing issues that may arise. During the fiscal year ended March 31, 2004, the Valuation Committee held four meetings.
NOMINATING COMMITTEE. Messrs. Brewster, Coleman, Cox and Stautberg are members of the Nominating Committee. The Nominating Committee is responsible for selecting candidates to serve on the Board and its operating committees. During the fiscal year ended March 31, 2004, the Nominating Committee did not hold any meetings. The Nominating Committee does not consider nominees recommended by shareholders.
THE INVESTMENT ADVISOR. Touchstone Advisors, Inc. (the "Advisor"), is the Fund's investment manager. The Advisor is a wholly-owned subsidiary of IFS Financial Services, Inc., which is a wholly-owned subsidiary of The Western and Southern Life Insurance Company. The Western and Southern Life Insurance Company is a wholly-owned subsidiary of Western & Southern Financial Group, Inc., which is a wholly-owned subsidiary of Western - Southern Mutual Holding Company. Ms. McGruder may be deemed to be an affiliate of the Advisor because she is a Director of the Advisor and an officer of affiliates of the Advisor. Mr. Barrett may be deemed to be an affiliate of the Advisor because he is President and Chairman of The Western and Southern Life Insurance Company and Western - Southern Life Assurance Company, parent companies of the Advisor and an officer of affiliates of the Advisor. Ms. McGruder and Mr. Barrett, by reason of such affiliations, may directly or indirectly receive benefits from the advisory fees paid to the Advisor.
Under the terms of the investment advisory agreement between the Trust and the Advisor, the Advisor appoints and supervises each Fund sub-advisor, reviews and evaluates the performance of the sub-advisors and determines whether or not a sub-advisor should be replaced. The Advisor furnishes at its own expense all facilities and personnel necessary in connection with providing these services. The Fund pays the Advisor a fee computed and accrued daily and paid monthly at an annual rate of 1.25% of its average daily net assets
During the fiscal periods ended March 31, 2004 and 2003, the Fund incurred advisory fees of $569,567 and $86,494, respectively. Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor waived fees and/or reimbursed the Fund $125,840 and $97,022 for the fiscal periods ended March 31, 2004 and 2003, respectively.
Under the Sponsor Agreement between the Advisor and the Trust, the Advisor has been retained to provide certain management and supervisory services to the Fund in exchange for the payment of a sponsor fee by the Fund equal to an annual rate of 0.20% of the Fund's average daily net assets. The Advisor has agreed to waive its fees and reimburse expenses in order to limit the Fund's annual expenses to 1.95% for Class A shares, 2.70% for Class B and Class C shares and 1.55% for Class I shares. The fee waivers and expense limitations will remain in effect until at least March 31, 2005.
The Fund shall pay the expenses of its operation, including but not limited to
(i) charges and expenses for accounting, pricing and appraisal services, (ii)
the charges and expenses of auditors; (iii) the charges and expenses of its
custodian, transfer and dividend disbursing agent and administrative agent
appointed by the Trust with respect to the Fund; (iv) brokers' commissions, and
issue and transfer taxes chargeable to the Fund in connection with securities
transactions to which the Fund is a party; (v) insurance premiums, interest
charges, dues and fees for membership in trade associations and all taxes and
fees payable to federal, state or other governmental agencies; (vi) fees and
expenses involved in registering and maintaining registrations of the Fund with
the SEC, state or blue sky securities agencies; (vii) all expenses of meetings
of Trustees and of shareholders of the Trust and of preparing, printing and
distributing prospectuses, notices, proxy statements and all reports to
shareholders and to governmental agencies; (viii) charges and expenses of legal
counsel to the Trust; (ix) compensation of the Independent Trustees of the
Trust; and (x) interest on borrowed money, if any. The compensation and expenses
of any officer, Trustee or employee of the Trust who is an affiliated person of
the Advisor is paid by the Advisor.
By its terms, the Fund's investment advisory agreement will remain in force for an initial period of two years and from year to year thereafter, subject to annual approval by (a) the Board of Trustees or (b) a vote of the majority of the Fund's outstanding voting securities; provided that in either event continuance is also approved by a majority of the Independent Trustees, by a vote cast in person at a meeting called for the purpose of voting such approval.
In determining whether to approve the continuation of the Small Cap Growth Fund's investment advisory agreement, the Advisor furnished information necessary for a majority of the Trustees, including a majority of the Independent Trustees, to make the determination that the continuance of the advisory agreement is in the best interests of the Fund and its shareholders. Specifically, the Board was provided (1) industry data comparing advisory fees and expense ratios of comparable investment companies, (2) comparative performance information and (3) the Advisor's revenues and costs of providing services to the Fund. The Board compared the advisory fees and total expense ratios for the Fund with the average advisory fees and expense ratios in the Lipper Small Cap category and found the advisory fees paid by the Fund were reasonable and appropriate under all facts and circumstances. The Board found that although the Fund's advisory fees and total operating expense ratios were higher than the averages in the Lipper Small Cap category, the higher fees are justified due to the management structure and performance of the Fund. It noted that the Fund uses a multi-manager structure whereby Bjurman, Barry & Associates manages approximately 30% of the portfolio consisting of micro-cap stocks and Longwood Investment Advisors, Inc. manages the balance of the portfolio consisting of small-cap stocks. It further noted that the Fund returned 44.17% during the six months ended September 30, 2003, as compared to the 31.69% median return by the Lipper Small Cap category. The Board also considered the effect of the Fund's growth and size on its performance and expenses. The Board further noted that the Advisor has consistently waived advisory fees and reimbursed expenses for the Fund as necessary to reduce its operating expenses to targeted levels. The Board also took into consideration the financial condition and profitability of the Advisor and the direct and indirect benefits derived by the Advisor from its relationship with the Fund. It discussed the Advisor's effectiveness in monitoring the performance of the Sub-Advisors and its timeliness in responding to performance issues. In evaluating the quality of services provided by the Advisor, the Board took into account its familiarity with the Advisor's senior management through Board meetings, conversations and reports during the preceding year. The Board took into account the Advisor's willingness to consider and implement organizational and operational changes designed to improve investment results. It noted the Advisor's efforts to strengthen operations by hiring additional qualified and experienced members to the senior management team. The Board also considered the Advisor's role in coordinating the activities of the Fund's other service providers, including its efforts to consolidate service providers and reduce costs to the Fund. The Board also considered the strategic planning process implemented by the Advisor and the results gained from this process. No single factor was considered to be determinative in the Board's decision to approve the Advisory Agreement. Rather, the Trustees concluded, in light of weighing and balancing all factors, that the continuation of the Advisory Agreement is in the best interests of the Fund and its shareholders.
The Fund's investment advisory agreement may be terminated at any time, on sixty days' written notice, without the payment of any penalty, by the Board of Trustees, by a vote of the majority of the Fund's outstanding voting securities, or by the Advisor. The investment advisory agreement automatically terminates in the event of its assignment, as defined by the 1940 Act and the rules thereunder.
THE SUB-ADVISORS. The Advisor has retained Bjurman, Barry & Associates and Longwood Investment Advisors, Inc. (the "Sub-Advisors") to serve as the discretionary portfolio managers of the Fund. The Sub-Advisors select the portfolio securities for investment by the Fund, purchase and sell securities of the Fund and place orders for the execution of such portfolio transactions, subject to the general supervision of the Board of Trustees and the Advisor. Each Sub-Advisor receives a fee from the Advisor that is paid monthly at an annual rate of the Fund's average daily net assets allocated to it by the Advisor as set forth below.
BJURMAN, BARRY & ASSOCIATES 0.90% OF AVERAGE DAILY NET ASSETS
LONGWOOD INVESTMENT ADVISORS, INC. 0.85% OF AVERAGE DAILY NET ASSETS
The Advisor has allocated to Longwood Investment Advisors, Inc. responsibility for managing approximately 70% of the Fund's assets and has allocated to Bjurman, Barry & Associates responsibility for managing approximately 30% of the Fund's assets. These allocations may be larger or smaller at various times, but the Advisor will not reallocate the Fund's assets between Sub-Advisors to reduce these differences in size until the assets vary from the percentages above by approximately 10% or more of the Fund's average daily net assets for a period of 3 consecutive months. In such event, the Advisor may, but is not obligated to, reallocate assets among the Sub-Advisors to provide for a more equal distribution of the Fund's assets.
The services provided by the Sub-Advisors are paid for wholly by the Advisor. The compensation of any officer, director or employee of the Sub-Advisor who is rendering services to the Fund is paid by the Sub-Advisor.
The employment of each Sub-Advisor will remain in force for an initial two year period and from year to year thereafter, subject to annual approval by (a) the Board of Trustees or (b) a vote of the majority of the Fund's outstanding voting securities; provided that in either event continuance is also approved by a majority of the Independent Trustees, by a vote cast in person at a meeting called for the purpose of voting such approval. The employment of the Sub-Advisor may be terminated at any time, on sixty days' written notice, without the payment of any penalty, by the Board of Trustees, by a vote of a majority of the Fund's outstanding voting securities, by the Advisor, or by the Sub-Advisor. Each Sub-Advisory Agreement will automatically terminate in the event of its assignment, as defined by the 1940 Act and the rules thereunder.
In determining whether to approve the continuation of the Fund's sub-advisory agreements with the Sub-Advisors, the Board noted the Advisor's expertise and resources in selecting Sub-Advisors and monitoring their performance, investment style and risk adjusted performance. It noted that the Advisor had presented to the Board detailed information about the criteria it used in selecting the Fund's Sub-Advisors, including investment returns, risk-adjusted performance analysis, historical investment results, consistency of process, market capitalization range, style purity over time, clean compliance review results and management fit with the Advisor. It noted that the Advisor had reported to the Board that each Sub-Advisor uses original research in its investment process, is a proven and experienced investment specialist in its field and has a highly structured and disciplined investment management process. The Board noted that it reviews on a quarterly basis detailed information about the Fund's performance results, portfolio composition and investment strategies and that there were no performance issues reported with respect to the Fund. It noted that the Advisor's compliance monitoring processes includes quarterly reviews of compliance reports and annual compliance visits to the Sub-Advisors and that compliance issues are reported quarterly to the Board. In determining to approve the continuation of the Sub-Advisory Agreements, the Board did not identify any information that was a controlling factor, rather after considering all factors, the Board determined that the continuation of the Sub-Advisory Agreements for the Fund was in the best interests of shareholders.
The SEC has granted an exemptive order that permits the Trust or the Advisor, under certain circumstances, to select or change non-affiliated Sub-Advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. Shareholders of the Fund will be notified of any changes in its Fund Sub-Advisor.
SUB-ADVISOR CONTROL. Listed below is a description of the persons or entities that control the Sub-Advisors.
Bjurman, Barry & Associates is owned by the George A. Bjurman Living Trust and the Thomas Barry Living Trust.
Longwood Investment Advisors, Inc. is owned by John McNiff, Robert Davidson, Jennifer Pawloski, Kathleen Jordan and Eileen Madden.
The Fund has adopted each Sub-Advisor's policies and procedures for voting proxies relating to portfolio securities held by the Fund, including procedures used when a vote presents a conflict between the interests of the Fund's shareholders and those of the Sub-Advisor or its affiliates. Information about how the Fund voted proxies relating to its portfolio securities during the year ended June 30, 2004 is available without charge, upon request, by calling toll-free 1-800-543-0407 and on the SEC website at http://www.sec.gov. Listed below is a summary of the Sub-Advisors' proxy voting procedures:
BJURMAN, BARRY & ASSOCIATES. Bjurman uses a third party service provider, Institutional Shareholder Services ("ISS"), to vote all proxies for the Fund. The proxy voting guidelines adopted by Bjurman are provided by ISS. The voting process involves an assessment that results in voting in agreement with company management and/or varying ISS recommendations. Management and ISS recommendations may be identical. In the event Bjurman votes against ISS recommendations, documentation must be prepared to describe the basis for such a decision. Bjurman has adopted proxy voting recommendations on issues involving board of directors, proxy contest defenses, auditors, tender offer defenses, miscellaneous governance provisions, capital structure, executive and director compensation, mergers and corporate restructuring, mutual fund proxies and social and environmental issues. The following are examples of Bjurman's policies on specific matters:
o Votes on director nominations will be made on a case-by-case basis examining factors such as long-term corporate performance relative to a market index, composition of board and keyboard committees, nominee's attendance at meetings, nominee's investment in the company, whether a retired CEO sits on the board and whether the chairman is also serving as CEO.
o Bjurman will vote against proposals that provide that directors may be removed only for cause and for proposals giving shareholders the ability to remove directors with or without cause.
o Bjurman will vote for shareholder proposals that ask a company to submit its poison pills for shareholder ratification.
o Bjurman will vote on a case-by-case basis proposals to increase the number of shares of common stock authorized for issue and will vote against proposed common stock authorizations that increase the existing authorization by more than 100% unless a clear need for the excess shares is presented by the company.
Bjurman's proxy voting policy does not demonstrate a conflict of interest regarding the Fund's best interests since votes are in accordance with a pre-determined policy based upon the recommendations of ISS. The proxy voting guidelines are not exhaustive and do not include all potential voting issues. Because proxy issues and the circumstances of individual companies are so varied, there may be instances when Bjurman may not vote in strict adherence to these guidelines.
LONGWOOD INVESTMENT ADVISORS, INC. Longwood's proxy voting policy and procedures are designed to ensure that Longwood votes proxies in the best interests of the Fund and to prevent and detect fraudulent, deceptive or manipulative acts by Longwood and its advisory affiliates. Longwood's policy is to vote proxies in the interest of maximizing shareholder value. To that end, Longwood will vote in a way that it believes, consistent with its fiduciary duty, will cause the value of the issue to increase the most or decline the least. Longwood has contracted with The Investor Responsibility Research Center ("IRRC") to assist it in the proxy voting process. Accordingly, IRRC shall be a source of proxy voting research and also maintain the documentation to substantiate the manner in which Longwood votes proxies. In general, Longwood will support management if management's position appears reasonable, is not detrimental to the long-term equity ownership of the corporation and reflects consideration of the impact of societal values and attitudes on the long-term viability of the corporation. The position of management on any resolution will typically not be supported if it:
o Would enrich management excessively.
o Would entrench incumbent officers or members of the board of directors.
o Would not reflect consideration of short and long-term costs and gains, including effects on the basic human rights of its employees and goodwill both in the U.S. and foreign countries in which the company operates.
o Would result in unreasonable costs.
o Would disadvantage the corporation relative to other corporations.
o Would oppose a proposal to have the shareholders approve the selection of an independent auditor.
o Would not support equal and fair employment practices for all employees.
If Longwood detects a conflict of interest with respect to voting of the Fund's proxies, such conflict will be addressed by IRRC, or another independent third party, to vote proxies that involve such conflict. Any vote cast by IRRC is binding and may not be overridden by Longwood.
Touchstone Securities, Inc. ("Touchstone"), 221 East Fourth Street, Cincinnati, Ohio 45202, is the principal distributor of the Trust and, as such, the exclusive agent for distribution of shares of the Fund. Touchstone is an affiliate of the Advisor by reason of common ownership. Touchstone is obligated to sell the shares on a best efforts basis only against purchase orders for the shares. Shares of the Fund are offered to the public on a continuous basis.
Touchstone currently allows concessions to dealers who sell shares of the Fund. Touchstone receives that portion of the sales charge that is not reallowed to the dealers who sell shares of a Fund that is subject to a front-end sales charge. Touchstone retains the entire sales charge on all direct initial investments and all investments in accounts with no designated dealer of record.
For the fiscal year ended March 31, 2004, the aggregate underwriting commissions on sales of the Fund's shares were $270,571 of which Touchstone paid $208,231 to unaffiliated broker-dealers in the selling network, earned $22,548 as a broker-dealer in the selling network and retained $39,792 in underwriting commissions.
For the fiscal period ended March 31, 2003, the aggregate underwriting commissions on sales of the Fund's shares were $67,083 of which Touchstone paid $55,918 to unaffiliated broker-dealers in the selling network, earned $1,693 as a broker-dealer in the selling network and retained $9,472 in underwriting commissions.
Touchstone retains the contingent deferred sales charge on redemptions of shares of the Fund that are subject to a contingent deferred sales charge. For the fiscal periods ended March 31, 2004 and 2003, Touchstone collected $10,788 and $1,268, respectively of contingent deferred sales charges on redemptions of Class B and Class C shares of the Fund.
Ms. McGruder may be deemed to be an affiliate of Touchstone because she is a Director of Touchstone and an officer of affiliates of Touchstone. Mr. Barrett may be deemed to be an affiliate of Touchstone because he is President and Chairman of The Western and Southern Life Insurance Company and Western-Southern Life Assurance Company, parent companies of Touchstone and an officer of affiliates of Touchstone. Ms. McGruder and Mr. Barrett, by reason of such affiliations, may directly or indirectly receive benefits from the underwriting fees paid to Touchstone.
The Fund may compensate dealers, including Touchstone and its affiliates, based on the average balance of all accounts in the Fund for which the dealer is designated as the party responsible for the account.
Decisions to buy and sell securities for the Fund and the placing of the Fund's securities transactions and negotiation of commission rates where applicable are made by the Sub-Advisors and are subject to review by the Advisor and the Board of Trustees. In the purchase and sale of portfolio securities, the Sub-Advisor's primary objective will be to obtain the most favorable price and execution for the Fund, taking into account such factors as the overall direct net economic result to the Fund (including commissions, which may not be the lowest available but ordinarily should not be higher than the generally prevailing competitive range), the financial strength and stability of the broker, the efficiency with which the transaction will be effected, the ability to effect the transaction at all where a large block is involved and the availability of the broker or dealer to stand ready to execute possibly difficult transactions in the future.
For the fiscal periods ended March 31, 2004 and 2003, the Fund paid brokerage commissions of $546,008 and $112,858, respectively. The higher commissions paid during the March 31, 2004 fiscal year are due to increased assets.
Each Sub-Advisor is specifically authorized to pay a broker who provides research services to the Sub-Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker would have charged for effecting such transaction, in recognition of such additional research services rendered by the broker or dealer, but only if the Sub-Advisor determines in good faith that the excess commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer viewed in terms of the particular transaction or the Sub-Advisor's overall responsibilities with respect to discretionary accounts that it manages, and that the Fund derives or will derive a reasonably significant benefit from such research services.
During the fiscal year ended March 31, 2004, the Fund directed $6,756,396 of brokerage transactions to brokers for research services and paid $26,320 in brokerage commissions for such services.
Research services include securities and economic analyses, reports on issuers' financial conditions and future business prospects, newsletters and opinions relating to interest trends, general advice on the relative merits of possible investment securities for the Fund and statistical services and information with respect to the availability of securities or purchasers or sellers of securities. Although this information is useful to the Fund and the Sub-Advisors, it is not possible to place a dollar value on it. Research services furnished by brokers through whom the Fund effects securities transactions may be used by the Sub-Advisor in servicing all of its accounts and not all such services may be used by the Sub-Advisor in connection with the Fund.
The Fund has no obligation to deal with any broker or dealer in the execution of securities transactions. However, the Fund may effect securities transactions that are executed on a national securities exchange or transactions in the over-the-counter market conducted on an agency basis. The Fund will not effect any brokerage transactions in its portfolio securities with an affiliated broker if such transactions would be unfair or unreasonable to its shareholders. Over-the-counter transactions will be placed either directly with principal market makers or with broker-dealers. Although the Fund does not anticipate any ongoing arrangements with other brokerage firms, brokerage business may be transacted from time to time with other firms. Affiliated broker-dealers of the Trust will not receive reciprocal brokerage business as a result of the brokerage business transacted by the Fund with other brokers. In order to reduce total operating expenses, the Fund may apply a portion of its brokerage commission dollars to offset custody expenses through a Commission Share Program offered by Brown Brothers Harriman & Co., the Trust's Custodian.
Deutsche Bank may be deemed to be an affiliate of the Trust because it is an affiliate of Deutsche Investment Management Americas Inc., a sub-advisor for Touchstone Variable Series Trust. Listed below is information about the brokerage commissions paid to Deutsche Bank by the Fund during the past two fiscal periods.
Amount Percentage Percentage
of of Aggregate of Aggregate
Commissions Commissions Paid Transactions Effected
----------- ---------------- ---------------------
March 31, 2004 $ 7,202 .32% .47%
March 31, 2003 $ 2,786 2.5% 2.8%
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Consistent with the conduct rules of the National Association of Securities Dealers, Inc., and such other policies as the Board of Trustees may determine, the Fund Sub-Advisors may consider sales of shares of the Trust as a factor in the selection of broker-dealers to execute portfolio transactions. The Fund Sub-Advisors will make such allocations if commissions are comparable to those charged by nonaffiliated, qualified broker-dealers for similar services.
In certain instances there may be securities that are suitable for the Fund as well as for one or more of the Fund Sub-Advisor's other clients. Investment decisions for the Fund and for the Sub-Advisor's other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment advisor, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Fund is concerned. However, it is believed that the ability of the Fund to participate in volume transactions will produce better executions for the Fund.
The Trust, the Advisor, the Sub-Advisors and Touchstone have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act that permits Fund personnel to invest in securities for their own accounts and may permit personnel to invest in securities that may be purchased by the Fund. The Code of Ethics adopted by each of the Trust, the Advisor, the Sub-Advisors and Touchstone is on public file with, and is available from, the SEC.
The Fund's portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the Fund. High turnover may result in the Fund recognizing greater amounts of income and capital gains, which would increase the amount of commissions. A 100% turnover rate would occur if all of the Fund's portfolio securities were replaced once within a one-year period. The rate of portfolio turnover will depend upon market and other conditions, and will not be a limiting factor when the Sub-Advisor believes that portfolio changes are appropriate. The Fund may engage in active trading to achieve its investment goals and, as a result, may have substantial portfolio turnover.
The share price or net asset value ("NAV") of Class I shares of the Fund is determined as of the close of the regular session of trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time), on each day the Trust is open for business. The Trust is open for business on every day except Saturdays, Sundays and the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. The Trust may also be open for business on other days in which there is sufficient trading in the Fund's portfolio securities that its NAV might be materially affected. Securities held by the Fund may be primarily listed on foreign exchanges or traded in foreign markets that are open on days (such as Saturdays and U.S. holidays) when the New York Stock Exchange is not open for business. As a result the NAV of the Fund may be significantly affected by trading on days when the Trust is not open for business. For a description of the methods used to determine the share price, see "Pricing of Fund Shares" in the Prospectus.
The Fund offers four classes of shares: Class A, Class B, Class C and Class I shares. Each class represents an interest in the same portfolio of investments and has the same rights, but differs primarily in sales charges, distribution expense amounts and shareholder features. Before choosing a class, you should consider the following factors, as well as any other relevant facts and circumstances:
The decision as to which class of shares is more beneficial to you depends on the amount of your investment, the intended length of your investment and the quality and scope of the value-added services provided by financial advisors who may work with a particular sales load structure as compensation for their services. If you qualify for reduced front-end sales charges or, in the case of purchases of $1 million or more, no initial sales charge, you may find Class A shares attractive. Moreover, Class A shares are subject to lower ongoing expenses than Class B or Class C shares over the term of the investment. As an alternative, Class B and Class C shares are sold without an initial sales charge so the entire purchase price is immediately invested in the Fund. Any investment return on these investments may be partially or wholly offset by the higher annual expenses. However, because the Fund's future returns cannot be predicted, there can be no assurance that this would be the case. If you participate in an asset allocation program offered by a selected financial advisor and your initial investment in the Fund is $10,000 or more, you may find Class I shares attractive since Class I shares are sold without a sales charge or 12b-1 distribution fee. However, you must pay an annual fee and meet the minimum investment requirements in order to participate in the asset allocation program.
When determining which class of shares to purchase, you may want to consider the services provided by your financial advisor and the compensation provided to these financial advisors under each share class. Touchstone works with many financial advisors throughout the country that may provide assistance to you through ongoing education, asset allocation programs, personalized financial planning reviews or other services vital to your long-term success. Touchstone believes that these value-added services can greatly benefit you through market cycles and will work diligently with your chosen financial advisor.
Finally, you should consider the effect of the CDSC and any conversion rights of each class in the context of your investment timeline. For example, Class C shares are generally subject to a significantly lower CDSC upon redemption than Class B shares, however, unlike Class B shares, they do not convert to Class A shares after a stated period of time. Class C shares are subject to a 1.00% annual 12b-1 fee for an indefinite period of time, while Class B shares will convert to Class A shares after approximately eight years and will be subject to only a 0.25% annual 12b-1 fee. Thus, Class B shares may be more attractive than Class C shares if you have a longer-term investment outlook. On the other hand, if you are unsure of the length of time you intend to invest or the conversion feature is not attractive to you, you may wish to elect Class C shares.
Below is a chart comparing sales charges, 12b-1 fees and conversion features for each class:
CLASS SALES CHARGE 12B-1 FEE CONVERSION FEATURE
------------------------------------------------------------------------------------------
A Maximum of 5.75% initial sales charge, 0.25% None
reduced for purchases of $50,000 and
over; shares sold without an initial sales
charge may be subject to a 1.00% CDSC
during the 1st year if a commission was
paid to a dealer.
B Maximum 5.00% CDSC during 1.00% Class B Shares
the 1st year which decreases automatically convert
incrementally and is 0 after to Class A
6 years shares after
approximately 8 years
C 1.00% CDSC during the 1st year 1.00% None
I None None None
------------------------------------------------------------------------------------------
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CLASS A SHARES
Class A shares are sold at NAV plus an initial sales charge. In some cases, reduced initial sales charges for the purchase of Class A shares may be available, as described below. Investments of $1 million or more are not subject to a sales charge at the time of purchase but may be subject to a CDSC of 1.00% on redemptions made within 1 year after purchase if a commission was paid by Touchstone to a participating unaffiliated dealer. Class A shares are also subject to an annual 12b-1 distribution fee of up to .25% of the Fund's average daily net assets allocable to Class A shares.
The following table illustrates the current initial sales charge breakpoints for the purchase of Class A shares:
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Invested Amount Invested
------------- ------------- ---------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.50 4.71 3.75
$100,000 but less than $250,000 3.50 3.63 2.75
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.25 2.30 1.75
$1,000,000 or more None None
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For initial purchases of Class A shares of $1 million or more and subsequent purchases further increasing the size of the account, participating unaffiliated dealers will receive first year compensation of up to 1.00% of such purchases from Touchstone. In determining a dealer's eligibility for such commission, purchases of Class A shares of the Fund may be aggregated with concurrent purchases of Class A shares of other funds in the Touchstone Funds. Dealers should contact Touchstone for more information on the calculation of the dealer's commission in the case of combined purchases.
An exchange from other Touchstone Funds will not qualify for payment of the dealer's commission unless the exchange is from a Touchstone Fund with assets as to which a dealer's commission or similar payment has not been previously paid. No commission will be paid if the purchase represents the reinvestment of a redemption made during the previous twelve months. Redemptions of Class A shares may result in the imposition of a CDSC if the dealer's commission described in this paragraph was paid in connection with the purchase of such shares. See "CDSC for Certain Redemptions of Class A Shares" below.
WAIVER OF CLASS A SALES CHARGE. There is no front-end sales charge if you invest $1 million or more in Class A shares of a Fund. If you redeem shares that you purchased as part of the $1 million purchase within one year, you may pay a contingent deferred sales charge (CDSC), a sales charge you pay when you redeem your shares, of 1% on the shares redeemed. There is no front-end sales charge on exchanges between Funds or dividends reinvested in a Fund. In addition, there is no front-end sales charge on the following purchases:
o Purchases by registered representatives or other employees (and their immediate family members*) of broker-dealers, banks or other financial institutions having agreements with Touchstone Securities, Inc. ("Touchstone").
o Purchases by any director, officer or other employee (and their immediate family members*) of The Western & Southern Financial Group or any of its affiliates or any portfolio advisor or service provider to the Trust.
o Purchases in accounts as to which a broker-dealer or other financial intermediary charges an asset management fee economically comparable to a sales charge, provided the broker-dealer or other financial intermediary has an agreement with Touchstone.
o Purchases by a trust department of any financial institution in its capacity as trustee to any trust.
o Purchases through Processing Organizations described in the Prospectus.
o Purchases by an employee benefit plan having more than 25 eligible employees or a minimum of $250,000 invested in the Funds.
o Purchases by an employee benefit plan that is provided administrative services by a third-party administrator that has entered into a special service arrangement with Touchstone.
*Immediate family members are defined as the spouse, parents, siblings, domestic partner, natural or adopted children, mother-in-law, father-in- law, brother-in-law and sister-in-law of a director, officer or employee. The term "employee" is deemed to include current and retired employees.
Exemptions must be qualified in advance by Touchstone. Purchases at NAV may be made for investment only, and the shares may not be resold except through redemption by or on behalf of the Trust. At the option of the Trust, the front-end sales charge may be included on purchases by such persons in the future.
REDUCED CLASS A SALES CHARGE. You may purchase shares at a reduced sales charge through programs such as aggregation, letter of intent and right of accumulation.
o Aggregation. In order to qualify for a reduced sales charge through the aggregation program, you must inform your financial advisor or Touchstone of any other investments that you, your spouse and your children under the age of 21 have in the Touchstone Funds. This includes, for example, investments held in a retirement account, an employee benefit plan or with a financial advisor other than the one handling your current purchase or by a trust (or other fiduciary arrangement) solely for the benefit of these individuals. Individual purchases by trustees or other fiduciaries may also be aggregated if the investments are: (1) for a single trust estate or fiduciary account, including an employee benefit plan other than those described above; (2) made for two or more employee benefit plans of a single employer or of affiliated employers as defined in the 1940 Act, other than employee benefit plans described above; or (3) for a common trust fund or other pooled account not specifically formed for the purpose of accumulating Fund shares. Purchases made for nominee or street name accounts (securities held in the name of a dealer or another nominee such as a bank trust department instead of the customer) may not be aggregated with those made for other accounts and may not be aggregated with other nominee or street name accounts unless otherwise qualified as described above. Touchstone will credit the combined value (at the current offering price) of all of your eligible accounts to determine if your current purchase qualifies for a reduced sales charge.
o Letter of Intent. A purchaser may use a letter of intent to qualify for a reduced sales charge if you plan to invest at least $50,000 (excluding any reinvestment of dividends and capital gains distributions) during the next 13 months in Class A shares of any Touchstone Fund sold with a front-end sales charge. A letter of intent is a letter you sign whereby, based upon your representation to purchase at least $50,000 in Class A shares of the Touchstone Funds over the next thirteen months, the Fund agrees to provide you the reduced sales charge indicated in the above chart. The minimum initial investment under a letter of intent is $10,000. You are not obligated to purchase additional shares if you complete a letter of intent. However, if you do not buy enough shares to qualify for the projected level of sales charge by the end of the 13-month period (or when you sell your shares, if earlier), your sales charges will be recalculated to reflect your actual purchase level. During the term of the letter of intent, shares representing 5% of your intended purchase will be held in escrow. If you do not purchase enough shares during the 13-month period to qualify for the projected reduced sales charge, the additional sales charge will be deducted from your escrow account. If you have purchased Class A shares of any Touchstone Fund within 90 days prior to signing a letter of intent, they may be included as part of your intended purchase. A purchaser includes an individual and his immediate family members, purchasing shares for his or their own account; or a trustee or other fiduciary purchasing shares for a single fiduciary account although more than one beneficiary is involved; or employees of a common employer, provided that economies of scale are realized through remittances from a single source and quarterly confirmation of such purchases; or an organized group, provided that the purchases are made through a central administration, or a single dealer, or by other means which result in economy of sales effort or expense.
o Right of Accumulation. A purchaser of Class A shares of a Fund has the right to combine the cost or current NAV (whichever is higher) of his existing Class A shares of the load funds distributed by Touchstone with the amount of his current purchases in order to take advantage of the reduced sales charges set forth in this Prospectus. The purchaser or his dealer must notify the transfer agent that an investment qualifies for a reduced sales charge. The reduced charge will be granted upon confirmation of the purchaser's holdings by the transfer agent. A purchaser includes an individual and his immediate family members, purchasing shares for his or their own account; or a trustee or other fiduciary purchasing shares for a single fiduciary account although more than one beneficiary is involved; or employees of a common employer, provided that economies of scale are realized through remittances from a single source and quarterly confirmation of such purchases; or an organized group, provided that the purchases are made through a central administration, or a single dealer, or by other means which result in economy of sales effort or expense.
CDSC FOR CERTAIN REDEMPTIONS OF CLASS A SHARES. A CDSC is imposed upon certain redemptions of Class A shares of the Fund (or shares into which such Class A shares were exchanged) purchased at NAV in amounts totaling $1 million or more, if the dealer's commission described above was paid by Touchstone and the shares are redeemed within one year from the date of purchase. The CDSC will be paid to Touchstone and will be equal to the commission percentage paid at the time of purchase as applied to the lesser of (1) the NAV at the time of purchase of the Class A shares being redeemed, or (2) the NAV of such Class A shares at the time of redemption. If a purchase of Class A shares is subject to the CDSC, you will be notified on the confirmation you receive for your purchase. Redemptions of such Class A shares of the Fund held for at least one year will not be subject to the CDSC.
CLASS B SHARES
Class B shares of the Fund are sold at NAV without an initial sales charge. Class B shares are subject to a CDSC if you redeem Class B shares within 6 years of their purchase. The CDSC will be a percentage of the dollar amount of shares redeemed and will be assessed on an amount equal to the lesser of (1) the NAV at the time of purchase of the Class B shares being redeemed, or (2) the NAV of such Class B shares being redeemed. A CDSC will not be imposed upon redemptions of Class B shares held for at least six years. The amount of sales charge will depend on how long you have held your shares, as set forth in the following table:
YEAR SINCE PURCHASE PAYMENT MADE CDSC AS A % OF AMOUNT SUBJECT TO CHARGE -------------------------------- --------------------------------------- First 5.00% Second 4.00% Third 3.00% Fourth 2.00% Fifth 1.00% Sixth 1.00% Seventh and thereafter* None |
* Class B shares will automatically convert to Class A shares after they have been held for approximately 8 years.
Class B shares are subject to an annual 12b-1 fee of up to 1.00% of the Fund's average daily net assets allocable to Class B shares. Touchstone intends to pay a commission of 4.00% of the purchase amount to your broker at the time you purchase Class B shares.
CLASS C SHARES
Class C shares are sold at NAV, without an initial sales charge and are subject to a CDSC of 1.00% on redemptions of Class C shares made within one year of their purchase. The CDSC will be a percentage of the dollar amount of shares redeemed and will be assessed on an amount equal to the lesser of (1) the NAV at the time of purchase of the Class C shares being redeemed, or (2) the NAV of such Class C shares being redeemed. A CDSC will not be imposed upon redemptions of Class C shares held for at least one year. Class C shares are subject to an annual 12b-1 fee of up to 1.00% of the Fund's average daily net assets allocable to Class C shares. Touchstone intends to pay a commission of 1.00% of the purchase amount to your broker at the time you purchase Class C shares.
CLASS I SHARES
Class I shares are sold at NAV, without an initial sales charge and are not subject to a 12b-1 fee or CDSC, but are subject to higher initial investment requirements than other classes of shares of the Fund. Class I shares are only offered through certain broker-dealers or financial institutions that have distribution agreements with Touchstone. These agreements are generally limited to discretionary managed, asset allocation, or wrap products offered by broker-dealers and financial institutions and may be subject to fees by the participating broker-dealer or financial institution. Class I shares may not be exchanged for any other Touchstone Funds.
ADDITIONAL INFORMATION ON THE CDSC
The CDSC is waived under the following circumstances:
o Any partial or complete redemption following death or disability (as defined in the Internal Revenue Code) of a shareholder (including one who owns the shares with his or her spouse as a joint tenant with rights of survivorship) from an account in which the deceased or disabled is named. Touchstone may require documentation prior to waiver of the charge, including death certificates, physicians' certificates, etc.
o Redemptions from a systematic withdrawal plan. If the systematic withdrawal plan is based on a fixed dollar amount or number of shares, systematic withdrawal redemptions are limited to no more than 10% of your account value or number of shares per year, as of the date the transfer agent receives your request. If the systematic withdrawal plan is based on a fixed percentage of your account value, each redemption is limited to an amount that would not exceed 10% of your annual account value at the time of withdrawal.
o Redemptions from retirement plans qualified under Section 401 of the Internal Revenue Code. The CDSC will be waived for benefit payments made by Touchstone directly to plan participants. Benefit payments will include, but are not limited to, payments resulting from death, disability, retirement, separation from service, required minimum distributions (as described under IRC Section 401(a)(9)), in-service distributions, hardships, loans and qualified domestic relations orders. The CDSC waiver will not apply in the event of termination of the plan or transfer of the plan to another financial institution.
All sales charges imposed on redemptions are paid to Touchstone. In determining whether the CDSC is payable, it is assumed that shares not subject to the CDSC are the first redeemed followed by other shares held for the longest period of time. The CDSC will not be imposed upon shares representing reinvested dividends or capital gains distributions, or upon amounts representing share appreciation.
The following example will illustrate the operation of the CDSC. Assume that you open an account and purchase 1,000 shares at $10 per share and that six months later the NAV per share is $12 and, during such time, you have acquired 50 additional shares through reinvestment of distributions. If at such time you should redeem 450 shares (proceeds of $5,400), 50 shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 400 shares, the charge is applied only to the original cost of $10 per share and not to the increase in NAV of $2 per share. Therefore, $4,000 of the $5,400 redemption proceeds will pay the charge. At the rate of 5.00%, the CDSC would be $200 for redemptions of Class B shares. At the rate of 1.00%, the CDSC would be $40 for redemptions of Class C shares. In determining whether an amount is available for redemption without incurring a deferred sales charge, the purchase payments made for all shares in your account are aggregated.
The following example will illustrate the operation of the CDSC for Class B shares. Assume that you open an account and purchase 1,000 shares at $10 per share and that twenty-eight months later the NAV per share is $14 and, during such time, you have acquired (a) 150 additional shares through reinvestment of distributions and (b) 500 shares through purchases at $11 per share during the second year. If at such time you should redeem 1,450 shares (proceeds of $20,300), 150 shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 1,300 shares, the charge is applied only to the (a) original cost of $10 per share for the first 1,000 shares and not to the increase in NAV of $4 per share and (b) to the original cost of $11 per share for the next 300 shares and not to the increase in NAV of $3 per share. Therefore, $18,200 of the $20,300 redemption proceeds will pay the charge. The redemption of the first 1,000 shares is in the third year of the CDSC schedule and will be charged at the rate of 3.00%, or $300. The redemption of the next 300 shares is in the second year of the CDSC schedule and will be charged at the rate of 4.00%, or $132. After this transaction is completed, the account has 200 shares remaining with an initial purchase value of $11 per share and these shares are in the second year of the CDSC schedule.
PURCHASES IN KIND. Shares may be purchased by tendering payment in-kind in the form of marketable securities, including but not limited to shares of common stock, provided the acquisition of such securities is consistent with the Fund's investment objectives and is otherwise acceptable to a Sub-Advisor.
REDEMPTIONS IN KIND. Under unusual circumstances, when the Board of Trustees deems it in the best interests of the Fund's shareholders, the Fund may make payment for shares repurchased or redeemed in whole or in part in securities of the Fund taken at current value. Should payment be made in securities, the redeeming shareholder will generally incur brokerage costs in converting such securities to cash. Portfolio securities that are issued in an in-kind redemption will be readily marketable. The Trust has filed an irrevocable election with the SEC under Rule 18f-1 under the 1940 Act wherein the Fund is committed to pay redemptions in cash, rather than in kind, to any shareholder of record of the Fund who redeems in cash, rather than in kind, to any shareholder of record of the Fund who redeems during any ninety day period, the lesser of $250,000 or 1% of the Fund's NAV at the beginning of such period.
The Trust intends to qualify annually and to elect that the Fund be treated as a regulated investment company under the Code.
To qualify as a regulated investment company, the Fund must, among other things:
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.
As a regulated investment company, the Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund
must distribute during each calendar year an amount equal to the sum of: (1) at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year; (2) at least 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses, as prescribed by
the Code) for the one-year period ending on October 31 of the calendar year; and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by the Fund in
October, November or December with a record date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
Each Fund shareholder will receive, if appropriate, various written notices at the end of the calendar year as to the federal income status of his dividends and distributions that were received from the Fund during the year. Shareholders should consult their tax advisors as to any state and local taxes that may apply to these dividends and distributions.
FOREIGN TAXES. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Fund's assets to be invested in various countries will vary. If the Fund is liable for foreign taxes, and if more than 50% of the value of the Fund's total assets at the close of its taxable year consists of stocks or securities of foreign corporations, it may make an election pursuant to which certain foreign taxes paid by it would be treated as having been paid directly by shareholders of the entities that have invested in the Fund. Pursuant to such election, the amount of foreign taxes paid will be included in the income of the Fund's shareholders, and such Fund shareholders (except tax-exempt shareholders) may, subject to certain limitations, claim either a credit or deduction for the taxes. Each such Fund shareholder will be notified after the close of the Fund's taxable year whether the foreign taxes paid will "pass through" for that year and, if so, such notification will designate (a) the shareholder's portion of the foreign taxes paid to each such country and (b) the portion which represents income derived from sources within each such country. The amount of foreign taxes for which a shareholder may claim a credit in any year will generally be subject to a separate limitation for "passive income," which includes, among other items of income, dividends, interest and certain foreign currency gains. Because capital gains realized by the Fund on the sale of foreign securities will be treated as U.S.-source income, the available credit of foreign taxes paid with respect to such gains may be restricted by this limitation.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company taxable income will be taxable to U.S. shareholders, other than corporations, at the qualified dividend income rate of 15%, or 5% for lower income levels and may qualify for the corporate dividends-received deduction, to the extent derived from qualified dividend income. Distributions of net capital gains, if any, designated as capital gain dividends are taxable as long-term capital gains, regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends-received deduction. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a cost basis in each such share equal to the NAV of the Fund's shares on the reinvestment date. Shareholders will be notified annually as to the U.S. federal tax status of distributions.
SALE OF SHARES. Any gain or loss realized by a shareholder upon the sale or other disposition of any shares of the Fund, or upon receipt of a distribution in complete liquidation of the Fund, generally will be a capital gain or loss which will be long-term or short-term, generally depending upon the shareholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced (including shares acquired pursuant to a dividend reinvestment plan) within a period of 61 days beginning 30 days before and ending 30 days after disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares.
TIMING OF INVESTMENT. At the time of a shareholder's purchase of the Fund's shares, a portion of the purchase price may be attributable to realized or unrealized appreciation in the Fund's portfolio or undistributed taxable income of the Fund. Consequently, subsequent distributions by the Fund with respect to these shares from such appreciation or income may be taxable to such shareholder even if the NAV of the shareholder's shares is, as a result of the distributions, reduced below the shareholder's cost for such shares and the distributions economically represent a return of a portion of the investment.
FOREIGN WITHHOLDING TAXES. Income received by the Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. federal income tax on all taxable distributions and sales payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The current backup-withholding rate is 28%. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign shareholder of an investment in the Fund may be different from those described herein. Foreign shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Fund.
OTHER TAXATION. Shareholders may be subject to state and local taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Fund.
From time to time, the Fund may advertise average annual total return. Average annual total return quotations will be computed by finding the average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending redeemable value, according to the following formula:
n P(1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all dividends and distributions and the deduction of the current maximum sales charge from the initial $1,000 payment. If the Fund has been in existence less than one, five or ten years, the time period since the date of the initial public offering of shares will be substituted for the periods stated.
THE AVERAGE ANNUAL TOTAL RETURNS OF THE FUND FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Small Cap Growth Fund (Class A) ------------------------------- 1 Year 58.31% Since inception (10-21-02) 35.47% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 62.99% Since inception (10-21-02) 37.85% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 67.26% Since inception (10-21-02) 40.31% |
The Fund may also advertise total return (a "nonstandardized quotation") that is calculated differently from average annual total return. A nonstandardized quotation of total return may be a cumulative return which measures the percentage change in the value of an account between the beginning and end of a period, assuming no activity in the account other than reinvestment of dividends and capital gains distributions. This computation does not include the effect of the applicable sales charge, which, if included, would reduce total return.
The total returns of the Fund as calculated in this manner for each fiscal period since the date of initial public offering are as FOLLOWS:
SMALL CAP GROWTH FUND(1)
Period Ended Class A Class B Class C ------------ ------- ------- ------- March 31, 2003 -2.20% -2.50% -2.60% March 31, 2004 68.02% 66.99% 67.26% |
(1) From date of initial public offering on October 21, 2002.
A nonstandardized quotation may also indicate average annual compounded rates of return without including the effect of the applicable sales charge or over periods other than those specified for average annual total return.
THE AVERAGE ANNUAL COMPOUNDED RATES OF RETURN FOR THE FUND (EXCLUDING SALES CHARGES) FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Small Cap Growth Fund (Class A) ------------------------------- 1 Year 68.02% Since inception (10-21-02) 41.15% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 66.99% Since inception (10-21-02) 40.25% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 67.26% Since inception (10-21-02) 40.31% |
A nonstandardized quotation of total return will always be accompanied by the Fund's average annual total return as described above.
The Fund may advertise average annual total return after taxes on distributions. Average annual total return after taxes on distributions will be computed by finding the average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending value, according to the following formula:
n
P(1+T) =ATV
D
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions).
n = number of years.
ATV = ending value of a hypothetical $1,000 payment made at the
D beginning of the 1-, 5-, or 10-year periods at the end of the 1-,
5-, or 10-year periods (or fractional portion), after taxes on fund
distributions but not after taxes on redemption.
The calculation of average annual total return after taxes on distributions assumes the reinvestment of all dividends and distributions, less the taxes due on such distributions. The calculation also assumes the deduction of the current maximum sales charge from the initial $1,000 payment. If the Fund (or class) has been in existence less than one, five or ten years, the time period since the date of the initial public offering of shares will be substituted for the periods stated.
THE AVERAGE ANNUAL RETURNS OF THE FUND AFTER TAXES ON DISTRIBUTIONS FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Small Cap Growth Fund (Class A) ------------------------------- 1 Year 57.06% Since inception (10-21-02) 34.72% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 61.66% Since inception (10-21-02) 37.07% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 65.93% Since inception (10-21-02) 39.53% |
The Fund may advertise average annual total return after taxes on distributions and redemption. Average annual total return after taxes on distributions and redemption will be computed by finding the average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending value, according to the following formula:
n
P(1+T) = ATV
DR
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions and
redemption).
n = number of years.
ATV = ending value of a hypothetical $1,000 payment made at the
DR beginning of the 1-, 5-, or 10-year periods at the end of the 1-,
5-, or 10-year periods (or fractional portion), after taxes on
fund distributions and redemption.
The calculation of average annual total return after taxes on distributions and redemption assumes the reinvestment of all dividends and distributions, less the taxes due on such distributions. The calculation also assumes the deduction of the current maximum sales charge from the initial $1,000 payment. If the Fund (or class) has been in existence less than one, five or ten years, the time period since the date of the initial public offering of shares will be substituted for the periods stated.
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION FOR THE PERIODS ENDED MARCH 31, 2004 ARE AS FOLLOWS:
Small Cap Growth Fund (Class A) ------------------------------- 1 Year 37.90% Since inception (10-21-02) 29.98% Small Cap Growth Fund (Class B) ------------------------------- 1 Year 40.94% Since inception (10-21-02) 32.02% Small Cap Growth Fund (Class C) ------------------------------- 1 Year 43.72% Since inception (10-21-02) 34.15% |
From time to time, the Fund may advertise its yield. A yield quotation is based on a 30-day (or one month) period and is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula:
Where:
a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period
Solely for the purpose of computing yield, dividend income is recognized by accruing 1/360 of the stated dividend rate of the security each day that the Fund owns the security. Generally, interest earned (for the purpose of "a" above) on debt obligations is computed by reference to the yield to maturity of each obligation held based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day prior to the start of the 30-day (or one month) period for which yield is being calculated, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest).
Performance quotations are based on historical earnings and are not intended to indicate future performance. Average annual total return and yield are computed separately for each class of shares of the Fund. The yield of Class I shares is expected to be higher than the yield of other classes of shares due to the distribution fees and sales charges imposed on Class A, Class B and Class C shares.
To help investors better evaluate how an investment in the Fund might satisfy their investment objective, advertisements regarding the Fund may discuss various measures of Fund performance, including current performance ratings and/or rankings appearing in financial magazines, newspapers and publications which track mutual fund performance. Advertisements may also compare Fund performance to performance as reported by other investments, indices and averages.
When advertising current ratings or rankings, the Fund may use the following publications to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis measures total return and average current yield for the mutual fund industry and ranks individual mutual fund performance over specified time periods assuming reinvestment of all distributions, exclusive of sales charges.
Morningstar, Inc., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars and ratings are effective for two weeks.
In addition, the Fund may also use comparative performance information of relevant indices, including The Russell 2000 Growth Index. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
In assessing such comparisons of performance an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, that the averages are generally unmanaged and that the items included in the calculations of such averages may not be identical to the formula used by the Fund to calculate its performance. In addition, there can be no assurance that the Fund will continue this performance as compared to such other averages.
As of July 9, 2004, the following shareholders held over 5% of the outstanding Class I shares of the Fund:
--------------------------------------------------------------------------------
FUND SHAREHOLDER % OF CLASS
--------------------------------------------------------------------------------
Small Cap Growth Fund - Charles Schwab & Company, Inc. 16.36%
Class I Mutual Funds
101 Montgomery Street
San Francisco, CA
--------------------------------------------------------------------------------
Small Cap Growth Fund - Prudential Investment Management 83.28%
Class I 194 Wood Avenue South
Iselin, NJ
--------------------------------------------------------------------------------
|
As of July 9, 2004, the Trustees and officers of the Trust as a group owned of record or beneficially less than 1% of the outstanding Class I shares of the Fund.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, serves as the Trust's custodian. Brown Brothers Harriman acts as the Trust's depository, safe keeps its portfolio securities, collects all income and other payments with respect thereto, disburses funds as instructed and maintains records in connection with its duties.
The firm of Ernst & Young LLP, 312 Walnut Street, Cincinnati, Ohio 45202, has been selected as independent auditors for the Trust for fiscal year ending March 31, 2005. Ernst & Young LLP will perform an audit of the Trust's financial statements for its fiscal year end and advise the Trust as to certain accounting matters.
TRANSFER AGENT. The Trust's transfer agent, Integrated Fund Services, Inc. ("Integrated"), 221 East Fourth Street, Cincinnati, Ohio 45202, maintains the records of each shareholder's account, answers shareholders' inquiries concerning their accounts, processes purchases and redemptions of the Fund's shares, acts as dividend and distribution disbursing agent and performs other shareholder service functions. For providing transfer agent and shareholder services to the Trust, Integrated receives a monthly per account fee from the Fund, plus out of-pocket expenses. Integrated is an affiliate of the Advisor by reason of common ownership.
ACCOUNTING AND PRICING AGENT. Integrated provides accounting and pricing services to the Trust. For calculating daily NAV per share and maintaining all necessary books and records to enable Integrated to perform its duties, the Fund pays Integrated a fee based on its asset size plus out-of-pocket expenses. The Fund also pay the costs of outside pricing services. The accounting and pricing fees paid by the Fund during the fiscal periods ended March 31, 2004 and 2003 were $41,500 and $19,169, respectively.
ADMINISTRATIVE AGENT. Integrated also provides administrative services to the Fund. These administrative services include supplying non-investment related statistical and research data, internal regulatory compliance services, executive and administrative services, supervising the preparation of tax returns, reports to shareholders of the Fund, reports to and filings with the SEC and state securities commissions, and materials for meetings of the Board of Trustees. For the performance of these administrative services, Integrated receives a monthly fee from the Fund based on its average daily net assets, plus out-of-pocket expenses. The fees paid for administrative services by the Fund for the fiscal periods ended March 31, 2004 and 2003 were $25,060 and $3,806, respectively.
The financial statements for the Small Cap Growth Fund as of March 31, 2004 appear in the Trust's Annual Report, which is incorporated by reference herein. The Trust's financial statements were audited by Ernst & Young LLP.
(a) ARTICLES OF INCORPORATION Restated Agreement and Declaration of Trust and Amendment No. 1 dated May 24, 1994, Amendment No. 2 dated February 28, 1997 and Amendment No. 3 dated August 11, 1997, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 36, is incorporated by reference.
Amendment No. 4 to Restated Agreement and Declaration of Trust dated February 12, 1998, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 42, is incorporated by reference.
Amendments to Restated Agreement and Declaration of Trust dated March 16, 2000, which were filed as Exhibits to Registrant's Post-Effective Amendment No. 42 is incorporated by reference.
Amendment to Restated Agreement and Declaration of Trust dated April 6, 2000, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 42 is incorporated by reference.
Amendment to Restated Agreement and Declaration of Trust, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 45 is incorporated by reference.
Amendment to Restated Agreement and Declaration of Trust, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 45 is incorporated by reference.
Amendment to Restated Agreement and Declaration of Trust, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 48 is incorporated by reference.
Amendment dated November 7, 2002 to Restated Agreement and Declaration of Trust, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
Amendment dated April 14, 2004 to Restated Agreement and Declaration of Trust is filed herewith.
(b) BYLAWS Bylaws with Amendments adopted July 17, 1984 and April 5, 1989, which were filed as Exhibits to Registrant's Post-Effective Amendment No.36, are hereby incorporated by reference.
(c) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS Article IV of Registrant's Restated Agreement and Declaration of Trust provides the following rights for security holders:
LIQUIDATION. In event of the liquidation or dissolution of the Trust, the Shareholders of each Series that has been established and designated shall be entitled to receive, as a Series, when and as declared by the Trustees, the excess of the assets belonging to that Series over the liabilities belonging to that Series. The assets so distributable to the Shareholders of any particular Series shall be distributed among such Shareholders in proportion to the number of Shares of that Series held by them and recorded on the books of the Trust.
VOTING. All shares of all Series shall have "equal voting rights" as such term is defined in the Investment Company Act of 1940 and except as otherwise provided by that Act or rules, regulations or orders promulgated thereunder. On each matter submitted to a vote of the Shareholders, all shares of each Series shall vote as a single class except as to any matter with respect to which a vote of all Series voting as a single series is required by the 1940 Act or rules and regulations promulgated thereunder, or would be required under the Massachusetts Business Corporation Law if the Trust were a Massachusetts business corporation. As to any matter which does not affect the interest of a particular Series, only the holders of Shares of the one or more affected Series shall be entitled to vote.
REDEMPTION BY SHAREHOLDER. Each holder of Shares of a particular Series shall have the right at such times as may be permitted by the Trust, but no less frequently than once each week, to require the Trust to redeem all or any part of his Shares of that Series at a redemption price equal to the net asset value per Share of that Series next determined in accordance with subsection (h) of this Section 4.2 after the Shares are properly tendered for redemption.
Notwithstanding the foregoing, the Trust may postpone payment of the redemption price and may suspend the right of the holders of Shares of any Series to require the Trust to redeem Shares of that Series during any period or at any time when and to the extent permissible under the 1940 Act, and such redemption is conditioned upon the Trust having funds or property legally available therefor.
TRANSFER. All Shares of each particular Series shall be transferable, but transfers of Shares of a particular Series will be recorded on the Share transfer records of the Trust applicable to that Series only at such times as Shareholders shall have the right to require the Trust to redeem Shares of that Series and at such other times as may be permitted by the Trustees.
Article V of Registrant's Restated Agreement and Declaration of Trust provides the following rights for security holders:
VOTING POWERS. The Shareholders shall have power to vote only (i) for
the election or removal of Trustees as provided in Section 3.1, (ii)
with respect to any contract with a Contracting Party as provided in
Section 3.3 as to which Shareholder approval is required by the 1940
Act, (iii) with respect to any termination or reorganization of the
Trust or any Series to the extent and as provided in Sections 7.1 and
7.2, (iv) with respect to any amendment of this Declaration of Trust
to the extent and as provided in Section 7.3, (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
not 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 the
1940 Act, this Declaration of Trust, the Bylaws or any registration of
the Trust with the Commission (or any successor agency) in any state,
or as the Trustees may consider necessary or desirable. There shall be
no cumulative voting in the election of any Trustee or Trustees.
Shares may be voted in person or by proxy.
(d) INVESTMENT ADVISORY CONTRACTS
(i) Advisory Agreement with Touchstone Advisors, Inc. is filed herewith.
(ii) Subadvisory Agreement between Touchstone Advisors, Inc. and Mastrapasqua Asset Management, Inc. for the Growth Opportunities Fund which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 42 is incorporated by reference.
(iii) Subadvisory Agreement between Touchstone Advisors, Inc. and TCW Investment Management Company for the Emerging Growth Fund, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 45 is incorporated by reference.
(iv) Subadvisory Agreement between Touchstone Advisors, Inc. and Westfield Capital Management, Inc. for the Emerging Growth Fund, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(v) Subadvisory Agreement between Touchstone Advisors, Inc. and Fort Washington Investment Advisors, Inc. for the Value Plus Fund, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(vi) Form of Subadvisory Agreement between Touchstone Advisors, Inc. and Navellier & Associates, Inc. for the Large Cap Growth Fund is filed herewith.
(vii) Subadvisory Agreement between Touchstone Advisors, Inc. and Todd Investment Advisors, Inc. for the Enhanced 30 Fund, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(viii) Subadvisory Agreement betweeen Touchstone Advisors, Inc. and Bjurman, Barry & Associates for the Small Cap Growth Fund, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 48 is hereby incorporated by reference.
(ix) Subadvisory Agreement between Touchstone Advisors, Inc. and Longwood Investment Advisors, Inc. for the Small Cap Growth Fund, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 48 is hereby incorporated by reference.
(x) Subadvisory Agreement between Touchstone Advisors, Inc. and Bjurman, Barry & Associates for the Micro Cap Growth Fund is filed herewith.
(e) UNDERWRITING CONTRACTS
(i) Distribution Agreement with Touchstone Securities, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 45, is incorporated by reference.
(ii) Form of Underwriter's Dealer Agreement is filed herewith.
(f) BONUS OR PROFIT SHARING CONTRACTS
Touchstone Trustee Deferred Compensaton Plan, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 43, is incorporated by reference.
(g) CUSTODIAN AGREEMENTS
(i) Custodian Agreement with Brown Brothers Harriman & Co., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(ii) Securities Lending Agreement, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(h) OTHER MATERIAL CONTRACTS
(i) Accounting Services Agreement dated December 31, 2002 with Integrated Fund Services, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(ii) Transfer Agency Agreement dated December 31, 2002 with Integrated Fund Services, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(iii) Administration Agreement dated December 31, 2002 with Integrated Fund Services, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(iv) Allocation Agreement for Allocation of Fidelty Bond Proceeds, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 50 is incorporated by reference.
(v) Amended Expense Limitation Agreement with Touchstone Advisors, Inc., which was filed as an Exhibit to Registrant's Post- Effective Amendment No. 50 is incorporated by reference.
(vi) Sponsor Agreement with Touchstone Advisors, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 43 is incorporated by reference.
(vii) Amendment No. 1 to Sponsor Agreement, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 45 is incorporated by reference.
(viii) Amendment No. 2 to Sponsor Agreement, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(ix) Amendments 3 and 4 to Sponsor Agreement with Touchstone Advisors, Inc., which were filed as Exhibits to Registrant's Post-Effective Amendment No. 50 are incorporated by reference.
(x) Amendments 5, 6, and 7 to Sponsor Agreement with Touchstone Advisors, Inc. are filed herewith.
(xi) Recordkeeping Agreement which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 51 is incorporated by reference.
(xii) Integrated Fund Services Anti-Money Laundering Compliance Program Service Agreement Addendum which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 51 is incorporated by reference.
(i) LEGAL OPINION
Opinion and Consent of Counsel, which was filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1, is hereby incorporated by reference.
(j) OTHER OPINIONS
Consent of Independent Auditors is filed herewith.
(k) OMITTED FINANCIAL STATEMENTS
None.
(l) INITIAL CAPITAL AGREEMENTS Copy of Letter of Initial Stockholder, which was filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1, is hereby incorporated by reference.
(m) RULE 12B-1 PLAN
(i) Registrant's Plans of Distribution Pursuant to Rule 12b-1 for Class A Shares and Class C Shares, which were filed as an Exhibit to Registrant's Post-Effective Amendment No. 42, are incorporated by reference.
(ii) Registrant's Plan of Distribution Pursuant to Rule 12b-1 for Class B Shares, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 45, is incorported by reference.
(n) RULE 18f-3 PLAN
Amended Rule 18f-3 Plan Adopted with Respect to the Multiple Class Distribution System, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 49 is incorporated by reference.
(o) CODE OF ETHICS
(i) Registrant's Code of Ethics, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 51 is incorporated by reference.
(ii) Code of Ethics for Touchstone Securities, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 42, is incorporated by reference.
(iii) Code of Ethics for Touchstone Advisors, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 42, is incorporated by reference.
(iv) Code of Ethics for Fort Washington Investment Advisors, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 42, is incorporated by reference.
(v) Code of Ethics for Westfield Capital Management, Inc. is filed herewith.
(vi) Code of Ethics for Todd Investment Advisors, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 41, is incorporated by reference.
(vii) Code of Ethics for Mastrapasqua Asset Management, Inc. is filed herewith.
(viii) Code of Ethics for The TCW Group, Inc. is filed herewith.
(ix) Code of Ethics for Bjurman, Barry & Associates, which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 48 is hererby incorporated by reference.
(x) Code of Ethics for Longwood Investment Advisors, Inc., which was filed as an Exhibit to Registrant's Post-Effective Amendment No. 48 is hereby incorporated by reference.
(xi) Code of Ethics for Navellier & Associates is filed herewith.
(b) The Registrant maintains a mutual fund and investment advisory professional and directors and officers liability policy. The policy provides coverage to the Registrant, its trustees and officers, Touchstone Advisors, Inc. ("Touchstone"), Fort Washington Investment Advisors, Inc. and Todd Investment Advisors, Inc. Coverage under the policy includes losses by reason of any act error, omission,
misstatement, misleading statement, neglect or breach of duty. The Registrant may not pay for insurance which protects the Trustees and officers against liabilities |
rising from action involving willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their offices.
The Advisory Agreement and the Subadvisory Agreements provide that Touchstone Advisors, Inc.(or a Subadvisor) shall not be liable for any act or omission in the course of rendering services, absent willful misfeasance, bad faith or gross negligence or reckless disregard by Touchstone (or a Subadvisor) of its obligations under the Agreement.
A. TOUCHSTONE ADVISORS, INC. (the "Advisor") is a registered investment adviser which provides investment advisory services to the Funds. The Advisor also serves as the investment adviser to Touchstone Investment Trust, Touchstone Tax-Free Trust and Touchstone Variable Series Trust, registered investment companies.
The following list sets forth the business and other connections of the directors and executive officers of the Advisor. Unless otherwise noted, the address of the corporations listed below is 221 East Fourth Street, Cincinnati, Ohio 45202.
(1) Jill T. McGruder, Chief Executive Officer and Director of the Advisor.
(a) A Director of Capital Analysts Incorporated, 3 Radnor Corporate Center, Radnor, PA, an investment adviser and broker-dealer, IFS Fund Distributors, Inc., a broker- dealer, Integrated Fund Services, Inc., a transfer agent and Touchstone Securities, Inc., a broker-dealer.
(b) President, Chief Executive Officer and a Director of IFS Financial Services, Inc., a holding company.
(c) President and a Director of IFS Agency Services, Inc., an insurance agency, W&S Financial Group Distributors, Inc., an insurance agency, IFS Systems, Inc., an information systems provider, 400 Broadway, Cincinnati, Ohio.
(d) Senior Vice President of The Western & Southern Life Insurance Company, 400 Broadway, Cincinnati, Ohio, an insurance company.
(e) Senior Vice President and Director of Fort Washington Brokerage Services, Inc., 400 Broadway, Cincinnati, Ohio, a broker-dealer.
(f) President and Trustee of Touchstone Strategic Trust, Touchstone Investment Trust, Touchstone Tax-Free Trust and Touchstone Variable Series Trust.
(g) President of Touchstone Advisors, Inc. and Touchstone Securities, Inc. until February 2004.
(2) James R. Grifo, President of the Advisor
(a) President of Touchstone Securities, Inc.
(b) Managing Director, Deutsche Asset Management, 885 Third Avenue, New York, NY until 2003
(3) Patricia J. Wilson, Chief Compliance Officer of the Advisor
(a) Chief Compliance Officer of Touchstone Securities, Inc.
(4) Donald J. Wuebbling, Chief Legal Officer, Secretary and a Director of the Advisor
(a) Director of Touchstone Securities, Inc., IFS Agency Services, Inc., W&S Financial Group Distributors, Inc. IFS Systems, Inc., Integrated Fund Services, Inc., IFS Holdings, Inc., Capital Analysts Incorporated, Integrity Life Insurance Company, 515 West Market Street, Louisville, KY 40202, National Integrity Life Insurance Company, 515 West Market Street, Louisville, KY 40202 and WestAd Inc., 400 Broadway, Cincinnati, OH 45202
(b) Vice President and General Counsel of The Western and Southern Life Insurance Company
(c) Secretary of Fort Washington Investment Advisors, Inc., 420 E. Fourth Street, Cincinnati, OH 45202 and IFS Financial Services, Inc.
(d) Senior Vice President and Director of Fort Washington Brokerage Services, Inc., a broker-dealer
(e) Senior Vice President and Secretary of Columbus Life
Insurance Company, 400 East Fourth Street, Cincinnati,
OH 45202
(f) Secretary and a Director of Eagle Realty Group, LLC, 421 East Fourth Street, Cincinnati, OH 45202 and IFS Financial Services, Inc.
(g) Assistant Secretary and a Director of Eagle Realty
Investments, Inc., 421 East Fourth Street, Cincinnati,
OH 45202
(5) Richard K. Taulbee, Vice President of the Advisor
(a) Vice President of IFS Financial Services, Inc., IFS Agency Services, Inc., W&S Financial Group Distributors, Inc., Touchstone Securities, Inc., Capital Analysts Incorporated, Eagle Realty Investments, Inc., Fort Washington Brokerage Services, Inc., IFS Fund Distributors, Inc., IFS Systems, Inc. and WestAd Inc.
(b) Assistant Treasurer of Fort Washington Investment Advisors, Inc.
(6) James J. Vance, Vice President & Treasurer of the Advisor
(a) Vice President & Treasurer of The Western and Southern Life Insurance Company, Fort Washington Investment Advisors, Inc., IFS Financial Services, Inc., IFS Agency Services, Inc., W&S Financial Group Distributors, Inc., IFS Systems, Inc., Touchstone Securities, Inc., Columbus Life Insurance Company, Eagle Realty Group, LLC, Eagle Realty Investments, Inc., Integrity Life Insurance Company, National Integrity Life Insurance Company and WestAd Inc.
(b) Treasurer of Fort Washington Brokerage Services, Inc.
(7) Terrie A. Wiedenheft - Chief Financial Officer of the Advisor
(a) Senior Vice President, Chief Financial Officer and Treasurer of Integrated Fund Services, Inc., Fort Washington Brokerage Services, Inc. and IFS Fund Distributors, Inc.
(b) Chief Financial Officer of IFS Financial Services, Inc. and Touchstone Securities, Inc.
(c) Treasurer & Controller of Touchstone Investment Trust, Touchstone Tax-Free Trust, Touchstone Strategic Trust and Touchstone Variable Series Trust.
(d) Assistant Treasurer of Fort Washington Investment Advisors, Inc.
(8) James N. Clark - A Director of the Advisor
(a) A Director of The Western and Southern Life Insurance Company, Western-Southern Life Assurance Company, Western & Southern Financial Group, Inc., Columbus Life Insurance Company, Eagle Realty Group, LLC, Eagle Realty Investments, Inc., IFS Financial Services, Inc., IFS Agency Services, Inc., IFS Systems, Inc., Touchstone Securities, Inc. and W&S Financial Group Distributors, Inc.
(b) Director and Vice President of Capital Analysts Incorporated
(c) Director and Secretary of WestAd Inc.
(9) William A. Dent, Senior Vice President, Product Management and Marketing of the Advisor
(a) Senior Vice President, McDonald Financial Group, 800 Superior Avenue, Cleveland, OH until 2004.
B. FORT WASHINGTON INVESTMENT ADVISORS, INC.("Ft. Washington") is a registered investment adviser which provides sub-advisory services to the Value Plus Fund. Ft. Washington serves as the Sub-Advisor to Touchstone Investment Trust, Touchstone Tax-Free Trust and certain series of Touchstone Variable Series Trust. Ft. Washington also provides investment advice to institutional and individual clients. The address of Ft. Washington is 420 East Fourth Street, Cincinnati, OH 45202.
The following list sets forth the business and other connections of the directors and executive officers of Ft. Washington.
(1) Maribeth S. Rahe, President and a Director of Ft. Washington
(a) Director of Todd Investment Advisors, Inc., 3160 National City Tower, Louisville, KY 40202
(b) President of United States Trust Company of New York until October 2003.
(2) Nicholas P. Sargen, Senior Vice President, Chief Investment Officer and a Director of Ft. Washington
(a) Director of Todd Investment Advisors, Inc.
(b) Managing Director, Global Marketing Strategies of JP Morgan Chase until April 2003
(3) John F. Barrett, Chairman and Director of Ft. Washington
(a) President and Chief Executive Officer of The Western and Southern Life Insurance Company, Western- Southern Life Assurance Company and Western & Southern Financial Group, Inc.
(b) Trustee of Touchstone Variable Series Trust, Touchstone Strategic Trust, Touchstone Investment Trust and Touchstone Tax-Free Trust
(c) A Director and Chairman of Columbus Life Insurance Company, Integrity Life Insurance Company and National Integrity Life Insurance Company
(d) A Director of Eagle Realty Group, LLC, Eagle Realty Investments, Inc., Integrated Fund Services, Inc. and IFS Holdings, Inc.
(e) Director, Chairman & CEO of WestAd, Inc.
(f) President and Trustee of Western & Southern Foundation
(4) James J. Vance, Vice President & Treasurer of Ft. Washington
See biography above
(5) Rance G. Duke, Vice President and Senior Portfolio Manager of Ft. Washington
(a) Second Vice President and Senior Portfolio Manager of The Western and Southern Life Insurance Company
(6) John C. Holden, Vice President and Senior Portfolio Manager of Ft. Washington
(7) Charles E. Stutenroth IV, Vice President and Senior Portfolio Manager - Private Investment Counsel of Ft.
Washington
(8) Brendan M. White, Vice President and Senior Portfolio Manager of Ft. Washington
(9) John J. Goetz, Vice President and Senior Portfolio Manager of Ft. Washington
(10) Timothy J. Policinski, Vice President and Senior Portfolio Manager of Ft. Washington
(11) James A. Markley, Managing Director - Private Investment Counsel of Ft. Washington
(12) Roger M. Lanham - Vice President and Senior Portfolio Manager of Ft. Washington
(13) Augustine A. Long, Managing Director, Marketing of Ft.
Washington
(14) John J. O'Connor, Vice President/Research of Ft. Washington
(15) Thomas L. Finn, Vice President and Senior Portfolio Manager of Ft. Washington
(a) Vice President and Senior Portfolio Manager of Provident Financial Group, One East Fourth Street, Cincinnati, OH until May 2002.
(16) Donald J. Wuebbling - Secretary and Director of Ft.
Washington
see biography above
(17) Michele Hawkins, Chief Compliance Officer of Ft. Washington
(18) Stephen A. Baker, Vice President of Ft. Washington
(19) John J. Discepoli, Vice President of Ft. Washington
(20) Margaret C. Bell, Vice President -Sales and Client Services of Ft. Washington
(21) Robert L. Walker, a Director of Ft. Washington
(a) Director of Eagle Realty Group, LLC, Integrated Fund Services, Inc., Integrity Life Insurance Company and National Integrity Life Insurance Company
(22) Mark A. Frietch, Vice President of Ft. Washington
C. MASTRAPASQUA ASSET MANAGEMENT,INC.("MASTRAPASQUA")is a registered investment adviser providing investment advisory services to the Growth Opportunities Fund. The address of Mastrapasqua is 814 Church Street, Suite 600, Nashville, Tennessee. The following are officers of Mastrapasqua:
(1) Frank Mastrapasqua - Chairman, Chief Executive Officer and Portfolio Manager
(2) Thomas A. Trantum - President, Chief Operating Officer and Portfolio Manager
(3) Mauro M. Mastrapasqua - First Vice President and Associate Portfolio Manager
D. TCW INVESTMENT MANAGEMENT COMPANY ("TCW") is a registered investment adviser providing sub-advisory services to the Emerging Growth Fund. The address of TCW 865 South Figueroa Street, Los Angeles California 90017. The following are the executive officers and directors of TCW:
(1) Alvin R. Albe - Director, President and CEO
(2) Thomas E. Larkin - Director and Vice Chairman
(3) Marc I. Stern - Director and Chairman
(4) William C. Sonneborn - Executive Vice President & Chief Operating Officer
(5) Michael E. Cahill - General Counsel & Secretary
(6) David S. Devito - Chief Financial Officer
(7) Hilary G. Lord - Chief Compliance Officer
(8) Robert D. Beyer, Executive Vice President and Chief Investment Officer
E. WESTFIELD CAPITAL MANAGEMENT COMPANY, LLC ("WESTFIELD") is a registered adviser providing sub-advisory services to the Emerging Growth Fund. The address of Westfield is One Financial Center, Boston, MA 02111. The following are executive officers and directors of Westfield:
(1) Charles M. Hazard - Director
(2) Arthur J. Bauernfeind - Director, Chairman and Chief
Executive Officer
(3) William A. Muggia - Director, President and Chief
Investment Officer
|
(4) Timothy L. Vaill - Director
(5) Karen A. Digravio - Director, Chief Financial Officer, Chief Compliance Officer and Executive Vice President
F. TODD INVESTMENT ADVISORS, INC. ("TODD") is a registered adviser providing sub-advisory services to the Enhanced 30 Fund. The address of Todd is 3160 National City Tower, Louisville, KY 40202. The following are officers and directors of Todd:
(1) Bosworth M. Todd - Chairman and Director
(2) Robert P. Bordogna - President, Chief Executive Officer, Chief Investment Officer
(3) Maribeth S. Rahe - Director
(4) Curtiss M. Scott, Jr. - Partner, Senior Equity Portfolio Manager
(5) Gayle S. Dorsey - Partner, Private Client Services
(6) Margaret C. Bell - Partner, Director of Marketing
(7) Jennifer J. Doss, Partner, Secretary/Treasurer
(8) Margaret C. Bell, Partner, Director of Marketing
(9) John J. White, Partner, Director of Research
(10) John C. Feduchak, Director of Managed Account Programs
(11) Nicholas P. Sargen- Director
(12) Christopher A. Bennett- Regional Director of Managed Account Programs
H. BJURMAN, BARRY & ASSOCIATES ("BJURMAN") is a registered adviser providing sub-advisory services to the Small Cap Growth Fund and the Micro Cap Growth Fund. The address of Bjurman is 10100 Santa Monica Boulevard, Suite 1200, Los Angeles, CA. The following are officers and directors of Bjurman:
(1) G. Andrew Bjurman, President, Chief Executive Officer and Director
(2) O. Thomas Barry III, Senior Executive Vice President, Chief Investment Officer and Director
(3) Kathy K. Pommet - Chief Compliance Officer
I. LONGWOOD INVESTMENT ADVISORS, INC. ("LONGWOOD") is a registered advisor providing sub-advisory services to the Small Cap Growth Fund. The address of Longwood is One International Place, Suite 240, Boston, MA. The following are officers of Longwood:
(1) Robert A. Davidson, President
(2) Leonard M. Sorgini, Chief Financial Officer and Chief Compliance Officer
(3) Regan I. Royston, Director of Operations
(4) Jennifer M. Pawloski - Director of Research
(5) Kathleen J. Jordan - Director of Marketing
(6) Eileen M. Madden - Research Analyst
J. NAVELLIER & ASSOCIATES, Inc. ("Navellier") is a registered advisor providing sub-advisory services to the Large Cap Growth Fund. The address of Navellier is One East Liberty Street, Third Floor, Reno Nevada. The following are officers of Navellier.
(1) Louis G. Navellier, President
(2) Arjen P. Kuyper, Chief Operating Officer
(3) Alan K. Alpers, Vice President
(4) Keith M. Basso, Vice President
(5) James H. O'Leary, Vice President
(6) Paula M. Boyd, Vice President
(a) Touchstone Securities, Inc. also acts as underwriter for Touchstone Investment Trust, Touchstone Tax-Free Trust and Touchstone Variable Series Trust. Unless otherwise noted, the address of the persons named below is 221 East Fourth Street, Cincinnati, Ohio 45202. *The address is 400 Broadway, Cincinnati, Ohio 45202.
POSITION POSITION
WITH WITH
(b) NAME UNDERWRITER REGISTRANT
----- ----------- ----------
James H. Grifo President Vice President
Jill T. McGruder Director Trustee/President
James N. Clark* Director None
Donald J. Wuebbling* Director None
Patricia J. Wilson Chief Compliance None
Officer
Richard K. Taulbee* Vice President None
James J. Vance* Vice President & None
Treasurer
Terrie A. Wiedenheft Chief Financial Controller/
Officer Treasurer
Robert F. Morand* Secretary None
|
(c) None |
(b) Within five business days after receipt of a written application by shareholders holding in the aggregate at least 1% of the shares then outstanding or shares then having a net asset value of $25,000, whichever is less, each of whom shall have been a shareholder for at least six months prior to the date of application (hereinafter the "Petitioning Shareholders"), requesting to communicate with other shareholders with a view to obtaining signatures to a request for a meeting for the purpose of voting upon removal of any Trustee of the Registrant, which application shall be accompanied by a form of communication and request which such Petitioning Shareholders wish to transmit, Registrant will:
(i) provide such Petitioning Shareholders with access to a list of the names and addresses of all shareholders of the Registrant; or
(ii) inform such Petitioning Shareholders of the approximate number of shareholders and the estimated costs of mailing such communication, and to undertake such mailing promptly after tender by such Petitioning Shareholders to the Registrant of the material to be mailed and the reasonable expenses of such mailing.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act, the Registrant certifies that it meets the requirements for effectiveness of this registration statement under rule 485(b) under the Securities Act and has duly caused this registration statement to be signed on its behalf by the undersigned, duly authorized, in the City of Cincinnati, State of Ohio, on the 30th day of July, 2004.
TOUCHSTONE STRATEGIC TRUST
/s/ Jill T. McGruder By:--------------------------- Jill T. McGruder President |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the 30th day of July 2004.
/s/ Terrie A. Wiedenheft ----------------------- Controller & Treasurer TERRIE A. WIEDENHEFT |
By: /s/ Tina H. Bloom ----------------------- Tina H. Bloom *Attorney-in-Fact July 30, 2004 |
EXHIBIT INDEX
1. Amendment to Restated Agreement and Declaration of Trust
2. Advisory Agreement with Touchstone Advisors, Inc.
3. Sub-Advisory Agreement with Navellier & Associates, Inc. for the Large Cap Growth Fund
4. Sub-Advisory Agreement with Bjurman, Barry & Associates for the Micro Cap Growth Fund
5. Form of Underwriter's Dealer Agreement
6. Amendments 5, 6 and 7 to the Sponsor Agreement
7. Consent of Independent Accountants
8. Code of Ethics of Mastrapasqua Asset Management
9. Code of Ethics of The TCW Group, Inc.
10. Code of Ethics of Navellier & Associates, Inc.
11. Code of Ethics of Westfield Capital Management LLC
TOUCHSTONE STRATEGIC TRUST
AMENDMENT TO RESTATED AGREEMENT AND DECLARATION OF TRUST
The undersigned hereby certifies that she is the duly elected Secretary of Touchtone Strategic Trust (the "Trust") and that pursuant to Section 4.1 of the Restated Agreement and Declaration of Trust of the Trust, the Trustees, at a meeting held February 19, 2004, at which a quorum was present, adopted the following resolutions:
RESOLUTIONS ESTABLISHING NEW SERIES: THE MICRO CAP GROWTH FUND
"RESOLVED, that a new series of shares of the Trust be, and it hereby is established, and that such new series be, and hereby is, designated the `Micro Cap Growth Fund'; and
FURTHER RESOLVED, that the relative rights and preferences of the new series of shares shall be those rights and preferences set forth in Section 4.2 of the Trust's Restated Agreement and Declaration of Trust; and
FURTHER RESOLVED, that the Trust be, and it hereby is, authorized to issue and sell shares of the Micro Cap Growth Fund from time to time at its price per share of not less than the respective net asset value thereof; and
FURTHER RESOLVED, that the officers of the Trust be, and they hereby are, authorized and empowered to take any and all actions and to execute any and all documents and instruments, which they or any one of them in his sole discretion deem necessary, appropriate or desirable to implement the foregoing resolutions."
RESOLUTIONS ESTABLISHING NEW CLASS I SHARES FOR THE SMALL CAP GROWTH FUND
"WHEREAS, the issuance of Class I shares by the Small Cap Growth Fund (the `Fund') of the Trust is in the best interests of the Fund and its shareholders;
THEREFORE, BE IT RESOLVED, that the Trust be, and it hereby is, authorized to issue and sell Class I shares of the Fund from time to time at their respective prices per share of not less than the respective net asset values thereof; and
FURTHER RESOLVED, that such issuance and sale be made substantially in conformity with and subject to all of the provisions, terms and conditions set forth in the Prospectus and Statement of Additional Information of the Fund as they may be amended and/or supplemented from time to time; and
FURTHER RESOLVED, that when any of the Class I shares of the Fund shall have been so issued and sold, they shall be deemed to be validly issued, fully paid and nonassessable by the Trust; and
FURTHER RESOLVED, that the officers of the Trust be, and they hereby are, authorized and empowered to take any and all actions and to execute any and all documents and instruments, which they or any one of them in his sole discretion deem necessary, appropriate or desirable to implement the foregoing resolutions."
The undersigned certifies that the actions to effect the foregoing Amendment were duly taken in the manner provided by the Restated Agreement and Declaration of Trust, that said Amendment is to be effective as of February 19, 2004, and that she is causing this Certificate to be signed and filed as provided in Section 7.4 of the Restated Agreement and Declaration of Trust.
WITNESS my hand this 14th day of April 2004.
/s/ Tina H. Bloom -------------------------------- Tina H. Bloom, Secretary |
INVESTMENT ADVISORY AGREEMENT
TOUCHSTONE STRATEGIC TRUST
INVESTMENT ADVISORY AGREEMENT, dated as of May 1, 2000, amended December 31, 2002, by and between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and TOUCHSTONE STRATEGIC TRUST, a Massachusetts business trust created pursuant to an Agreement and Declaration of Trust dated November 18, 1982, as amended from time to time (the "Trust").
WHEREAS, the Trust is an open-end diversified management investment company registered under the Investment Company Act of 1940, as amended, (the "1940 Act"); and
WHEREAS, shares of beneficial interest in the Trust are divided into separate series (each, along with any series which may in the future be established, a "Fund"); and
WHEREAS, the Trust desires to avail itself of the services, information, advice, assistance and facilities of an investment advisor and to have an investment advisor perform for it various investment advisory and research services and other management services; and
WHEREAS, the Advisor is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and desires to provide investment advisory services to the Trust;
NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is agreed as follows:
1. EMPLOYMENT OF THE ADVISOR. The Trust hereby employs the Advisor to manage the investment and reinvestment of the assets of each Fund subject to the control and direction of the Trust's Board of Trustees, for the period on the terms hereinafter set forth. The Advisor hereby accepts such employment and agrees during such period to render the services and to assume the obligations herein set forth for the compensation herein provided. The Advisor shall for all purposes herein be deemed to be independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISOR. In providing the services and assuming the obligations set forth herein, the Advisor may, at its expense, employ one or more sub-advisors for any Fund. Any agreement between the Advisor and a sub-advisor shall be subject to the renewal, termination and amendment provisions of paragraph 10 hereof. The Advisor undertakes to provide the following services and to assume the following obligations:
a) The Advisor will manage the investment and reinvestment of the assets of each Fund, subject to and in accordance with the respective investment objectives and policies of each Fund and any directions which the Trust's Board of Trustees may issue from time to time. In pursuance of the foregoing, the Advisor may engage separate investment advisors ("Sub-Advisor(s)") to make all determinations with respect to the investment of the assets of each Fund, to effect the purchase and sale of portfolio securities and to take such steps as may be necessary to implement the same. Such determination and services by each Sub-Advisor shall also include determining the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the portfolio securities shall be exercised. The Advisor shall, and shall cause each Sub-Advisor to, render regular reports to the Trust's Board of Trustees concerning the Trust's and each Fund's investment activities.
b) The Advisor shall, or shall cause the respective Sub-Advisor(s) to place orders for the execution of all portfolio transactions, in the name of the respective Fund and in accordance with the policies with respect thereto set forth in the Trust's registration statements under the 1940 Act and the Securities Act of 1933, as such registration statements may be amended from time to time. In connection with the placement of orders for the execution of portfolio transactions, the Advisor shall create and maintain (or cause the Sub-Advisors to create and maintain) all necessary brokerage records for each Fund, which records shall comply with all applicable laws, rules and regulations, including but not limited to records required by Section 31(a) of the 1940 Act. All records shall be the property of the Trust and shall be available for inspection and use by the Securities and Exchange Commission (the "SEC"), the Trust or any person retained by the Trust. Where applicable, such records shall be maintained by the Advisor (or Sub-Advisor) for the periods and in the places required by Rule 31a-2 under the 1940 Act.
c) In the event of any reorganization or other change in the Advisor, its investment principals, supervisors or members of its investment (or comparable) committee, the Advisor shall give the Trust's Board of Trustees written notice of such reorganization or change within a reasonable time (but not later than 30 days) after such reorganization or change.
d) The Advisor shall bear its expenses of providing services to the
Trust pursuant to this Agreement except such expenses as are
undertaken by the Trust. In addition, the Advisor shall pay the
salaries and fees, if any, of all Trustees, officers and
employees of the Trust who are affiliated persons, as defined in
Section 2(a)(3) of the 1940 Act, of the Advisor.
e) The Advisor will manage, or will cause the Sub-Advisors to manage, the Fund assets and the investment and reinvestment of such assets so as to comply with the provisions of the 1940 Act and with Subchapter M of the Internal Revenue Code of 1986, as amended.
3. EXPENSES. The Trust shall pay the expenses of its operation, including
but not limited to (i) charges and expenses for Trust accounting, pricing and
appraisal services and related overhead, (ii) the charges and expenses of the
Trust's auditors; (iii) the charges and expenses of any custodian, transfer
agent, plan agent, dividend disbursing agent and registrar appointed by the
Trust with respect to the Funds; (iv) brokers' commissions, and issue and
transfer taxes, chargeable to the Trust in connection with securities
transactions to which the Trust is a party; (v) insurance premiums, interest
charges, dues and fees for Trust membership in trade associations and all taxes
and fees payable by the Trust to federal, state or other governmental agencies;
(vi) fees and expenses involved in registering and maintaining registrations of
the Trust and/or shares of the Trust with the SEC, state or blue sky securities
agencies and foreign countries, including the preparation of Prospectuses and
Statements of Additional Information for filing with the SEC; (vii) all expenses
of meetings of Trustees and of shareholders of the Trust and of preparing,
printing and distributing prospectuses, notices, proxy statements and all
reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; and (x) interest on borrowed money, if any.
4. COMPENSATION OF THE ADVISOR.
a) As compensation for the services rendered and obligations assumed hereunder by the Advisor, the Trust shall pay to the Advisor monthly a fee that is equal on an annual basis to that percentage of the average daily net assets of each Fund set forth on Schedule 1 attached hereto (and with respect to any future Fund, such percentage as the Trust and the Advisor may agree to from time to time). Such fee shall be computed and accrued daily. If the Advisor serves as investment advisor for less than the whole of any period specified in this Section 4a, the compensation to the Advisor shall be prorated. For purposes of calculating the Advisor's fee, the daily value of each Fund's net assets shall be computed by the same method as the Trust uses to compute the net asset value of that Fund.
b) The Advisor will pay all fees owing to each Sub-Advisor, and the Trust shall not be obligated to the Sub-Advisors in any manner with respect to the compensation of such Sub-Advisors.
c) The Advisor reserves the right to waive all or a part of its fee.
5. ACTIVITIES OF THE ADVISOR. The services of the Advisor to the Trust hereunder are not to be deemed exclusive, and the Advisor shall be free to render similar services to others. It is understood that the Trustees and officers of the Trust are or may become interested in the Advisor as stockholders, officers or otherwise, and that stockholders and officers of the Advisor
are or may become similarly interested in the Trust, and that the Advisor may become interested in the Trust as a shareholder or otherwise.
6. USE OF NAMES. The Trust will not use the name of the Advisor in any prospectus, sales literature or other material relating to the Trust in any manner not approved prior thereto by the Advisor; except that the Trust may use such name in any document which merely refers in accurate terms to its appointment hereunder or in any situation which is required by the SEC or a state securities commission; and provided further, that in no event shall such approval be unreasonably withheld. The Advisor will not use the name of the Trust in any material relating to the Advisor in any manner not approved prior thereto by the Trust; except that the Advisor may use such name in any document which merely refers in accurate terms to the appointment of the Advisor hereunder or in any situation which is required by the SEC or a state securities commission. In all other cases, the parties may use such names to the extent that the use is approved by the party named, it being agreed that in no event shall such approval be unreasonably withheld.
The Trustees of the Trust acknowledge that the Advisor has reserved for itself the rights to the name "Touchstone Strategic Trust" (or any similar names) and that use by the Trust of such name shall continue only with the continuing consent of the Advisor, which consent may be withdrawn at any time, effective immediately, upon written notice thereof to the Trust.
7. LIMITATION OF LIABILITY OF THE ADVISOR.
a) Absent willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part
of the Advisor, the Advisor shall not be subject to liability to
the Trust or to any shareholder in any Fund 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. As used in this
Section 7, the term "Advisor" shall include Touchstone Advisors,
Inc. and/or any of its affiliates and the directors, officers and
employees of Touchstone Advisors, Inc. and/or any of its
affiliates.
b) The Trust will indemnify the Advisor against, and hold it harmless from, any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) resulting from acts or omissions of the Trust. Indemnification shall be made only after: (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the Trust was liable for the damages claimed or (ii) in the absence of such a decision, a reasonable determination based upon a review of the facts, that the Trust was liable for the damages claimed, which determination shall be made by either (a) the vote of a majority of a quorum of Trustees of the Trust who are neither "interested persons" of the Trust nor parties to the proceeding ("disinterested non-party Trustees") or (b) an independent legal counsel satisfactory to the parties hereto, whose determination shall be set forth in a written opinion. The Advisor shall be entitled to advances from the Trust for payment of the
reasonable expenses incurred by it in connection with the matter as to which it is seeking indemnification in the manner and to the fullest extent that would be permissible under the applicable provisions of the General Corporation Law of Ohio. The Advisor shall provide to the Trust a written affirmation of its good faith belief that the standard of conduct necessary for indemnification under such law has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (i) the Advisor shall provide security in form and amount acceptable to the Trust for its undertaking; (ii) the Trust is insured against losses arising by reason of the advance; or (iii) a majority of a quorum of the Trustees of the Trust, the members of which majority are disinterested non-party Trustees, or independent legal counsel in a written opinion, shall have determined, based on a review of facts readily available to the Trust at the time the advance is proposed to be made, that there is reason to believe that the Advisor will ultimately be found to be entitled to indemnification.
8. LIMITATION OF TRUST'S LIABILITY. The Advisor acknowledges that it has received notice of and accepts the limitations upon the Trust's liability set forth in its Declaration of Trust. The Advisor agrees that the Trust's obligations hereunder in any case shall be limited to the Trust and to its assets and that the Advisor shall not seek satisfaction of any such obligation from the holders of the shares of any Fund nor from any Trustee, officer, employee or agent of the Trust.
9. FORCE MAJEURE. The Advisor shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of communication or power supply. In the event of equipment breakdowns beyond its control, the Advisor shall take reasonable steps to minimize service interruptions but shall have no liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a) This Agreement shall continue in effect, unless sooner terminated as hereinafter provided, for a period of one year from the date hereof and it shall continue indefinitely thereafter as to each Fund, provided that such continuance is specifically approved by the parties hereto and, in addition, at least annually by (i) the vote of holders of a majority of the outstanding voting securities of the affected Fund or by vote of a majority of the Trust's Board of Trustees and (ii) by the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of the Advisor, cast in person at a meeting called for the purpose of voting on such approval.
b) This Agreement may be terminated at any time, with respect to any Fund(s), without payment of any penalty, by the Trust's Board of Trustees or by a vote of the majority of the outstanding voting securities of the affected Fund(s)
upon 60 days' prior written notice to the Advisor and by the Advisor upon 60 days' prior written notice to the Trust.
c) This Agreement may be amended at any time by the parties hereto, subject to approval by the Trust's Board of Trustees and, if required by applicable SEC rules and regulations, a vote of the majority of the outstanding voting securities of any Fund affected by such change. This Agreement shall terminate automatically in the event of its assignment.
d) The terms "assignment," "interested persons" and "majority of the outstanding voting securities" shall have the meaning set forth for such terms in the 1940 Act.
11. SEVERABILITY. 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.
12. MISCELLANEOUS. Each party agrees to perform such further actions and execute such further documents as are necessary to effectuate the purposes hereof. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Ohio. The captions in this Agreement are included for convenience only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, all as of the day and year first above written. Pursuant to the Trust's Agreement and Declaration of Trust, dated as of November 18, 1982, the obligations of this Agreement are not binding upon any of the Trustees or shareholders of the Trust individually, but bind only the Trust estate.
TOUCHSTONE STRATEGIC TRUST
By: /s/ Patrick T. Bannigan
----------------------------
Patrick T. Bannigan
President
|
TOUCHSTONE ADVISORS, INC.
By: /s/ Michael S. Spangler
----------------------------
Michael S. Spangler
Vice President
|
EFFECTIVE JUNE 22, 2004
SCHEDULE 1
LARGE CAP GROWTH FUND
The Fund pays the Advisor a fee equal to the annual rate of 0.75% on the first $200 million of average daily net assets; 0.70% of the next $300 million of average daily net assets; and 0.50% of such assets in excess of $500 million.
GROWTH OPPORTUNITIES FUND
The Fund pays the Advisor a fee equal to the annual rate of 1.00% on the first $50 million of average daily net assets; 0.90% of the next $50 million of average daily net assets; 0.80% of the next $100 million of average daily net assets; and 0.75% of such assets in excess of $200 million.
EMERGING GROWTH FUND
The Fund pays the Advisor a fee equal to the annual rate of 0.80% of average daily net assets.
ENHANCED 30 FUND
The Fund pays the Advisor a fee equal to the annual rate of 0.65% on the first $100 million of average daily net assets; 0.60% of the next $100 million of average daily net assets; 0.55% of the next $100 million of average daily net assets; and 0.50% of such assets in excess of $300 million.
VALUE PLUS FUND
The Fund pays the Advisor a fee equal to the annual rate of 0.75% on the first $100 million of average daily net assets; 0.70% of the next $100 million of average daily net assets; 0.65% of the next $100 million of average daily net assets; and 0.60% of such assets in excess of $300 million.
SMALL CAP GROWTH FUND
The Fund pays the Advisor a fee equal to the annual rate of 1.25% of average daily net assets.
MICRO CAP GROWTH FUND
The Fund pays the Advisor a fee equal to the annual rate of 1.25% of average daily net assets.
SUB-ADVISORY AGREEMENT
LARGE CAP GROWTH FUND
TOUCHSTONE STRATEGIC TRUST
This SUB-ADVISORY AGREEMENT is made as of _________, 2004, by and between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and NAVELLIER & ASSOCIATES, INC., a Delaware corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and has been retained by Touchstone Strategic Trust (the "Trust"), a Massachusetts business trust organized pursuant to an Agreement and Declaration of Trust dated November 18, 1982 and registered as an open-end diversified management investment company under the Investment Company Act of 1940 (the "1940 Act"), to provide investment advisory services to the Large Cap Growth Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it with portfolio management services in connection with the Advisor's investment advisory activities on behalf of the Fund, and the Sub-Advisor is willing to furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is agreed as follows:
1. Employment of the Sub-Advisor. In accordance with and subject to the Investment Advisory Agreement between the Trust and the Advisor, attached hereto as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the Sub-Advisor to manage the investment and reinvestment of those assets of the Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control and direction of the Advisor and the Trust's Board of Trustees, for the period and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such employment and agrees during such period to render the services and to perform the duties called for by this Agreement for the compensation herein provided. The Sub-Advisor shall at all times maintain its registration as an investment advisor under the Investment Advisers Act of 1940 and shall otherwise comply in all material respects with all applicable laws and regulations, both state and federal. The Sub-Advisor shall for all purposes herein be deemed an independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment of the assets of the Fund, subject to and in accordance with the investment objectives, policies and restrictions of the Fund and any directions which the Advisor or the Trust's Board of Trustees may give from time to time with respect to the Fund. In furtherance of the foregoing, the Sub-Advisor will make all determinations with respect to the investment of the assets of the Fund and the purchase and sale of portfolio securities and shall take such steps as may be necessary or advisable to implement the same. The Sub-Advisor also will determine the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the portfolio securities will be exercised. The Sub-Advisor will render regular reports to the Trust's Board of Trustees and to the Advisor (or such other advisor or advisors as the Advisor shall engage to assist it in the evaluation of the performance and activities of the Sub-Advisor). Such reports shall be made in such form and manner and with respect to such matters regarding the Fund and the Sub-Advisor as the Trust or the Advisor shall from time to time request.
b. The Sub-Advisor shall provide support to the Advisor with respect to the marketing of the Fund, including but not limited to: (i) permission to use the Sub-Advisor's name as provided in Section 5, (ii) permission to use the past performance and investment history of the Sub-Advisor as the same is applicable to the Fund, (iii) access to the individual(s) responsible for day-to-day management of the Fund for marketing conferences, teleconferences and other activities involving the promotion of the Fund, subject to the reasonable request of the Advisor, (iv) permission to use biographical and historical data of the Sub-Advisor and individual manager(s), and (v) permission to use the names of clients to which the Sub-Advisor provides investment management services, subject to any restrictions imposed by clients on the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with all applicable laws,
rules and regulations, including but not limited to records required by
Section 31(a) of the 1940 Act. All records shall be the property of the
Trust and shall be available for inspection and use by the Securities
and Exchange Commission (the "SEC"), the Trust or any person retained
by the Trust. Where applicable, such records shall be maintained by the
Advisor for the periods and in the places required by Rule 31a-2 under
the 1940 Act. When placing orders with brokers and dealers, the
Sub-Advisor's primary objective shall be to obtain the most favorable
price and execution available for the Fund, and in placing such orders
the Sub-Advisor may consider a number of factors, including, without
limitation, the overall direct net economic result to the Fund
(including commissions, which may not be the lowest available but
ordinarily should not be higher than the generally prevailing competitive range), the financial strength and stability of the broker, the efficiency with which the transaction will be effected, the ability to effect the transaction at all where a large block is involved and the availability of the broker or dealer to stand ready to execute possibly difficult transactions in the future. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc., and subject to seeking the most favorable price and execution, the Sub-Advisor may give consideration to sales of shares of the Fund as a factor in the selection of brokers and dealers to execute portfolio transactions of the Fund. The Sub-Advisor is specifically authorized, to the extent authorized by law (including, without limitation, Section 28(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), to pay a broker or dealer who provides research services to the Sub-Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting such transaction, in recognition of such additional research services rendered by the broker or dealer, but only if the Sub-Advisor determines in good faith that the excess commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer viewed in terms of the particular transaction or the Sub-Advisor's overall responsibilities with respect to discretionary accounts that it manages, and that the Fund derives or will derive a reasonably significant benefit from such research services. The Sub-Advisor will present a written report to the Board of Trustees of the Trust, at least quarterly, indicating total brokerage expenses, actual or imputed, as well as the services obtained in consideration for such expenses, broken down by broker-dealer and containing such information as the Board of Trustees reasonably shall request.
d. In the event of any reorganization or other change in the Sub-Advisor, its investment principals, supervisors or members of its investment (or comparable) committee, the Sub-Advisor shall give the Advisor and the Trust's Board of Trustees written notice of such reorganization or change within a reasonable time (but not later than 30 days) after such reorganization or change.
e. The Sub-Advisor will bear its expenses of providing services to the Fund pursuant to this Agreement except such expenses as are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the investment and reinvestment of such assets so as to comply with the provisions of the 1940 Act and with Subchapter M of the Internal Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties undertaken hereunder by the Sub-Advisor, the Advisor will pay to the Sub-Advisor a monthly fee equal on an annual basis to 0.45% on the first $300 million of the Fund's average daily net assets and 0.40% of such assets in excess of $300 million. Such fee shall be computed and accrued daily. If the Sub-Advisor serves in such capacity for less than the whole of any period specified in this Section 3a, the compensation to the Sub-Advisor shall be prorated. For purposes of calculating the Sub-Advisor's fee, the daily value of the Fund's net assets shall be computed by the same method as the Trust uses to compute the net asset value of the Fund for purposes of purchases and redemptions of shares thereof.
b. The Sub-Advisor reserves the right to waive all or a part of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor may perform investment advisory services for various other clients, including other investment companies. The Sub-Advisor will report to the Board of Trustees of the Trust (at regular quarterly meetings and at such other times as such Board of Trustees reasonably shall request) (i) the financial condition and prospects of the Sub-Advisor, (ii) the nature and amount of transactions affecting the Fund that involve the Sub-Advisor and affiliates of the Sub-Advisor, (iii) information regarding any potential conflicts of interest arising by reason of its continuing provision of advisory services to the Fund and to its other accounts, and (iv) such other information as the Board of Trustees shall reasonably request regarding the Fund, the Fund's performance, the services provided by the Sub-Advisor to the Fund as compared to its other accounts and the plans of, and the capability of, the Sub-Advisor with respect to providing future services to the Fund and its other accounts. At least annually, the Sub-Advisor shall report to the Trustees the total number and type of such other accounts and the approximate total asset value thereof (but not the identities of the beneficial owners of such accounts). The Sub-Advisor agrees to submit to the Trust a statement defining its policies with respect to the allocation of business among the Fund and its other clients.
It is understood that the Sub-Advisor may become interested in the Trust as a shareholder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's statement of financial condition) and will hereafter supply to the Advisor, promptly upon the preparation thereof, copies of all amendments or restatements of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name of the Sub-Advisor in any prospectus, sales literature or other material relating to the Advisor or the Trust in any manner not approved in advance by the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses of its name which merely refer in accurate terms to its appointment hereunder or which are required by the SEC or a state securities commission; and provided further, that in no event shall such approval be unreasonably withheld. The Sub-Advisor shall not use the name of the Advisor or the Trust in any material relating to the Sub-Advisor in any manner not approved in advance by the Advisor or the Trust, as the case may be; provided, however, that the Advisor and the Trust shall each approve all uses of their respective names which merely refer in accurate terms to the appointment of the Sub-Advisor hereunder or which are required by the SEC or a state securities commission; and, provided further, that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be subject to liability to the Advisor, the Trust or to any shareholder in the Fund 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. As used in this Section 6, the term "Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the directors, officers and employees of the Sub-Advisor and/or any of its affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that it has received notice of and accepts the limitations upon the Trust's liability set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under the Advisory Agreement) shall be limited in any event to the assets of the Fund and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from the holders of shares of the Fund nor from any Trustee, officer, employee or agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of communication or power supply. In the event of equipment breakdowns beyond its control, the Sub-Advisor shall take reasonable steps to minimize service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner terminated as hereinafter provided for a period of one year from the date hereof and it shall continue thereafter provided that such continuance is specifically approved by the parties and, in addition, at least annually by (i) the vote of the holders of a majority of the outstanding voting securities (as herein defined) of the Fund or by vote of a majority of the Trust's Board of Trustees and (ii) by the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of either the Advisor or the Sub-Advisor, cast in person at a meeting called for the purpose of voting on such approval.
b. This Agreement may be terminated at any time, without payment of any penalty, (i) by the Advisor, by the Trust's Board of Trustees or by a vote of the majority of the outstanding voting securities of the Fund, in any such case upon not less than 60 days' prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor upon not less than 60 days' prior written notice to the Advisor and the Trust. This Agreement shall terminate automatically in the event of its assignment.
c. This Agreement may be amended at any time by the parties hereto, subject to approval by the Trust's Board of Trustees and, if required by applicable SEC rules and regulations, a vote of the majority of the outstanding voting securities of the Fund affected by such change.
d. The terms "assignment," "interested persons" and "majority of the outstanding voting securities" shall have the meaning set forth for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or shall be found to be invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing addressed and delivered personally (or by telecopy) or mailed postage-paid, to the other party at such address as such other party may designate in accordance with this paragraph for the receipt of such notice. Until further notice to the other party, it is agreed that the address of the Trust and that of the Advisor for this purpose shall be 221 East Fourth Street, Cincinnati, Ohio 45202 and that the address of the Sub-Advisor shall be One East Liberty, Third Floor, Reno, Nevada 89501.
12. MISCELLANEOUS. Each party agrees to perform such further actions and execute such further documents as are necessary to effectuate the purposes hereof. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Ohio. The captions in this Agreement are included for convenience only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Title:
NAVELLIER & ASSOCIATES, INC.
Title:
SUB-ADVISORY AGREEMENT
TOUCHSTONE MICRO CAP GROWTH FUND
TOUCHSTONE STRATEGIC TRUST
This SUB-ADVISORY AGREEMENT is made as of June 21, 2004, by and between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and Bjurman, Barry & Associates, a California corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the Investment Advisers Act of 1940, as amended, and has been retained by Touchstone Strategic Trust (the "Trust"), a Massachusetts business trust organized pursuant to a Declaration of Trust dated May 19, 1993 and registered as an open-end diversified management investment company under the Investment Company Act of 1940 (the "1940 Act"), to provide investment advisory services with respect to certain assets of the Touchstone Micro Cap Growth Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it with portfolio management services in connection with the Advisor's investment advisory activities on behalf of the Fund, and the Sub-Advisor is willing to furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the Investment Advisory Agreement between the Trust and the Advisor, attached hereto as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the Sub-Advisor to manage the investment and reinvestment of that portion of the assets of the Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control and direction of the Advisor and the Trust's Board of Trustees, for the period and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such employment and agrees during such period to render the services and to perform the duties called for by this Agreement for the compensation herein provided. The Sub-Advisor shall at all times maintain its registration as an investment advisor under the Investment Advisers Act of 1940 and shall otherwise comply in all material respects with all applicable laws and regulations, both state and federal. The Sub-Advisor shall for all purposes herein be deemed an independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment of the Fund Assets, subject to and in accordance with the investment objectives, policies and restrictions of the Fund and any directions which the Advisor or the Trust's Board of Trustees may give from time to time with respect to the Fund. In furtherance of the foregoing, the Sub-Advisor will make all determinations with respect to the investment of the Fund Assets and the purchase and sale of portfolio securities and shall take such steps as may be necessary or advisable to implement the same. The Sub-Advisor also will determine the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the portfolio securities will be exercised. The Sub-Advisor will render regular reports to the Trust's Board of Trustees and to the Advisor (or such other advisor or advisors as the Advisor shall engage to assist it in the evaluation of the performance and activities of the Sub-Advisor). Such reports shall be made in such form and manner and with respect to such matters regarding the Fund and the Sub-Advisor as the Trust or the Advisor shall from time to time request; provided, however, that in the absence of extraordinary circumstances, the individual primarily responsible for management of Fund Assets for the Sub-Advisor will not be required to attend in person more than one meeting per year with the trustees of the Trust.
b. The Sub-Advisor shall provide support to the Advisor with respect to the marketing of the Fund, including but not limited to: (i) permission to use the Sub-Advisor's name as provided in Section 5, (ii) permission to use the past performance and investment history of the Sub-Advisor with respect to a composite of other funds managed by the Sub-Advisor that are comparable, in investment objective and composition, to the Fund, (iii) access to the individual(s) responsible for day-to-day management of the Fund for marketing conferences, teleconferences and other activities involving the promotion of the Fund, subject to the reasonable request of the Advisor, (iv) permission to use biographical and historical data of the Sub-Advisor and individual manager(s), and (v) permission to use the names of those clients pre-approved by the Sub-Advisor to which the Sub-Advisor provides investment management services, subject to receipt of the consent of such clients to the use of their names.
c. The Sub-Advisor will, in the name of the Fund, place orders for the execution of all portfolio transactions in accordance with the policies with respect thereto set forth in the Trust's registration statements under the 1940 Act and the Securities Act of 1933, as such registration statements may be in effect from time to time. In connection with the placement of orders for the execution of portfolio transactions, the Sub-Advisor will create and maintain all necessary brokerage records of the Fund in accordance with all applicable laws, rules and regulations, including but not limited to records required by Section 31(a) of the 1940 Act. All records shall be the property of the Trust and shall be available for inspection and use by the Securities and Exchange Commission (the "SEC"), the Trust or any person retained by the Trust. Where applicable, such records shall be maintained by the Advisor for the periods and in the places required by Rule 31a-2 under the 1940 Act. When placing orders with brokers and dealers, the Sub-Advisor's primary objective shall be to obtain the most favorable price and execution available for the Fund, and in placing such orders the Sub-Advisor may consider a number of factors, including, without limitation, the overall direct net economic result to the Fund (including commissions, which may not be the lowest available but ordinarily should not be higher than the generally prevailing competitive range), the financial strength and stability of the broker, the efficiency with which the transaction will be effected, the ability to effect the transaction at all where a large block is involved and the availability of the broker or dealer to stand ready to execute possibly difficult transactions in the future. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc., and subject to seeking most favorable price and execution, the Sub-Advisor may give consideration to sales of shares of the Fund as a factor in the selection of brokers and dealers to execute portfolio transactions of the Fund. The Sub-Advisor is specifically authorized, to the extent authorized by law (including, without limitation, Section 28(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), to pay a broker or dealer who provides research services to the Sub-Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting such transaction, in recognition of such additional research services rendered by the broker or dealer, but only if the Sub-Advisor determines in good faith that the excess commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer viewed in terms of the particular transaction or the Sub-Advisor's overall responsibilities with respect to discretionary accounts that it manages, and that the Fund derives or will derive a reasonably significant benefit from such research services. The Sub-Advisor will present a written report to the Board of Trustees of the Trust, at least quarterly, indicating total brokerage expenses, actual or imputed, as well as the services obtained in consideration for such expenses, broken down by broker-dealer and containing such information as the Board of Trustees reasonably shall request.
d. In the event of any reorganization or other change in the Sub-Advisor, its investment principals, supervisors or members of its investment (or comparable) committee, the Sub-Advisor shall give the Advisor and the Trust's Board of Trustees written notice of such reorganization or change within a reasonable time (but not later than 30 days) after such reorganization or change.
e. The Sub-Advisor will bear its expenses of providing services to the Fund pursuant to this Agreement except such expenses as are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the investment and reinvestment of such assets so as to comply with the provisions of the 1940 Act and with Subchapter M of the Internal Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties undertaken hereunder by the Sub-Advisor, the Advisor will pay to the Sub-Advisor a monthly fee equal on an annual basis to 0.85% of the average daily net Fund Assets without regard to any total expense limitation of the Trust or the Advisor. Such fee shall be computed and accrued daily. If the Sub-Advisor serves in such capacity for less than the whole of any period specified in this Section 3a, the compensation to the Sub-Advisor shall be prorated. For purposes of calculating the Sub-Advisor's fee, the daily value of the Fund Assets shall be computed by the same method as the Trust uses to compute the net asset value of the Fund for purposes of purchases and redemptions of shares thereof.
b. The Sub-Advisor reserves the right to waive all or a part of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor may perform investment advisory services for various other clients, including other investment companies. The Trust and the Advisor acknowledge that the Sub-Advisor serves as the investment advisor to the "Bjurman, Barry Funds" which may have the same, similar or overlapping investment objectives. The Trust and the Advisor further acknowledge that the Sub-Advisor may form or serve as an investment advisor or sub-advisor to future funds, which have the same, similar, or overlapping investment objectives.
The Sub-Advisor will report to the Board of Trustees of the Trust (at regular quarterly meetings and at such other times as such Board of Trustees reasonably shall request, subject to the limitation on personal attendance at such meetings set forth in Section 2a) (i) the financial condition and prospects of the Sub-Advisor, (ii) the nature and amount of transactions affecting the Fund that involve the Sub-Advisor and affiliates of the Sub-Advisor, (iii) information regarding any potential conflicts of interest arising by reason of its continuing provision of advisory services to the Fund and to its other accounts, and (iv) such other information as the Board of Trustees shall reasonably request regarding the Fund, the Fund's performance, the services provided by the Sub-Advisor to the Fund as compared to its other accounts and the plans of, and the capability of, the Sub-Advisor with respect to providing future services to the Fund and its other accounts. The Sub-Advisor agrees to submit to the Trust a statement defining its policies with respect to the allocation of business among the Fund and its other clients.
It is understood that the Sub-Advisor may become interested in the Trust as a shareholder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's statement of financial condition) and will hereafter supply to the Advisor, promptly upon the preparation thereof, copies of all amendments or restatements of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name of the Sub-Advisor in any prospectus, sales literature or other material relating to the Advisor or the Trust in any manner not approved in advance by the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses of its name which merely refer in accurate terms to its appointment hereunder or which are required by the SEC or a state securities commission; and provided further, that in no event shall such approval be unreasonably withheld. The Sub-Advisor shall not use the name of the Advisor or the Trust in any material relating to the Sub-Advisor in any manner not approved in advance by the Advisor or the Trust, as the case may be; provided, however, that the Advisor and the Trust shall each approve all uses of their respective names which merely refer in accurate terms to the appointment of the Sub-Advisor hereunder or which are required by the SEC or a state securities commission; and, provided further, that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be subject to liability to the Advisor, the Trust or to any shareholder in the Fund 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. As used in this Section 6, the term "Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the directors, officers and employees of the Sub-Advisor and/or any of its affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that it
has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited in any event to the Fund Assets and
(ii) the Sub-Advisor shall not seek satisfaction of any such obligation from the
holders of shares of the Fund, other than the Advisor, nor from any Trustee,
officer, employee or agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of communication or power supply. In the event of equipment breakdowns beyond its control, the Sub-Advisor shall take reasonable steps to minimize service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner terminated
as hereinafter provided, until December 31, 2005; and it shall continue
thereafter provided that such continuance is specifically approved by the
parties and, in addition, at least annually by (i) the vote of the holders
of a majority of the outstanding voting securities (as herein defined) of
the Fund or by vote of a majority of the Trust's Board of Trustees and
(ii) by the vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the Sub-Advisor,
cast in person at a meeting called for the purpose of voting on such
approval.
b. This Agreement may be terminated at any time, without payment of any penalty, (i) by the Advisor, by the Trust's Board of Trustees or by a vote of the majority of the outstanding voting securities of the Fund, in any such case upon not less than 60 days' prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor upon not less than 60 days' prior written notice to the Advisor and the Trust. This Agreement shall terminate automatically in the event of its assignment.
c. This Agreement may be amended at any time by the parties hereto, subject to approval by the Trust's Board of Trustees and, if required by applicable SEC rules and regulations, a vote of the majority of the outstanding voting securities of the Fund affected by such change.
d. The terms "assignment," "interested persons" and "majority of the outstanding voting securities" shall have the meaning set forth for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or shall be found to be invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing addressed and delivered personally (or by telecopy) or mailed postage-paid, to the other party at such address as such other party may designate in accordance with this paragraph for the receipt of such notice. Until further notice to the other party, it is agreed that the address of the Trust and that of the Advisor for this purpose shall be 211 East Fourth Street, Suite 300, Cincinnati, Ohio 45202 and that the address of the Sub-Advisor shall be 10100 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90067
12. MISCELLANEOUS. Each party agrees to perform such further actions and execute such further documents as are necessary to effectuate the purposes hereof. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Ohio. The captions in this Agreement are included for convenience only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
/s/ Jay S. Fitton BY /s/ James R. Grifo
---------------------------------- -------------------------------------
James H. Grifo
Name: Jay S. Fitton President
-----------------------------
Title: Assistant Secretary
----------------------------
BJURMAN, BARRY & ASSOCIATES
Attest:
/s/ Kelly Quick BY O. T. Barry III
---------------------------------- -------------------------------------
Name: Kelly Quick Name: O.T. Barry III
----------------------------- -----------------------------------
Title: Complaince Officer Title: Chief Investment Officer
---------------------------- ----------------------------------
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Dealer #_______
TOUCHSTONE
INVESTMENTS
221 EAST FOURTH STREET, SUITE 300
CINCINNATI, OH 45202
800.638.8194
DEALER'S AGREEMENT
Touchstone Securities, Inc., as the exclusive distributor for the Touchstone Family of Mutual Funds (the "Funds") invites you, as a selected dealer, to participate as principal in the distribution of shares (the "Shares") of the mutual funds set forth on Schedule A to this Agreement. Distributor agrees to sell to you, subject to any limitations imposed by the Funds, Shares issued by the Funds and to promptly confirm each sale to you. All sales will be made according to the following terms:
1. All offerings of any of the Shares by you must be made at the public offering price or, if you so notify us, at net asset value, and shall be subject to the conditions of offering, set forth in the then current Prospectus of the Funds and to the terms and conditions herein set forth, and you agree to comply with all requirements applicable to you of all applicable laws, including federal and state securities laws, the rules and regulations of the Securities and Exchange Commission, and the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"), including Section 24 of the Rules of Fair Practice of the NASD. You will not offer the Shares for sale in any state or other jurisdiction where they are not qualified for sale under the Blue Sky Laws and regulations of such state or jurisdiction, or where you are not qualified to act as a dealer. Upon application to Distributor, Distributor will inform you as to the states or other jurisdictions in which Distributor believes the Shares may legally be sold.
2. (a) Unless a purchase of Shares qualifies as a purchase at net asset value, you will receive a discount from the public offering price ("concession") on all Shares purchased by you from Distributor as indicated on Schedule A, as it may be amended by Distributor from time to time. You as Dealer hereby agree to waive payment of any and all 12b-1 fees ("fees") or other amounts payable until Distributor shall have received and collected the fees or other amounts payable to Distributor.
(b) In all transactions in open accounts in which you are designated as Dealer of Record, you will receive the concessions as set forth on Schedule A. You hereby authorize Distributor to act as your agent in connection with all transactions in open accounts in which you are designated as Dealer of Record. All designations as Dealer of Record, and all authorizations of Distributor to act as your Agent pursuant thereto, shall cease upon the termination of this Agreement or upon the investor's instructions to transfer his open account to another Dealer of Record. No dealer concessions will be allowed on purchases generating less than $1.00 in dealer concessions.
(c) As the exclusive Distributor of the Shares, Distributor reserves the privilege of revising the discounts specified on Schedule A at any time by written notice.
3. Concessions will be paid to you at the address of your principal office, as indicated below in your acceptance of this Agreement.
4. Distributor reserves the right to cancel this Agreement at any time without notice if any Shares shall be offered for sale by you at less than the then current net asset values determined by, or for, the Funds.
5. All orders are subject to acceptance or rejection by Distributor in its sole discretion. The Distributor reserves the right, in its discretion, without notice, to suspend sales or withdraw the offering of Shares entirely.
6. Payment shall be made to the Funds and shall be received by its Transfer
Agent within three (3) business days after the acceptance of your order or such
shorter time as may be required by law. With respect to all Shares ordered by
you for which payment has not been received, you hereby assign and pledge to
Distributor all of your right, title and interest in such Shares to secure
payment therefore. You appoint Distributor as your agent to execute and deliver
all documents necessary to effectuate any of the transactions described in this
paragraph. If such payment is not received within the required time period,
Distributor reserves the right, without notice, and at its option, forthwith (a)
to cancel the sale, (b) to sell the Shares ordered by you back to the Funds, or
(c) to assign your payment obligation, accompanied by all pledged Shares, to any
person. You agree that Distributor may hold you responsible for any loss,
including loss of profit, suffered by the Funds or its Transfer Agent, resulting
from your failure to make payment within the required time period.
7. No person is authorized to make any representations concerning Shares of the Funds except those contained in the current applicable Prospectus and Statement of Additional Information and in sales literature issued and furnished by Distributor supplemental to such Prospectus. Distributor will furnish additional copies of the current Prospectus and Statement of Additional Information and such sales literature and other releases and information issued by Distributor in reasonable quantities upon request.
8. Under this Agreement, you act as principal and are not employed by Distributor as broker, agent or employee. You are not authorized to act for Distributor nor to make any representation on its behalf; and in purchasing or selling Shares hereunder, you rely only upon the current Prospectus and Statement of Additional Information furnished to you by Distributor from time to time and upon such written representations as may hereafter be made by Distributor to you over its signature.
9. You appoint the transfer agent for the Funds as your agent to execute the purchase transactions of Shares in accordance with the terms and provisions of any account, program, plan or service established or used by your customers and to confirm each purchase to your customers on your behalf, and you guarantee the legal capacity of your customers purchasing such Shares and any co-owners of such Shares.
10. You will (a) maintain all records required by law relating to transactions in the Shares, and upon the request of Distributor, or the request of the Funds, promptly make such records available to Distributor or to the Funds as are requested, and (b) promptly notify Distributor if you experience any difficulty in maintaining the records required in the foregoing clause in an accurate and complete manner. In addition, you will establish appropriate procedures and reporting forms and schedules, approved by Distributor and by the Funds, to enable the parties hereto and the Funds to identify all accounts opened and maintained by your customers.
11. Distributor has adopted compliance standards, attached hereto as Schedule B, as to when Class A, Class B and Class C Shares of the Funds may appropriately be sold to particular investors. You agree that all persons associated with you will conform to such standards when selling Shares.
12. Each party hereto represents that it is presently, and, at all times during the term of this Agreement, will be, a member in good standing of the NASD and agrees to abide by all its Rules of Fair Practice including, but not limited to, the following provisions:
(a) You agree to follow any written guidelines or standards relating to the sale or distribution of the Shares as may be provided to you by the Distributor including the provisions outlined in exhibits B and C as well as to follow any applicable federal and/or state securities laws, rules or regulations affecting the sale or distribution of Shares of investment companies offering multiple classes of shares.
(b) You shall not withhold placing customers' orders for any Shares so as to profit yourself as a result of such withholding. You shall not purchase any Shares from Distributor other than for investment, except for the purpose of covering purchase orders already received.
(c) All conditional orders received by Distributor must be at a specified definite price.
(d) If any Shares purchased by you are repurchased by the Funds (or by Distributor for the account of the Funds) or are tendered for redemption within seven business days after confirmation of the original sale of such Shares (1) you agree to forthwith refund to Distributor the full concession allowed to you on the original sale, such refund to be paid by Distributor to the Funds, and (2) Distributor shall forthwith pay to the Funds that part of the discount retained by Distributor on the original sale. Notice will be given to you of any such repurchase or redemption within ten days of the date on which the repurchase or redemption request is made.
(e) Neither Distributor, as exclusive Distributor for the Funds, nor you as principal, shall purchase any Shares from a record holder at a price lower than the net asset value then quoted by, or for, the Funds. Nothing in this sub-paragraph shall prevent you from selling Shares for the account of a record holder to Distributor or the Funds at the net asset value currently quoted by, or for, the Funds and charging the investor a fair commission for handling the transaction.
(f) You warrant on behalf of yourself and your registered representatives and employees that any purchase of Shares at net asset value by the same pursuant to the terms of the Prospectus of the applicable Fund is for investment purposes only and not for purposes of resale. Shares so purchased may be resold only to the Fund which issued them.
13. You agree that you will indemnify, defend and protect the Distributor, the Funds, the Funds' transfer agent and the Funds' custodians and each trustee, director, officer, employee and agent of such persons (collectively, the "Fund Parties") and shall hold the Fund Parties harmless from and against any and all claims, demands actions, losses, damages, liabilities, costs, charges, reasonable counsel fees and expenses of any nature the Funds or they incur ("Losses") to the extent such Losses arise out of (i) the dissemination by you or any persons or entities affiliated with you of information regarding the Funds that is materially incorrect and that is not provided to you or approved by the Funds, or (ii) the willful misconduct or negligence by you or any persons or entities affiliated with you in the performance of, or failure to perform your obligations under this Agreement or (iii) any violation of law related to or resulting from your participation in this Agreement and the activities contemplated hereby; except to the extent such Losses result from the Distributor's willful misconduct or negligence.
Distributor shall indemnify you and each of your directors, officers, employees and agents and hold you and any such director, officer, employee and agent harmless from and against any and all Losses arising out of (i) any inaccuracy or omission in any prospectus, registration statement, annual report or proxy statement of the funds or any advertising or promotional material generated by the Fund (ii) any breach by Distributor of any representation contained in this Agreement, and (iii) any action taken or omitted to be taken pursuant to this Agreement, except to the extent such Losses result from your breach of this Agreement, or your willful misconduct, or negligence.
14. This Agreement will automatically terminate in the event of its assignment. Either party hereto may cancel this Agreement without penalty upon ten days' written notice. This Agreement may also be terminated as to any Fund at any time without penalty by the vote of a majority of the members of the Board of Trustees of the terminating Fund who are not "interested persons" (as such term is defined in the Investment Company Act of 1940) and who have no direct or indirect financial interest in the applicable Fund's Distribution Expense Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940 or any agreement relating to such Plan, including this Agreement, or by a vote of a majority of the outstanding voting securities of the terminating fund on ten days' written notice.
15. All communications to Distributor should be sent to Touchstone Securities, Inc., 221 East Fourth Street, Cincinnati, Ohio 45202, or at such other address as Distributor may designate in writing. All communications to you should be sent to the address of your principal office, as indicated below in your acceptance of this Agreement, or at such other address as you designate in writing. Any notice to either party shall be duly given if mailed, telegraphed sent by facsimile transmission, or sent by express mail service.
16. This Agreement supersedes any other agreement with you relating to the offer and sale of the Shares, and relating to any other matter discussed herein.
17. This Agreement shall be binding (i) upon placing your first order with Distributor for the purchase of Shares, or (ii) upon receipt by Distributor in Cincinnati, Ohio of a counterpart of this Agreement duly accepted and signed by you, whichever shall occur first. This Agreement shall be construed in accordance with the laws of the State of Ohio.
18. You represent that you have adopted and implemented procedures to safeguard
customer information and records that are reasonably designed to: (1) insure the
security and confidentiality of your customer records and information; (2)
protect against any anticipated threats or hazards to the security or integrity
of customer records and information; (3) protect against unauthorized access to
or use of your customer records or information that could result in substantial
harm or inconvenience to any customer; (4) protect against unauthorized
disclosure of non-public personal information to unaffiliated third parties; and
(5) otherwise ensure your compliance with the Securities and Exchange
Commission's Regulation S-P. You agree to indemnify us against any and all
claims, liability, expense or loss in any way arising out of your failure to
adopt and implement these and such other privacy or confidentiality procedures
that may in the future be required by law or regulation.
19. You represent and warrant that you have in place and will maintain suitable and adequate know your customer policies and procedures and that you shall comply with all applicable laws and regulations regarding anti-money laundering activity and will provide such documentation to us upon our request.
20. By signing this Agreement, you certify that you have implemented procedures in accordance with the USA Patriot Act to verify the identity of any person seeking to open an account, that you maintain records of the information used to verify the person's identity, and you have taken steps to determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to investment companies by any government agency.
21. The undersigned, executing this Agreement on behalf of Dealer, hereby warrants and represents that he is duly authorized to so execute this Agreement on behalf of Dealer.
If the foregoing is in accordance with your understanding of our agreement, please sign and return all copies of this Agreement to the Distributor.
Accepted by Dealer Touchstone Securities, Inc. By:_______________________________ By:____________________________ Authorized Signature Authorized Signature ________________________________ ____________________________ Type or Print Name, Position Type or Print Name, Position _______________________________ ___________________________ Dealer Name Date _______________________________ Address _______________________________ City/State/Zip _______________________________ Phone _______________________________ Date |
SCHEDULE A
TOUCHSTONE FUNDS
BROKER-DEALER AGREEMENT EXHIBIT A- COMMISSION SCHEDULE
A SHARES - EQUITY FUNDS A SHARES - BOND FUNDS
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TOTAL SALES DEALER TOTAL SALES DEALER
CHARGE1 CONCESSION CHARGE1 CONCESSION
Under $50,000 5.75% 5.00% Under $50,000 4.75% 4.00%
$50,000 but less than $100,000 4.50% 3.75% $50,000 but less than $100,000 4.50% 3.75%
$100,000 but less than $250,000 3.50% 2.75% $100,000 but less than $250,000 3.50% 2.75%
$250,000 but less than $500,000 2.95% 2.25% $250,000 but less than $500,000 2.95% 2.25%
$500,000 but less than $1,000,000 2.25% 1.75% $500,000 but less than $1,000,000 2.25% 1.75%
$1,000,000 or more NAV2 0.00% $1,000,000 or more NAV2 0.00%
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1 Expressed as a percentage of the offering price.
2 There is no initial sales charge on any purchase of $1,000,000 or more, however, a 1% contingent deferred sales charge may be
assessed if redemption occurs within one year of purchase.
Class B Shares or Class C Shares may not be used in combination with Class A Shares to meet Right of Accumulation (ROA)
requirements.
12(b)-1 payment on A Shares/Equity and Bond Funds is 0.25% of its average daily net assets annually, (paid quarterly) beginning
immediately.
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B SHARES - EQUITY/BOND FUNDS3
Year Since Purchase Contingent Deferred
Payment Made Sales Charge
-------------------------------------------------------------------------------
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 1.00%
Seventh and thereafter4 None
-------------------------------------------------------------------------------
12(b)-1 Payment 0.25% annually (paid quarterly)
beginning in the 13th month
Dealer Concession 4.00%
-------------------------------------------------------------------------------
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3Including Money Market Fund Class B Shares.
4Class B Shares will automatically convert to Class A Shares after eight years.
*Not all Touchstone Funds offer Class B Shares. Please see a performance fact sheet or visit www.touchstoneinvestments.com to distinguish which funds do and do not offer Class B shares.
Dealer Concession 1.00%
Contingent Deferred Sales Charge5 1.00%
12(b)-1 Payment 1.00 annually (paid quarterly)
beginning in the 13th month
-------------------------------------------------------------------------------
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5 Assessed if redemption occurs within one year of purchase.
12(b)-1 Payment6 0.25% annually (paid quarterly)
beginning immediately
--------------------------------------------------------------------------------
6 Excludes Institutional share class.
|
QUARTERLY TRAIL PAYMENTS ARE RELEASED ONLY WHEN THE PAYMENT FOR THE FIRM EXCEEDS $50.00 IN ANY GIVEN QUARTER. UNPAID TRAILS DO NOT ACCUMULATE.
STOCK FUNDS BOND FUNDS MONEY MARKET FUNDS ----------- ---------- ------------------ Small Cap Growth Fund High Yield Fund Money Market Fund Emerging Growth Fund Core Bond Fund U.S. Government Money Market Fund Growth Opportunities Fund Ohio Insured Tax-Free Fund Tax-Free Money Market Fund Large Cap Growth Fund Ohio Tax-Free Money Market Fund - R Enhanced 30 Fund California Tax-Free Money Market Fund Value Plus Fund Florida Tax-Free Money Fund Micro Cap Growth Fund |
Touchstone Funds are distributed by Touchstone Securities, Inc.* *A registered broker/dealer and member NASD and SIPC A Member of Western & Southern Financial Group(R)
EXHIBIT B
POLICIES AND PROCEDURES WITH
RESPECT TO SALES OF MULTIPLE CLASS FUND SHARES
The Touchstone Family of Mutual Funds (the "Funds") are available to the public
in three series:(1)shares subject to a front-end sales charge ("Class A shares")
(2)shares subject to a contingent deferred sales charge if the redemption occurs
within six years of the purchase date. The contingent deferred sales charge
decreases from a maximum of 5%, which is applicable if the redemption occurs
within the first year of the purchase date, to 0%, if the redemption occurs
after the sixth year from the purchase date ("Class B shares") and (3) shares
subject to a 1% contingent deferred sales charge if the redemption occurs
within one year of purchase ("Class C shares"). It is important for an investor
to choose not only the Fund that best suits his investment objectives, but
also to choose the sales financing method which best suits his particular
situation. To assist investors in these decisions, we are instituting the
following policies:
1. Any purchase order is subject to approval by a registered principal of the Dealer, who must approve the purchase order for either Class A shares, Class B shares or Class C shares in light of the relevant facts and circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold the shares; and
(c) any other relevant circumstances, such as the availability of purchases under a Letter of Intent.
2. Any purchase order for $500,000 or more in Class B shares will usually be considered as a purchase request for Class A shares or declined because it is ordinarily more advantageous for an investor to purchase Class A shares.
3. Any purchase order for $1 million or more in Class C shares will usually be considered as a purchase request for Class A shares or declined because it is ordinarily more advantageous for an investor to purchase Class A shares.
There are instances when one financing method may be more appropriate than the other. For example, investors whose order would qualify for a significant discount from the maximum sales charge on Class A shares may determine that payment of such a reduced front-end sales charge is superior to payment of the higher ongoing distribution fees applicable to Class B and Class C shares. On the other hand, an investor whose order would not qualify for such a discount may wish to pay no front-end sales charge and have all of his funds invested in Class B or Class C shares. The investment return may partially or wholly offset the higher annual expenses; however, because the Fund's or Funds' future return(s) cannot be predicted, there can be no assurance that this would be the case. In addition, an investor that anticipates that he will redeem his shares within a short period of time, may, depending on the amount of purchase, choose to bear higher distribution fees associated with Class C shares. On the other hand, Class B shares may be more attractive than Class C shares if an investor has a longer term investment outlook and is interested in the conversion feature. Class B shares automatically convert to Class A shares after eight years.
In addition, an investor who intends to hold his shares for a significantly long time may wish to purchase Class A shares in order to avoid the higher ongoing distribution fees of Class B and Class C shares.
The appropriate principal must ensure that all employees of the Broker/Dealer receiving investor inquiries about the purchase of Fund shares advise an investor of the available financing methods offered by mutual funds, and the impact of choosing one method over another. It may be appropriate for the principal to discuss the purchase with an investor.
These policies are effective May 1, 2001 with respect to any order for the purchase of shares. Questions relating to these policies should be directed to Touchstone's appropriate senior management personnel.
EXHIBIT C
TOUCHSTONE SECURITIES, INC.
AS-OF PROCESSING POLICY
Touchstone Securities, Inc. will employ, through its Transfer Agent, As-Of policies that are consistent with those adopted by the Touchstone Family of Funds Board of Trustees. This policy shall be effective on May 1, 2001.
An "as-of" trade occurs whenever a current shareholder trade is processed at a previously issued public offering price. In order to not disadvantage existing shareholders from the possible losses to a fund (each portfolio treated separately) generated by such trades, the policy outlined below is to be followed.
1. No "as-of" trades will be accepted from a broker-dealer or service agents without prior receipt of signature guaranteed indemnification against any losses to the fund signed by the broker-dealer or service agent placing the trade. (See attached "Letter of Indemnity")
2. Broker-dealers and service agents will be billed for any loss of $50 or more resulting from a single transaction. Broker-dealers will not be able to use any prior gains to the fund generated by their "as-of" transactions to offset transaction losses. Invoices for losses are due and payable upon receipt.
3. Immediate payment is to be made to the fund by the responsible broker-dealer or service agent at anytime in which the impact of an As-Of trade results in a material loss to the fund or more than $.005 per share of the fund's net asset value.
4. The Fund's Transfer Agent shall reserve the right to refuse any request to process any As-Of transaction requested by a broker/dealer or service agent.
5. The Fund's Transfer Agent may at its discretion reduce commissions or 12b-1 payments due to a broker/dealer or service agent by an amount equal to losses invoiced to the broker/dealer or service agent for failure to pay invoices for losses caused by requested As-Of trades.
SPONSOR AGREEMENT
TOUCHSTONE ADVISORS, INC. AND
TOUCHSTONE STRATEGIC TRUST
AMENDMENT NO. 5
AMENDMENT dated as of April 1, 2004, between TOUCHSTONE STRATEGIC TRUST, a Massachusetts business trust (the "Trust"), and TOUCHSTONE ADVISORS, INC., an Ohio corporation ("Touchstone");
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended;
WHEREAS, the Trust has engaged Touchstone to provide certain management services with respect to certain series of the Trust (each a "Fund") pursuant to the Sponsor Agreement dated as of May 1, 2000, as amended, between the Trust and Touchstone (the "Agreement"); and
WHEREAS, the Trust and Touchstone wish to amend the Agreement to extend the period during which the provisions of the Agreement related to operating expense waivers or reimbursement shall apply.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as set forth in the Agreement and herein, acting pursuant to
Section 7 of the Agreement, the Trust and Touchstone hereby amend the Agreement
as follows:
(A) Section 3 of the Agreement shall read as follows:
3. Operating Expense Waivers or Reimbursement.
a) Touchstone shall waive all or a portion of its fee pursuant to this Sponsor Agreement and/or reimburse a portion of the operating expenses (including amortization of organization expense, but excluding interest, taxes, brokerage commissions and other portfolio transaction expenses, capital expenditures and extraordinary expenses) ("Expenses") of each Class of the following Funds (each a "Class") such that, after such reimbursement, the aggregate Expenses of a Class shall be less than or equal, on an annual basis, to the following percentages of average daily net assets of the Class for the Fund's then-current fiscal year:
Touchstone Emerging Growth Fund - Class A 1.50% Touchstone Emerging Growth Fund - Class B 2.25% Touchstone Emerging Growth Fund - Class C 2.25% Touchstone Enhanced 30 Fund - Class A 1.00% Touchstone Enhanced 30 Fund - Class B 1.75% Touchstone Enhanced 30 Fund - Class C 1.75% Touchstone Value Plus Fund - Class A 1.30% Touchstone Value Plus Fund - Class B 2.05% Touchstone Value Plus Fund - Class C 2.05% Touchstone Small Cap Growth Fund - Class A 1.95% Touchstone Small Cap Growth Fund - Class B 2.70% Touchstone Small Cap Growth Fund - Class C 2.70% |
Touchstone's obligations in this Section 3 may be terminated, with respect to any Fund or class of shares, by Touchstone as of the end of any calendar quarter after March 31, 2005, upon at least 30 days' prior written notice to the Trust (an "Expense Cap Termination").
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, all as of April 1, 2004. The undersigned has executed this Agreement not individually, but as an officer under the Trust's Declaration of Trust, and the obligations of this Agreement are not binding upon such person or upon any of the Trust's Trustees, officers or investors in the Funds individually, but bind only the Trust estate.
TOUCHSTONE ADVISORS, INC. TOUCHSTONE STRATEGIC TRUST
By: /s/ Terrie A. Wiedenheft By: /s/ Tina H. Bloom
--------------------------- -------------------------
Name: Terrie A. Wiedenheft Name: Tina H. Bloom
------------------------------- ----------------------
Title: Chief Financial Officer Title: Secretary
------------------------------ ----------------------
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SPONSOR AGREEMENT
TOUCHSTONE ADVISORS, INC. AND
TOUCHSTONE STRATEGIC TRUST
AMENDMENT NO. 6
AMENDMENT dated as of May 4, 2004, between TOUCHSTONE STRATEGIC TRUST, a Massachusetts business trust (the "Trust"), and TOUCHSTONE ADVISORS, INC., an Ohio corporation ("Touchstone");
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended;
WHEREAS, the Trust has engaged Touchstone to provide certain management services with respect to certain series of the Trust (each a "Fund") pursuant to the Sponsor Agreement dated as of May 1, 2000, as amended, between the Trust and Touchstone (the "Agreement"); and
WHEREAS, the Trust and Touchstone wish to amend the Agreement to reflect the addition of Class I Shares of the Small Cap Growth Fund.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as set forth in the Agreement and herein, acting pursuant to
Section 7 of the Agreement, the Trust and Touchstone hereby amend the Agreement
as follows:
(A) Section 3 of the Agreement shall read as follows:
3. Operating Expense Waivers or Reimbursement.
a) Touchstone shall waive all or a portion of its fee pursuant to this Sponsor Agreement and/or reimburse a portion of the operating expenses (including amortization of organization expense, but excluding interest, taxes, brokerage commissions and other portfolio transaction expenses, capital expenditures and extraordinary expenses) ("Expenses") of each Class of the following Funds (each a "Class") such that, after such reimbursement, the aggregate Expenses of a Class shall be less than or equal, on an annual basis, to the following percentages of average daily net assets of the Class for the Fund's then-current fiscal year:
Touchstone Emerging Growth Fund - Class A 1.50% Touchstone Emerging Growth Fund - Class B 2.25% Touchstone Emerging Growth Fund - Class C 2.25% Touchstone Enhanced 30 Fund - Class A 1.00% Touchstone Enhanced 30 Fund - Class B 1.75% Touchstone Enhanced 30 Fund - Class C 1.75% Touchstone Value Plus Fund - Class A 1.30% Touchstone Value Plus Fund - Class B 2.05% Touchstone Value Plus Fund - Class C 2.05% Touchstone Small Cap Growth Fund - Class A 1.95% Touchstone Small Cap Growth Fund - Class B 2.70% Touchstone Small Cap Growth Fund - Class C 2.70% Touchstone Small Cap Growth Fund - Class I 1.55% |
Touchstone's obligations in this Section 3 may be terminated, with respect to any Fund or class of shares, by Touchstone as of the end of any calendar quarter after March 31, 2005, upon at least 30 days' prior written notice to the Trust (an "Expense Cap Termination").
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, all as of May 4, 2004. The undersigned has executed this Agreement not individually, but as an officer under the Trust's Declaration of Trust, and the obligations of this Agreement are not binding upon such person or upon any of the Trust's Trustees, officers or investors in the Funds individually, but bind only the Trust estate.
TOUCHSTONE ADVISORS, INC. TOUCHSTONE STRATEGIC TRUST
By: /s/ Terrie A. Wiedenheft By: /s/ Tina H. Bloom
-------------------------- -------------------------
Name: Terrie A. Wiedenheft Name: Tina H. Bloom
------------------------------- -----------------------
Title: Chief Financial Officer Title: Secretary
------------------------------ ---------------------
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AMENDMENT NO. 7
AMENDMENT dated as of June 22, 2004, between TOUCHSTONE STRATEGIC TRUST, a Massachusetts business trust (the "Trust"), and TOUCHSTONE ADVISORS, INC., an Ohio corporation ("Touchstone");
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended;
WHEREAS, the Trust has engaged Touchstone to provide certain management services with respect to certain series of the Trust (each a "Fund") pursuant to the Sponsor Agreement dated as of May 1, 2000, as amended, between the Trust and Touchstone (the "Agreement"); and
WHEREAS, the Trust and Touchstone wish to amend the Agreement to reflect the addition of the Micro Cap Growth Fund.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as set forth in the Agreement and herein, acting pursuant to
Section 7 of the Agreement, the Trust and Touchstone hereby amend the Agreement
as follows:
(A) Section 3 of the Agreement shall read as follows:
3. Operating Expense Waivers or Reimbursement.
a) Touchstone shall waive all or a portion of its fee pursuant to this Sponsor Agreement and/or reimburse a portion of the operating expenses (including amortization of organization expense, but excluding interest, taxes, brokerage commissions and other portfolio transaction expenses, capital expenditures and extraordinary expenses) ("Expenses") of each Class of the following Funds (each a "Class") such that, after such reimbursement, the aggregate Expenses of a Class shall be less than or equal, on an annual basis, to the following percentages of average daily net assets of the Class for the Fund's then-current fiscal year:
Touchstone Emerging Growth Fund - Class A 1.50% Touchstone Emerging Growth Fund - Class B 2.25% Touchstone Emerging Growth Fund - Class C 2.25% Touchstone Enhanced 30 Fund - Class A 1.00% Touchstone Enhanced 30 Fund - Class B 1.75% Touchstone Enhanced 30 Fund - Class C 1.75% Touchstone Value Plus Fund - Class A 1.30% Touchstone Value Plus Fund - Class B 2.05% Touchstone Value Plus Fund - Class C 2.05% Touchstone Small Cap Growth Fund - Class A 1.95% Touchstone Small Cap Growth Fund - Class B 2.70% Touchstone Small Cap Growth Fund - Class C 2.70% Touchstone Small Cap Growth Fund - Class I 1.55% Touchstone Micro Cap Growth Fund - Class A 1.95% Touchstone Micro Cap Growth Fund - Class C 2.70% |
Touchstone's obligations in this Section 3 may be terminated, with respect to any Fund or class of shares, by Touchstone as of the end of any calendar quarter after March 31, 2005, upon at least 30 days' prior written notice to the Trust (an "Expense Cap Termination"), except that the Expense Cap Termination for the Micro Cap Growth Fund shall be March 31, 2006.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, all as of June 22, 2004. The undersigned has executed this Agreement not individually, but as an officer under the Trust's Declaration of Trust, and the obligations of this Agreement are not binding upon such person or upon any of the Trust's Trustees, officers or investors in the Funds individually, but bind only the Trust estate.
TOUCHSTONE ADVISORS, INC. TOUCHSTONE STRATEGIC TRUST
By: /s/ Terrie A. Wiedenheft By: /s/ Tina H. Bloom
------------------------------ --------------------------
Name: Terrie A. Wiedenheft Name: Tina H. Bloom
------------------------------- ------------------------
Title: Chief Financial Officer Title: Secretary
------------------------------ -----------------------
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CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial Highlights" in the Prospectuses and "Auditors" and "Financial Statements" in the Statements of Additional Information, included in Post-Effective Amendment Number 54 to the Registration Statement (Form N-1A, No. 2-80859) of Touchstone Strategic Trust and to the use of our report dated May 11, 2004 on the March 31, 2004 financial statements of the Touchstone Strategic Trust, incorporated by reference therein.
/s/ Ernst & Young LLP
Cincinnati, Ohio
July 29, 2004
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MASTRAPASQUA ASSET MANAGEMENT, INC.
CODE OF ETHICS
PLUS
ANTI-MONEY LAUNDERING AND INSIDER TRADING POLICY AND PROCEDURES
I. INTRODUCTION
Mastrapasqua Asset Management ("Mastrapasqua") has adopted this Code of Ethics for the purpose of instructing all employees, officers, and directors of the investment adviser in its ethical obligations and to provide rules for its personal securities transactions. All such employees, officers, directors and trustees owe a fiduciary duty to the Client Accounts they manage. A fiduciary duty means a duty of loyalty, fairness and good faith towards the Client Accounts, and the obligation to adhere not only to the specific provisions of this Code but to the general principles that guide the Code.
II. STATEMENT OF GENERAL PRINCIPLES
(i) The duty at all times to place the interests of the Client Accounts first;
(ii) The requirement that all personal securities transactions be conducted in a manner consistent with the Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of any individual's position of trust and responsibility; and
(iii) The fundamental standard that such employees, officers, directors and trustees should not take inappropriate advantage of their positions, or of their relationship with the Client Accounts.
The Company will not disclose any nonpublic personal information about a Client to any nonaffiliated third party unless the Client expressly gives permission to the Company to do so. The Client in writing must grant such permission, or denial of permission, to the Company. A copy of the permission/denial document will be filed in the Client file (see our Privacy Notice for further reference).
It is imperative that the personal trading activities of the employees, officers, and directors of Mastrapasqua be conducted with the highest regard for these general principles in order to avoid any possible conflict of interest, any appearance of a conflict, or activities that could lead to disciplinary action. This includes executing transactions through or for the benefit of a third party when the transaction is not in keeping with the general principles of this Code.
All personal securities transactions must comply with Mastrapasqua's Code of Ethics, Insider Trading Policy and Procedures and the Securities and Exchange Commission's Rule 17J-1. Under this rule, no Employee may:
(i) employ any device, scheme or artifice to defraud Client Accounts;
March 2004 Code of Ethics... 2
(ii) make to the Client Accounts or any of its beneficiaries any untrue
statement of a material fact or omit to state to such client a
material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not
misleading;
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(iii) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Client Accounts or any of their beneficiaries; or
(iv) engage in any manipulative practice with respect to the Client Accounts or any of their beneficiaries.
DEFINITIONS
A. Advisory Employees
Employees who participate in, make, or obtain information regarding recommendations with respect to the purchase or sale of securities. The Chief Compliance Officer will maintain a current list of all Advisory Employees.
B. Beneficial Interest
Ownership or any benefits of ownership, including the opportunity to directly or indirectly profit or otherwise obtain financial benefits from any interest in a security.
C. Client Account
Any securities account or portfolio managed or directed by Mastrapasqua.
D. Chief Compliance Officer
Nancy Martinez or, in her absence, the alternate Compliance Officer, Jim Basham, or their successors in such positions.
E. Employee Account
Each account in which an Employee or a member of his or her family has any direct or indirect Beneficial Interest or over which such person exercises control or influence, including, but not limited to, any joint account, partnership, corporation, trust or estate. An Employee's family members include the Employee's spouse, minor children, any person living in the home of the Employee, and any relative of the Employee (including in-laws) to whose support an Employee directly or indirectly contributes.
F. Employees
The employees, officers and directors of Mastrapasqua, including Advisory Employees. The Chief Compliance Officer will maintain a current list of all Employees.
G. Exempt Transactions
Transactions which are (1) effected in an amount or in a manner over which the Employee has no direct or indirect influence or control; (2) pursuant to a systematic dividend reinvestment plan, systematic cash purchase plan or systematic withdrawal plan; (3) in connection with the exercise or sale of rights to purchase additional securities from an issuer and granted by such issuer pro-rata to all holders of a class of its securities; (4) in connection with the call by the issuer of a preferred stock or bond; (5) pursuant to the exercise by a second party of a put or call option; or, (6) closing transactions no more than five business days prior to the expiration of a related put or call option.
March 2004 Code of Ethics... 3
H. Recommended List
The list of those Securities which the Advisory Employees currently are recommending for purchase or sale on behalf of Client Accounts.
I. Related Securities
Securities issued by the same issuer or issuer under common control, or when either security gives the holder any contractual rights with respect to the other security, including options, warrants or other convertible securities.
J. Securities
Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security," or any certificate or interest or participation in temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase (including options) any of the foregoing, including any option on a security that is convertible into or is exchangeable for any security that is held or to be acquired by a fund; except for the following: (1) securities issued by the government of the United States; (2) bankers' acceptances; (3) bank certificates of deposit; (4) commercial paper; (5) debt securities, provided that (a) the security has a credit rating of Aa or Aaa from Moody's Investor Services, AA or AAA from Standard & Poor's Ratings Group, or an equivalent rating from another rating service, or is unrated but comparably creditworthy, (b) the security matures within twelve months of purchase, (c) the market is very broad so that a large volume of transactions on a given day will have relatively little effect on yields, and (d) the market for the instrument features highly efficient machinery permitting quick and convenient trading in virtually any volume.
K. Securities Transaction
The purchase or sale, or any action to accomplish the purchase or sale, of a Security for an Employee Account.
PERSONAL INVESTMENT GUIDELINES
A. Personal Accounts and Pre-Clearance
1. Employees must obtain prior written permission from the Chief Compliance Officer to open or maintain a margin account, or a joint or partnership account with persons other than the Employee's spouse, parent, or child (including custodial accounts).
2. No Employee may execute a Securities Transaction without first obtaining Pre-Clearance from the Chief Compliance Officer. Prior to execution, the Employee must submit the Pre-Clearance form to the Chief Compliance Officer, or in the case of a Pre-Clearance request by the Chief Compliance Officer, to the alternate Compliance Officer.
Clients Accounts have been notified in the ADV and have agreed as part of the Investment Management Agreement that (a) employee advisers will manage accounts and perform investment advisory services for others; (b) depending upon investment objectives and cash availability, that advisory employees may sell or recommend the sale of a particular security for certain accounts and buy or recommend the purchase of such security for other accounts, and accordingly, transactions in particular accounts may not be consistent with transactions in other accounts or with advisory employees investment recommendations; (c) where there is a limited supply of a security, advisory employees cannot assure absolute equality among all accounts and clients; and (d) advisory employees and /or employees may from time to time have an interest, direct or indirect, in a security which is purchased, sold or otherwise traded for the Client Account, and advisory employee may effect transactions in said security for the Client Account which may be the same as or different from the action which advisory employee or employee may take with respect thereto for its or their accounts.
March 2004 Code of Ethics... 4
Settlement of Securities Transactions must be made on or before settlement date. Extensions and pre-payments are not permitted.
The Personal Investment Guidelines in this Section III do not apply to Exempt Transactions. Employees must remember that regardless of the transaction's status as exempt or not exempt, the Employee's fiduciary obligations remain unchanged.
Limitations on Pre-Clearance
1. After receiving a Pre-Clearance request, the Chief Compliance Officer will promptly review the request and will deny the request if the Securities Transaction violate this Code.
2. Employees may not execute a Securities Transaction on a day during which a purchase or sell order in that same Security or a Related Security is pending for, or is being actively considered on behalf of, a Client Account. In order to determine whether a Security is being actively considered on behalf of a Client Account, the Chief Compliance Officer will consult the current Recommended List and, in the case of non-equity Securities, consult each Advisory Employee responsible for investing in non-equity Securities for any Client Account. Securities Transactions executed in violation of this prohibition, if not precleared, shall be unwound or, if not possible or practical, the Employee must disgorge to the appropriate Client Account(s) the value received by the Employee due to any favorable price differential received by the Employee. For example, if the Employee buys 100 shares at $10 per share, and a Client Account buys 1000 shares at $11 per share, the Employee will pay $100 (100 shares x $1 differential) to the Client Account.
Advisory Employees shall not purchase or sell a security within five calendar days before or two calendar days after a mutual fund for which the Advisory Employee makes or participates in making a recommendation trades in that security. Any profits realized on trades within this proscribed period shall be disgorged. This blackout period does not apply to money market mutual funds which are advised by Mastrapasqua.
3. Pre-Clearance requests involving a Securities Transaction by an Employee within two calendar days after any Client Account has traded in the same Security or a Related Security will be evaluated by the Chief Compliance Officer to ensure that the proposed transaction by the Employee is consistent with this Code and that all contemplated Client Account activity in the Security has been completed. It is wholly within the Chief Compliance Officer's discretion to determine when Pre-Clearance will or will not be given to an employee if the proposed transaction falls within the two-day period.
4. Pre-Clearance procedures apply to any Securities Transactions in a private placement. In connection with a private placement acquisition, the Chief Compliance Officer will take into account, among other factors, whether the investment opportunity should be reserved for a Client Account, and whether the opportunity is being offered to the Employee by virtue of the Employee's position with Mastrapasqua. Employees who have been authorized to acquire securities in a private placement will, in connection therewith, be required to disclose that investment if and when the Employee takes part in any subsequent investment in the same issuer. In such circumstances, the determination to purchase Securities of that issuer on behalf of a Client Account will be subject to an independent review by the Chief Compliance Officer or someone else with no personal interest in the issuer.
5. Employees are prohibited from acquiring low priced over-the-counter equity securities (or "penny stock") as defined in Section 3(a) of the Securities Exchange Act of 1934.
March 2004 Code of Ethics... 5
Other Restrictions
1. Employees are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization in accord with the general procedures of this Code. The consideration of prior authorization will be based upon a determination that the board service will be consistent with the interests of Client Accounts. In the event that board service is authorized, Employees serving as directors will be isolated from other Employees making investment decisions with respect to the securities of the company in question.
2. No Employee may accept from a customer or vendor gifts or gratuities in an amount greater than $100 per year that could be construed as compensation for services. If there is a question regarding receipt of a gift, gratuity or compensation, it is to be reviewed by the Chief Compliance Officer.
3. All employees, officers, and directors are prohibited from taking personal advantage of any opportunity properly belonging to a fund.
III. COMPLIANCE PROCEDURES
A. Employees Disclosure and Certification
1. At the commencement of employment with Mastrapasqua, each Employee must certify that he or she has read and understands this Code and recognized that he or she is subject to it, and must disclose all personal Securities holdings within 10 days of becoming an employee.
2. The above disclosure and certification is also required quarterly, along with an additional certification that the Employee has complied with the requirements of this Code and has disclosed or reported all personal Securities Transactions required to be disclosed or reported pursuant to the requirements of this Code.
B. Pre-Clearance
1. Advisory Employees will maintain an accurate and current Recommended List at all times, updating the list as necessary. The Advisory Employees will submit all Recommended Lists to the Chief Compliance Officer as they are generated, and the Chief Compliance Officer will retain the Recommended Lists for use when reviewing Employee compliance with this Code. Upon receiving a Pre-Clearance request, the Chief Compliance Officer will contact the trading desk and all Advisory Employees to determine whether the Security the Employee intends to purchase or sell is or was owned within the past two days by a Client Account, and whether there are any pending purchase or sell orders for the Security. The Chief Compliance Officer will determine whether the Employee's request violates any prohibitions or restrictions set out in this Code.
2. If authorized, the Pre-Clearance is valid for orders placed by the close of business on the second trading day after the authorization is granted. If during the two-day period the Employee becomes aware that the trade does not comply with this Code or that the statements made on the request form are no longer true, the Employee must immediately notify the Chief Compliance Officer of that information and the Pre-Clearance may be terminated. If, during the two-day period, the trading desk is notified that a purchase or sell order for the same Security or Related Security is pending or is being considered on behalf of a Client Account, the trading desk will not execute the Employee Transaction and will notify the Employee and the Chief Compliance Officer that the Pre-Clearance is terminated.
C. Compliance
1. All Employees must direct their broker, dealer or bank to send duplicate copies of all confirmations and periodic account statements directly to the Chief Compliance Officer.
March 2004 Code of Ethics... 6
2. The Chief Compliance Officer will check the trading confirmations provided by brokers to verify that the Employee obtained any necessary Pre-Clearance for the transaction. On a quarterly basis, the Chief Compliance Officer will compare all confirmations with the Pre-Clearance records, to determine, among other things, irregular trading patterns or violations to this Code.
3. If an Employee violates this Code, the Chief Compliance Officer will report the violation to management personnel of Mastrapasqua for appropriate remedial action, which, in addition to the actions specifically delineated in other sections of this Code, may include a reprimand of the Employee, or suspension or termination of the Employee's relationship with Mastrapasqua.
4. The Chief Compliance Officer will Annually prepare a written report to the Trustees of the various mutual funds that describes any issues under the code of ethics or insider trading policy and procedures since the last report to the Trustees, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to the material violations; and certifies that the Adviser has adopted procedures reasonably necessary to prevent employees, officers, and directors from violating the code.
5. The Chief Compliance Officer shall maintain and cause to be maintained:
(a) a copy of any code of ethics adopted by Mastrapasqua which has been in effect during the previous five (5) years in an easily accessible place;
(b) a record of any violation of any code of ethics, and of any action taken as a result of such violation, in an easily accessible place for at least five (5) years after the end of the fiscal year in which the violation occurs;
(c) a copy of each report made as required by Section V(c)(4) for at least five (5) years after the end of the fiscal year in which the report is made, the first two (2) years in an easily accessible place;
(d) a list of all persons who are, or within the past five years have been, required to make reports or who were responsible for reviewing these reports pursuant to any code of ethics adopted by Mastrapasqua in an easily accessible place;
(e) a copy of each written report and certification required pursuant to this Code for at least five (5) years after the end of the fiscal year in which it is made, the first two (2) years in an easily accessible place; and
(f) a record of any decision, and the reasons supporting the decision, approving the acquisition by an employee of securities under Section IV of this Code, for at least five (5) years after the end of the fiscal year in which the approval is granted.
IV. ANTI-MONEY LAUNDERING POLICY - USA PATRIOT ACT OF 2001
As a member of the financial services industry in its role as registered investment adviser, Mastrapasqua Asset Management has an obligation to comply with the provisions of the USA PATRIOT Act, which requires compliance by April 24, 2002.
As a registered investment adviser, Mastrapasqua Asset Management does not custody client funds nor accepts client funds except those amounts that are earmarked as fees for our investment management services. In the case of intermediaries such as Wrap Programs, Institutional Accounts or Consultants, we rarely have direct contact with the client. However, during the course of conducting normal business, we do have direct client contact both in the process of soliciting new business as well as servicing existing business. Primarily, sales and support personnel conduct such contact.
During the course of direct client contacts as well as intermediaries, Mastrapasqua Asset Management employees understand that they have a responsibility to be sensitive to any statements, actions, or inferences that could be construed to mean that funds under management could be illegitimate as to ownership or ultimate use. Should such an instance occur, the employee is to immediately communicate the concern to our Chief Compliance Officer, who will in turn record and report the concern to senior management, where appropriate action will be initiated.
March 2004 Code of Ethics... 7
From a practical sense, effective compliance with the statute requires employee awareness and sensitivity to potentially illegal activity or handling of relevant assets. As such, every employee, who comes into direct contact with clients or with their representatives will be asked to sign a statement quarterly confirming that no suspicious activity or communication took place during the most recent three months. This will have the dual effect of constantly updating awareness as well as encouraging any questions. In addition, the Chief Compliance Officer will conduct training on this policy with every new relevant employee, as well as provide one hour of ongoing training every year.
March 2004 Code of Ethics... 8
V. INSIDER TRADING ADVISERS ACT SECTION 204-A
A. SUPERVISORY RESPONSIBILITY. The Chief Compliance Officer shall be responsible for implementing, monitoring and enforcing MAM's policies and procedures against insider trading.
B. SECTION 204A OF THE ADVISER ACT. Section 204A requires all investment advisers to establish, maintain and enforce written procedures designed to prevent the misuse of material, non-public information in violation of the Securities and Exchange Act of 1934. This conduct is frequently referred to as "insider trading."
C. DEFINITIONS
1. INSIDER. The term "insider" is broadly defined. It includes officers, directors and employees of MAM. In addition, a person can be a "temporary insider" if they enter into a special confidential relationship in the conduct of a company's affairs and, as a result, are given access to information solely for the company's purposes. A temporary insider can include, among others, the company's attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, the Company may become a temporary insider of a client it advises or for which it performs other services. If a client expects the Company to keep the disclosed non-public information confidential and the relationship implies such a duty, then the Company will be considered an insider.
2. INSIDER TRADING. The term "insider trading" is not defined in federal securities laws, but generally is used to refer to the effecting of securities transactions while in possession of material, non-public information (regardless of whether one is an "insider") or to the communication of material, non-public information to others. While the law concerning insider trading is not static, it is generally understood that the law prohibits:
a. Trading by an insider on the basis of material non-public information;
b. Trading by a non-insider (also called a "temporary insider") on the basis of material non-public information, where the information was either disclosed to the non-insider in violation of an insider's duty to keep the information confidential or was misappropriated; and,
c. Communicating material non-public information to others.
3. MATERIAL INFORMATION. The term "material information" is generally defined as information that a reasonable investor would most likely consider important in making their investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities, regardless of whether the information is related directly to their business. Material information includes, but is not limited to: dividend changes; earnings estimates; changes in previously released earnings estimates; significant merger or acquisition proposals or agreements; major litigation; liquidation problems; and, extraordinary management developments.
4. NON-PUBLIC INFORMATION. Information is non-public until it has been effectively communicated to the marketplace. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public information.
D. THE COMPANY'S POLICY ON INSIDER TRADING. All officers, directors, employees and IARs are prohibited from trading either personally or on behalf of others, on material non-public information or communicating material non-public information to others in violation of Section 204A. The Agreement to Abide by the Written Policy of the Company on Insider Trading must be read and signed by every officer, director, IAR and employee. Covered persons should be instructed to direct any questions regarding the Company's policy on insider trading to the Chief Compliance Officer.
March 2004 Code of Ethics... 9
E. INTER-DEPARTMENTAL COMMUNICATIONS
SHARING OF INFORMATION. Inside Information is to be communicated only to such employees of MAM who have a "need to know" such information in the performance of their job responsibilities. When necessary to communicate material, non-public information to an employee, the Chief Compliance Officer must document the:
a. name of the employee with whom the information was shared;
b. employee's position and department;
c. date of the communication;
d. nature of the communication;
e. identity of the security affected; and,
f. name of the person requesting that the information be communicated.
F. PREVENTION OF INSIDER TRADING. To prevent insider trading from occurring, the Chief Compliance Officer shall:
1. design an appropriate educational program and provide educational materials to familiarize officers, directors, employees and IARs with the Company's policy;
2. answer questions and inquiries regarding the Company's policy;
3. review the Company's policy on a regular basis and update it as necessary to reflect regulatory and industry changes;
4. resolve issues as to whether information received by an officer, director, employee or IAR constitutes material and non-public information;
5. upon determination that an officer, director, employee, or IAR has possession of material non-public information:
a. implement measures to prevent dissemination of such information; and,
b. restrict officers, directors, employees and IARs from trading on any affected securities.
6. if necessary, physically separate the departments which regularly receive confidential material, including the separation of record-keeping and support systems;
7. hold meetings with all employees at least annually to review the policy.
G. DETECTION OF INSIDER TRADING. In order to detect insider trading, the Chief Compliance Officer shall, on a quarterly basis:
1. review the trading activity reports filed by each officer, director, employee and IAR;
2. submit his or her trading records and other relevant information to another senior manager for review;
3. review the trading activity of accounts managed by MAM;
4. review trading activity involving MAM's own account; and
March 2004 Code of Ethics... 10
5. coordinate the review of such reports with other appropriate
officers, directors, employees and IARs of the Company.
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H. REPORTS TO MANAGEMENT
1. IMMEDIATE REPORTS. Immediately upon learning of a potential insider trading violation, the Chief Compliance Officer shall prepare a written report to the management of MAM providing full details and recommendations for further action.
2. ANNUAL REPORT. The Chief Compliance Officer shall prepare an annual written report to the management of MAM setting forth the following:
a. A summary of existing procedures to detect and prevent insider trading;
b. Full details of any investigation, either internal or by a regulatory agency, of any suspected insider trading and the results of such investigation;
c. An evaluation of the Company's current procedures for monitoring and enforcing its insider trading policy and any recommendations for improvement; and,
d. A description of the Company's continuing education program regarding insider trading, including copies of any new materials used since the last report to management.
March 2004 Code of Ethics... 11
AGREEMENT TO ABIDE BY WRITTEN POLICY
ON INSIDER TRADING
MAM forbids any officer, director, employee, investment advisory representative, or other associated persons from trading, either personally or on behalf of others, on material non-public information or communicating material non-public information to others in violation of the Insider Trading and Securities Fraud Enforcement Act of 1988. This conduct is frequently referred to as "insider trading." This policy applies to every officer, director, employee, investment advisory representative and other associated persons and extends to activities within and outside their duties at MAM. The "Agreement to Abide by the Written Policy of the Company on Insider Trading" must be read and signed by all officers, directors, employees, investment advisory representatives and other associated persons. Any questions regarding this policy should be referred to the Chief Compliance Officer.
The term "insider trading" is not clearly defined in federal or state securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an "insider") or to communications of material non-public information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
o Trading by an insider on the basis of material non-public information;
o Trading by a non-insider on the basis of material non-public information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or,
o Communicating material non-public information to others.
The elements of insider trading and penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, you have any questions you should consult the Chief Compliance Officer.
I. WHO IS AN INSIDER?
The term "insider" is broadly defined. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if they enter into a special confidential relationship in the conduct of a company's affairs and, as a result, are given access to information solely for the company's purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, MAM may become a temporary insider of a client company it advises or which it performs other services. If a client company expects our Company to keep the disclosed non-public information confidential and the relationship implies such a duty, than our Company will be considered an insider.
II. WHAT IS MATERIAL INFORMATION?
Trading on insider information is not a basis for liability unless the information is material. "Material information" generally is defined as information that a reasonable investor would most likely consider important in making their investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities, regardless of whether the information is related directly to the company's business. Information that officers, directors, employees, investment advisory representatives and other associated persons should consider material includes, but is not limited to: dividend changes; earnings estimates; changes in previously released earnings estimates; significant merger or acquisition proposals or agreements; major litigation; liquidation problems; and extraordinary management developments.
March 2004 Code of Ethics... 12
III. WHAT IS NON-PUBLIC INFORMATION?
Information is non-public until it has been effectively communicated to the marketplace. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public information.
IV. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public information are severe, bother for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties described below even if they do not personally benefit from the activities surrounding the violation. Penalties include: civil injunctions; treble damages; disgorgement of profits; jail sentences; fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or non the person actually benefited; and, fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided. In addition, any violation of this policy statement can be expected to result in serious sanctions by MAM, including dismissal of the persons involved.
V. PROCEDURES TO IMPLEMENT INSIDER TRADING POLICY
The following procedures have been established to aid the officers, directors, employees, investment advisory representatives and other associated persons of MAM in avoiding insider trading. Failure to follow these procedures may result in dismissal, regulatory sanctions and criminal penalties.
A. IDENTIFY INSIDER INFORMATION
Before trading or making investment recommendations for yourself or others, including investment companies or private accounts managed by MAM, or in the securities of a company about which you may have potential insider information, ask yourself the following questions:
1. Is the information material? Is this information that an investor would consider important in making an investment decision? Is this information that would substantially affect the market price of the securities if generally disclosed?
2. Is the information non-public? To whom has this information been provided? Has the information been effectively communicated to the market place by being published in publications of general circulation?
B. If, after consideration of the above, the information is material and non-public, or if further questions arise as to whether the information is material and non-public, the following procedures shall be followed.
1. Report the matter immediately to the Chief Compliance Officer.
2. Do not purchase, sell or recommend securities on behalf of yourself or others, including accounts managed by MAM.
3. Do not communicate the information inside or outside MAM other than to the Chief Compliance Officer and/or the President.
4. After the Chief Compliance Officer and/or the President have reviewed the issue, you will be instructed as to the proper course of action to take.
March 2004 Code of Ethics... 13
C. PERSONAL SECURITIES TRADING
1. All officers, directors, employees, investment advisory representatives and other associated persons of MAM are required to submit a report to the Company of every securities transaction in which they, their families (including spouse, minor children and adults living in the same household), and any trust of which they are trustees or in which they have a beneficial interest or are parties, within ten (10) days after the end of the calendar quarter in which the transactions were effected. The report shall include the names of the securities, dates of the transactions, quantities, prices and broker/dealer or other entity through which the transactions were effected.
This requirement may be satisfied by submitting copies of confirmations or account statements accompanied by a signed and dated notice of submission.
2. Any transactions by an officer, director, employee, investment advisory representative and other associated persons (including their related parties) through a broker/dealer, investment advisory firm or clearing firm, other than MAM, shall be reported to the Company within ten (10) days after such transactions are effected and such report shall include the names of the securities, dates of the transactions, quantities, prices and broker/dealer or other entity through which the transactions were effected. This requirement may be satisfied by submission of duplicate confirmations accompanied by a signed and dated notice of submission.
D. RESTRICTING ACCESS TO MATERIAL NON-PUBLIC INFORMATION
Information in your possession that you identify as material and non-public may not be communicated to anyone, including persons within MAM except as provided in paragraph 1 above. In addition, care should be taken so that such information is secure. For example, files containing material non-public information should be sealed.
E. RESOLVING ISSUES CONCERNING INSIDER TRADING
If, after consideration of the items set forth in paragraph 1, doubt remains as to whether information is material or non-public, or if there is any unresolved question as to the applicability or interpretation of the foregoing procedures, or as to the propriety of any action, it must be discussed with the Chief Compliance Officer and/or the President before trading or communicating the information to anyone.
F. ACKNOWLEDGMENT
By affixing my signature below, I acknowledge that I have read and understood the foregoing policies and will comply in all respects with such policies.
I. INTRODUCTION
The TCW Group, Inc. is the parent of several companies which act as investment adviser or manager of investment companies, corporate pension funds, other institutions and individuals. As used in this Code of Ethics, "TCW" refers to The TCW Group, Inc., all of its subsidiaries and affiliated partnerships that are investment advisers registered with the Securities and Exchange Commission, and Trust Company of the West.
This Code of Ethics is based on the principle that the officers, directors and employees of TCW owe a fiduciary duty to, among others, TCW's clients. In light of this fiduciary duty, you should conduct yourself in all circumstances in accordance with the following general principles:
o You must at all times place the interests of TCW's clients before your own interests.
o You must conduct all of your personal investment transactions consistent with this Code and in such a manner as to avoid any actual or potential conflict of interest or any abuse of your position of trust and responsibility.
o You should adhere to the fundamental standard that investment advisory personnel should not take inappropriate advantage of their positions to their personal benefit.
o You should comply with those federal securities laws and TCW policies as issued from time to time applicable to your group.
Although it is sometimes difficult to determine what behavior is necessary or appropriate to adhere to these general principles, this Code contains several guidelines for proper conduct. However, the effectiveness of TCW's policies regarding ethics depends on the judgment and integrity of its employees rather than on any set of written rules. Accordingly, you must be sensitive to the general principles involved and to the purposes of the Code in addition to the specific guidelines and examples set forth below. If you are uncertain as to whether a real or apparent conflict exists in any particular situation between your interests and those of TCW's clients, you should consult the Chief Compliance Officer immediately.
II. PERSONAL INVESTMENT TRANSACTIONS POLICY
Laws and ethical standards impose on TCW and its employees duties to avoid conflicts of interest between their personal investment transactions and transactions TCW makes on behalf of its customers. In view of the sensitivity of this issue, it is important to avoid even the appearance of impropriety. The following personal investment transaction policies are designed to reduce the
possibilities for such conflicts and or inappropriate appearances, while at the same time preserving reasonable flexibility and privacy in personal securities transactions.
Except as otherwise noted, TCW's restrictions on personal investment transactions apply to all Covered Persons. "COVERED PERSONS" include all TCW directors, officers and employees, except directors who (i) do not devote substantially all working time to the activities of TCW, and (ii) do not have access to information about the day-to-day investment activities of TCW. Every employee should consider himself or herself a Covered Person unless otherwise specifically exempted by the Approving Officers or unless he or she falls within a class exempted by the Approving Officers. In addition, this policy governs your investments in securities. "SECURITIES" include any interest or instrument commonly known as a security, including stocks, bonds, shares of mutual funds and other investment companies, options, warrants, financial commodities, other derivative products and interests in privately placed offerings and limited partnerships, including hedge funds.
GENERAL PRINCIPLES REGARDING SECURITIES TRANSACTIONS OF COVERED PERSONS AND TCW DIRECTORS
No Covered Person or TCW director may purchase or sell, directly or indirectly, for his or her own account, or any account in which he or she may have a beneficial interest:
o Any security (or related option or warrant) that to his or her knowledge TCW is buying or selling for its clients, until such buying or selling is completed or canceled.
o Any security (or related option or warrant) that to his or her knowledge is under active consideration for purchase or sale by TCW for its clients.
The term "BENEFICIAL INTEREST" is defined by rules of the SEC. Generally, under the SEC rules, a person is regarded as having a beneficial interest in securities held in the name of:
o A husband, wife or a minor child;
o A relative sharing the same house;
o Anyone else if the Covered Person:
(i) obtains benefits substantially equivalent to ownership of the securities;
(ii) can obtain ownership of the securities immediately or at some future time; or
(iii) can vote or dispose of the securities.
An example where a Covered Person would have a "beneficial interest" includes trades in a relative's brokerage account if the Covered Person is authorized to do trades for that brokerage account regardless of whether the Covered Person actually does trades.
If you act as a fiduciary with respect to funds and accounts managed outside of TCW (for example, if you have a power of attorney regarding such accounts or act as the executor of an estate for which you make investment decisions), you will have a beneficial interest in the assets of that fund or account. Accordingly, any securities transactions you make on behalf of that fund or account will be subject to the general trading restrictions set forth above. You should review the restrictions on your ability to act as a fiduciary outside of TCW set forth under "Outside Activities -- Outside Fiduciary Appointments."
PRECLEARANCE PROCEDURES
Each Covered Person must obtain preclearance for any personal investment transaction in a security if such Covered Person has, or as a result of the transaction acquires, any direct or indirect beneficial ownership in the security. Preclearance is not necessary for exempt securities or Outside Fiduciary Accounts. A portfolio manager of a third party mutual fund for which TCW acts as the sole advisor or sub-advisor must obtain preclearance for any personal investment transaction in such fund. "EXEMPT SECURITIES" are securities (or securities obtained in transactions) described on page C6. "OUTSIDE FIDUCIARY ACCOUNTS" are certain fiduciary accounts outside of TCW for which you have received TCW's approval to act as fiduciary and which TCW has determined qualify to be treated as Outside Fiduciary Accounts under this Personal Investment Transactions Policy. Separate certification procedures will apply for securities transactions executed on behalf of Outside Fiduciary Accounts in lieu of preclearance.
You must obtain preclearance for all non-exempt securities transactions by completing and signing the Request for Personal Investment Transactions Approval Form provided for that purpose by TCW and by obtaining the signature of the TCW Personal Securities Administrator. You will be required to make certain certifications each time you trade a security, including that you have no knowledge that would violate the general trading principles set forth above. The Request for Personal Investment Transactions Approval Forms for domestic and foreign preclearance are available on myTCW, TCW's intranet site, in the Department Resources section under the Compliance Department.
You must complete an approved securities transaction by the end of the business day following the day that you obtain preclearance. If the transaction is not completed within these time requirements, you must obtain a new preclearance, including one for any uncompleted portion of the transaction. Post-approval is not permitted under this Code of Ethics. If TCW determines that you completed a trade before approval or after the clearance expires, you will be considered to be in violation of the Code.
Note that preclearance will ordinarily be given on the day you request it if it is received before the daily processing at 6:30 am and 10:30 am (Los Angeles time); however if you are in the Hong Kong office preclearance for these requests will ordinarily be given on the next business day.
TRADING RESTRICTIONS
In addition to the more general restrictions discussed above, TCW has adopted other restrictions on personal investment transactions. Except as otherwise noted below, the trading restrictions do not apply to Outside Fiduciary Accounts.
Remember these are limits on what you can do directly or indirectly, for your own account or for any account in which you my have a "beneficial interest" (including an Outside Fiduciary Account).
NO COVERED PERSON MAY:
o Enter into an uncovered short sale.
o Write an uncovered option.
o Acquire any non-exempt security in an initial public offering (IPO). (Remember - under NASD rules, you may also be prohibited from participating in any initial equity public offering.
o Purchase or sell any security that is subject to a firm-wide restriction or a department restriction by his or her department.
o Have more than four "roundtrip" trades in the TCW Galileo Funds ("Galileo Fund(s)"), other than the Galileo Money Market Fund, in a calendar year. A "roundtrip trade" is any purchase followed by a redemption in any single Galileo Fund. This in effect means that LIFO (last in, first out) applies for matching purposes. Also, the dollar amount of the purchase and the redemption need not match or even correlate to one another for there to be a roundtrip trade. Pre-instructed transactions that occur automatically following the instruction ("auto-trades"), such as dividend or distribution reinvestments, paycheck contributions, and periodic or automatic withdrawal programs are not counted as a purchase or sale for the purpose of determining whether a round trip transaction has occurred.
o Redeem shares of a Galileo Fund, other than the Galileo Money Market Fund, within 15 days of the purchase of a share in that Galileo Fund.
COMPLIANCE [GRAPHIC OMITTED]
TCW
EMPLOYEE POLICY
APRIL 2004
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o Have more than one reallocation in the TCW Profit Sharing and
Savings Plan (the "TCW Plan") per calendar quarter.
o Make more than one reallocation in the TCW Plan within a 15 day
period.
o Use a Galileo Fund for short-term trading.
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Note that the redemption fees imposed by any Galileo Fund will be applicable to transactions in the TCW Plan.
NO INVESTMENT PERSONNEL MAY:
o Purchase securities offered in a hedge fund or other private placement (other than those sponsored by TCW) except with the prior approval of the Approving Officers. Contact the Personal Securities Administrator who will coordinate the request for approval. "INVESTMENT PERSONNEL" include any portfolio manager or securities analyst or securities trader who provide information or advice to a portfolio manager or who help execute a portfolio manager's decisions. "APPROVING OFFICERS" are (i) one of Alvin Albe or Marc Stern and (ii) one of Michael Cahill or Hilary Lord. In considering approval, the Approving Officers will take into consideration whether the --- investment opportunity you have been offered should be reserved for TCW's clients and whether the opportunity is being offered to you by virtue of your position with TCW. If you or your department want to purchase on behalf of a TCW client the security of an issuer or its affiliate where you have a beneficial interest (including through an Outside Fiduciary Account) in the securities of that issuer through a private placement, you must first disclose your interest to an Approving Officer. In such event, the Approving Officers will independently review the proposed investment decision. Written records of any such circumstance should be sent to the Personal Securities Administrator.
NO INVESTMENT PERSONNEL WHO MANAGE OR OTHERWISE PROVIDE ADVICE OR EXECUTION SERVICES FOR A REGISTERED INVESTMENT COMPANY (INCLUDING THE GALILEO FUNDS) MAY:
o Profit from the purchase or sale, or sale and purchase, of the same (or equivalent) securities within 60 calendar days. This applies to any security, whether or not it is held in any client portfolio at TCW.
o Redeem shares of a Galileo Fund, other than the Galileo Money Market Fund, within 60 days of the purchase of a share in that Galileo Fund. This 60 day "blackout" period also applies to transactions in the TCW Plan.
COMPLIANCE [GRAPHIC OMITTED]
TCW
EMPLOYEE POLICY
APRIL 2004
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Because of TCW's portfolio management support structure,
securities analysts and securities traders should assume that
they are subject to this trading restriction unless they have
received confirmation to the contrary from the Chief Compliance
Officer. Note that a person's status or duties may change which
could result in him or her subsequently being subject to this
trading restriction. If you have any questions resulting from
such a change, you should consult with the Chief Compliance
Officer. You should also note that this prohibition would
effectively limit the utility of options trading and short sales
of securities and could make legitimate hedging activities less
available. Any profits realized on such short term trades will be
subject to disgorgement.
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NO PORTFOLIO MANAGER MAY:
o Purchase or sell any security for his or her own account or any Outside Fiduciary Account for a period of seven days before that security is bought or sold on behalf of any TCW client for which the portfolio manager serves as portfolio manager. Violation of this prohibition will require reversal of the transaction and any resulting profits will be subject to disgorgement.
o Purchase any security for his or her own account or any Outside Fiduciary Account for a period of seven days after that security is sold or sell any security for his or her own account or any Outside Fiduciary Account for a period of seven days after that security is bought on behalf of any TCW client for which the portfolio manager serves as portfolio manager. In addition, any portfolio manager who manages a registered investment company may not purchase or sell any security for his or her own account or any Outside Fiduciary Account for the period of seven days after that security is bought or sold on behalf of registered investment company for which the portfolio manager serves as investment manager. Violation of these prohibitions will require reversal of the transaction and any resulting profits will be subject to disgorgement.
Any profits subject to disgorgement will be given to a charity under TCW's direction.
SECURITIES OR TRANSACTIONS EXEMPT FROM PERSONAL INVESTMENT TRANSACTIONS POLICY
The following securities or transactions are exempt from some aspects of the personal investment transactions policy:
(a) U.S. Government Securities.
(b) Bank Certificates of Deposit.
(c) Bankers' Acceptances.
(d) Commercial Paper or other high quality short-term debt instruments
(investment grade, maturity not greater than thirteen months).
(e) Shares in open-end investment companies (mutual funds).
(f) Securities purchased on behalf of an Covered Person for an account over which the Covered Person has no direct or indirect influence or control.
(g) Securities purchased through an automatic dividend reinvestment plan.
(h) Security purchases effected upon the exercise of rights issued by the issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.
(i) Stock index futures and nonfinancial commodities (e.g., pork belly contracts).
(j) Interests in TCW-sponsored limited partnerships or other TCW-sponsored private placements.
(k) Securities acquired in connection with the exercise of an option. If cash is received in connection with the exercise of the option, the transaction must be pre-cleared. The purchase or writing (sale) of an option is not an exempt transaction.
It is not necessary to preclear personal transactions for any exempt securities or transactions except for (e) if TCW is the sole advisor or sub-advisor of the third party mutual fund and you are a portfolio manager for the fund if the mutual fund is in the investment strategy for which you act as portfolio manager. However, it still is necessary to report such securities (other than securities exempt under clauses (a), (b), (c), (d), (f), (i) and (j) above) in the quarterly transaction reports or annual securities holdings list. With respect to (e), only holdings of the Galileo Funds (exclusive of the Galileo Money Market Fund) have to be reported. Personal investment transactions in exempt securities are still subject to TCW's policy on inside information.
The following reference table summarizes the pre-clearance and reporting requirements for exempt securities or transactions. The letter in column 1 corresponds with the above list. For example, (a) refers to U.S. Government Securities, (b) refers to Bank Certificates of Deposit and so on.
Type of Exempt Securities or Transactions Pre-clearance Reporting on Quarterly or Annual Reports
------------------------------------------- ---------------------------------- -----------------------------------------------
(a) No No
(b) No No
(c) No No
(d) No No
(e) Only if TCW is the sole advisor Only shares of the Galileo Fund (exclusive of
or sub-advisor of the third party the Galileo Money Market Fund).
mutual fund and you are the
portfolio manager for the fund.
(f) No No
(g) No No
(h) No No
(i) No No
(j) No No
(k) No, unless cash received in Yes
connection with exercise of the
option.
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GALILEO FUNDS TRADES
All purchases and redemptions by Covered Persons of any Galileo Fund are to be done exclusively through a "TCW Account." A "TCW Account" means (a) an account maintained at TCW through the Private Client Services Department ("PCS"), or (b) a direct trade in an account maintained directly with the Galileo Funds' transfer agent (PFPC, Inc.) and (c) in the case of an Individual Retirement Account ("IRA"), through an IRA established through PCS where Mellon Bank, N.A., is the custodian. Transactions in the Galileo Money Market Funds and redemptions (but not purchases) of shares of the Galileo Funds out of existing third party accounts currently held, but only if accounts are direct accounts and not omnibus accounts are excepted from this requirement. A direct account is that which specifically identifies the beneficial owner with the Galileo Funds' transfer agent.
REPORTING OF TRANSACTIONS
I. COVERED PERSONS
Quarterly Reports. All Covered Persons must file with the Compliance Department quarterly reports of personal investment transactions (including transactions in the Galileo Funds) (Exhibit C-B) by the 10th day of January, April, July and October or, if that day is not a business day, then the first business day thereafter. In each quarterly report, the Covered Person must report all personal investment transactions in which he or she has a beneficial interest and which were transacted during the quarter other than transactions in U.S. government securities, bank certificates of deposit, bankers' acceptances, commercial paper, high quality short-term debt instruments, (investment grade, maturity not greater than one year) third party mutual funds, the Galileo Money Market Fund and auto-trades in the Galileo Funds such as dividend or distribution reinvestments, paycheck contributions and periodic or automatic withdrawal programs ("Auto-Trades"). Every Covered Person must file a quarterly report when due even if such person made no purchases or sales of securities during the period covered by the report. You are charged with the responsibility for making the quarterly reports. Any effort by TCW to facilitate the reporting process does not change or alter that responsibility.
The report must be on the form provided by TCW. Since the form may change over time, you should see the form posted on myTCW in the Department Resources section under the Compliance Department.
Broker Statements and Trade Confirmations. All Covered Persons are required to direct brokers of accounts in which they have a beneficial interest to supply to TCW, on a timely basis, duplicate copies of trade confirmations and copies of periodic broker account statements. This requirement does not apply to Outside Fiduciary Accounts, to accounts that hold only third party mutual funds or to TCW Accounts that exclusively hold shares of the Galileo Funds. To maximize the protection of your privacy, you should direct your brokers to send this information to:
Trust Company of the West
P.O. Box 71940
Los Angeles, CA 90017
II. OFFICERS AND DIRECTORS OF TCW INVESTMENT MANAGEMENT COMPANY, THE GALILEO FUNDS AND CVT, AND ALL TCW INVESTMENT PERSONNEL
Officers of TCW Investment Management Company, the Galileo Funds and CVT, and all TCW Investment Personnel are required to file the following reports in addition to those above.
Initial Holdings Reports. All TCW Investment Personnel and "ACCESS PERSONS" are required to submit an Initial Holdings Report listing all securities in which the person has a beneficial interest other than U.S. government securities, bank certificates of deposit, bankers' acceptances, commercial paper or high quality short-term debt instruments (investment grade, maturity not greater than thirteen months) or third party mutual funds, and the Galileo Money Market Fund within 10 days of becoming either TCW Investment Personnel or an "ACCESS PERSON". An "ACCESS PERSON" means Director, President, Executive Vice President, Managing Director or Senior Vice President of TCW Investment Management Company (the investment adviser to registered investment companies) or any officer or interested Director of the Galileo Funds or CVT.
Annual Holdings Reports. All TCW Investment Personnel and "ACCESS PERSONS" are required to file an Annual Holdings Report which provides a listing of all securities in which the person a beneficial interest as of December 31 of the preceding year, other than U.S. government securities, bank certificates of deposit, bankers' acceptances, commercial paper or high quality short-term debt securities (investment grade, maturity not greater than thirteen months) or third party mutual funds and the Galileo Money Market Fund.
See the reference table below for a summary of reporting requirements.
REPORTING REQUIREMENTS REFERENCE TABLE
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If you are a "Covered Person" Then you must file:
[all TCW directors, officers and employees]. (1) Personal Investment Transactions Approval Form
prior to trading;
(2) Quarterly Reports;
(3) Broker Statements and Trade
Confirmations; and
(4) an Annual Compliance Certification.
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If you are considered TCW "Investment Personnel" In addition to the requirements for
[portfolio manager, securities analyst "Covered Person", you must file:
or a securities trader]. (1) an Initial Holdings Report; and
(2) an Annual Holdings Report.
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If you are an "Access Person" of TCW Investment Management In addition to the requirements for
Company [Director, President, Executive Vice President, "Covered Person", you must file:
Managing Director or Senior Vice President] or the Galileo (1) an Initial Holdings Report; and
Funds or CVT [any officer or interested Director]. (2) an Annual Holdings Report.
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If you have any questions about the Personal Investment Transactions Policy, call the TCW Personal Securities Administrator, Hilary Lord or Michael Cahill.
TABLE OF CONTENTS
Things You Need to Know to Use This Code
Section I (Applies to all personnel)
A. General Principles
B. Gifts to or from Brokers or Clients
C. Service on the Board or as an Officer of Another Company
D. Excessive trading or Market Timing
Section II (Applies to Access Persons and Investment Persons)
A. Reporting Requirements
1. Initial Holdings Reports.
2. Quarterly Transaction Reports.
3. Annual Holdings Reports.
4. Duplicate Confirmation Statements.
B. Transaction Restrictions
1. Restrictions applicable to Access Persons
a. Preclearance
b. Black-Out Periods
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c. Initial Public Offerings and Private Placements
2. Restrictions applicable to Investment Persons
a. Prohibition on Short-Term Trading
b. Prohibition on Front-Running
3. Exemptions
a. Preclearance
b. Complete Exemptions
c. WCM Sub-Advised Funds Exemption
d. Large Cap Stock Exemption
Section III
Definitions
o Access Person
o Beneficial Ownership
o Code Officer
o Covered Security
o Family/Household
o Investment Person
Form A - Initial Holdings Report
Form B - Quarterly Personal Transactions and Brokerage Account Report
Form C - Annual Certification of Compliance and Inventory Report
Form D - Preclearance Transaction Form
This is the Code of Ethics (the "Code") of Westfield Capital Management Company, LLC ("WCM").
THINGS YOU NEED TO KNOW TO USE THIS CODE
1. Terms in BOLDFACE TYPE have special meanings as used in this Code. To understand the Code, you need to read the definitions of these terms. The definitions are at the end of the Code in Section III.
2. To understand what parts of this Code apply to you, you need to know whether you are an ACCESS PERSON OR AN INVESTMENT PERSON. These terms are defined in Section III of this Code. If you don't know, ask the CODE OFFICER, KAREN DIGRAVIO.
3. This Code has three sections:
1. Section I-- Applies to All Personnel
2. Section II-- Applies to ACCESS PERSONS and INVESTMENT PERSONS
3. Section III-- Definitions
4. There are also three Reporting Forms that ACCESS PERSONS have to fill out under this Code. You can also get copies of the Reporting Forms from the CODE OFFICER.
5. If you are an INVESTMENT PERSON, you are automatically an ACCESS PERSON too, so you must comply with both the ACCESS PERSON provisions and the INVESTMENT PERSON provisions.
6. By SEC rule, all the members of WCM's board are ACCESS PERSONS
INCLUDING THOSE BOARD MEMBERS WHO ARE NOT EMPLOYEES OF WCM. However,
Section II.B.1 and Section II.B.2 of the Code are not applicable to
board members who are not employees of WCM.
7. The CODE OFFICER has the authority to grant written waivers of the provisions of this Code in appropriate instances. However:
i. WCM expects that waivers will be granted only in rare instances, and documented on file; and
ii. Some provisions of the Code that are mandated by SEC rule cannot be waived.
8. The CODE OFFICER shall report to Westfield's Board of Directors at the next meeting following the deadline for receipt of annual reports of holdings or quarterly reports of securities transactions, the results of her review of such reports, and any apparent violation of the reporting requirements.
9. The CODE OFFICER shall perform sample testing on each quarterly securities transactions report submission for randomly selected employees.
10. The WCM Board of Directors shall consider reports made to it and shall determine whether the policies established in this Code have been violated, and what sanctions, if any, should be imposed. The Board shall review the operations of this Code at least annually or as dictated by changes in applicable law or regulation. This Code shall be governed by Rule 17j-1 under the Investment Company Act and Rule 204A-1 under the Investment Adviser Acts of 1940, as amended.
11. This Code, a copy of each Personal Securities Holdings Report and each transactions report by the parties covered in the Code, together with any written report prepared by the CODE OFFICER and lists of all persons required to make reports hereunder, shall be preserved with Westfield for the period required by Rule 17j-1 under the Investment Company Act of 1940.
* * *
SECTION I
A. GENERAL PRINCIPLES
The following general principles apply to ALL PERSONNEL, INCLUDING ALL
BOARD MEMBERS.
1. WCM is a fiduciary for its investment advisory and sub-advisory clients. Because of this fiduciary relationship, it is generally improper for WCM or its personnel to use for their own benefit (or the benefit of anyone other than the client) information about WCM's trading or recommendations for client accounts; or
2. Take advantage of investment opportunities that would otherwise be available for WCM's clients.
3. As a matter of business policy, WCM wants to avoid the appearance that WCM, its personnel or others receive any improper benefit from information about client trading or accounts, or from our relationships with our clients or with the brokerage community.
4. WCM expects all personnel to comply with the spirit of the Code, as well as the specific rules contained in the Code.
5. WCM TREATS VIOLATIONS OF THIS CODE (INCLUDING VIOLATIONS OF THE SPIRIT OF THE CODE) VERY SERIOUSLY. IF YOU VIOLATE EITHER THE LETTER OR THE SPIRIT OF THIS CODE, WCM MIGHT IMPOSE PENALTIES OR FINES, CUT YOUR COMPENSATION, DEMOTE YOU, REQUIRE DISGORGEMENT OF TRADING GAINS, OR SUSPEND OR TERMINATE YOUR EMPLOYMENT.
6. Improper trading activity can constitute a violation of this Code. But you can also violate this Code by failing to file required reports, or by making inaccurate or misleading reports or statements concerning trading activity or securities accounts. Your conduct can violate this Code, even if no clients are harmed by your conduct.
7. IF YOU HAVE ANY DOUBT OR UNCERTAINTY ABOUT WHAT THIS CODE REQUIRES OR PERMITS, YOU SHOULD ASK THE CODE OFFICER. PLEASE DON'T JUST GUESS AT THE ANSWER!
B. GIFTS TO OR FROM BROKERS OR CLIENTS - THIS APPLIES TO ALL PERSONNEL
(INCLUDING ALL BOARD MEMBERS)
1. No personnel may accept or receive on their own behalf or on behalf of WCM any gift or other accommodations from a vendor, broker, securities salesman, client or prospective client (a "business contact") that might create a conflict of interest or interfere with the impartial discharge of such personnel's responsibilities to WCM or its clients or place the recipient or WCM in a difficult or embarrassing position. This prohibition applies equally to gifts to members of the FAMILY/HOUSEHOLD of firm personnel.
2. No personnel may give on their own behalf or on behalf of WCM any gift or other accommodation to a business contact that may be construed as an improper attempt to influence the recipient.
3. In no event should gifts to or from any one business contact have a value that exceeds $100.
4. These policies are not intended to prohibit normal business entertainment.
C. SERVICE ON THE BOARD OR AS AN OFFICER OF ANOTHER COMPANY - THIS APPLIES TO ALL PERSONNEL (INCLUDING ALL BOARD MEMBERS)
1. To avoid conflicts of interest, inside information and other compliance and business issues, WCM prohibits all its employees from serving as officers or members of the board of any other entity, except with the advance written approval of WCM. Approval must be obtained through the CODE OFFICER, and may require consideration by the board of WCM. The CODE OFFICER can deny approval for any reason.
2. This pre-approval requirement does not apply to service as an officer or board member of any parent or subsidiary of WCM, nor does it apply to members of WCM's board who are not employees of WCM, although board members who are not employees are required to inform WCM of all positions held by them on boards or as officers of other companies.
D. EXCESSIVE TRADING OR MARKET TIMING - THIS APPLIES TO ALL PERSONNEL
(INCLUDING ALL BOARD MEMBERS)
Personnel should not engage in excessive trading or market timing activities with respect to any WCM Sub-Advised Fund. When placing trades in any WCM Sub-Advised Fund, whether the trade is placed directly in the Associate's direct personal account, 401(k) account, deferred compensation account, account held with an intermediary or any other account, all personnel must comply with the rules set forth in the Fund's prospectus and SAI regarding the frequency of trades.
Section II
A. REPORTING REQUIREMENTS APPLICABLE TO ALL ACCESS PERSONS AND INVESTMENT PERSONS
The following reporting requirements apply to all ACCESS PERSONs (including all Investment Persons and all members of WCM's Board). One of the most complicated parts of complying with this Code is understanding what holdings, transactions and accounts you must report and what accounts are subject to trading restrictions. For example, accounts of certain members of your family and household are covered, as are certain categories of trust accounts, certain investment pools in which you might participate, and certain accounts that others may be managing for you. To be sure you understand what holdings, transactions and accounts are covered, it is essential that you carefully review the definitions of COVERED SECURITY, FAMILY/HOUSEHOLD and BENEFICIAL OWNERSHIP in the "Definitions" section, Section III, at the end of this Code.
YOU MUST FILE THE REPORTS DESCRIBED BELOW, EVEN IF YOU HAVE NO HOLDINGS,
TRANSACTIONS OR ACCOUNTS TO LIST IN THE REPORTS.
1. INITIAL HOLDINGS REPORTS. No later than 10 days after you become an ACCESS PERSON, you must file with the CODE OFFICER an Initial Holdings Report on Form A (copies of all reporting forms are available from the CODE OFFICER). Personnel who are ACCESS PERSONS on the date this Code goes into effect must file an Initial Holdings Report on Form A with the CODE OFFICER within 10 days of receipt of the Code.
Form A requires you to list all COVERED SECURITIES in which you or members of your FAMILY/HOUSEHOLD have BENEFICIAL OWNERSHIP. It also requires you to list all brokers, dealers and banks where you maintained an account in which any securities (not just COVERED SECURITIES) were held for the direct or indirect benefit of you or a member of your FAMILY/HOUSEHOLD on the date you became an ACCESS PERSON.
Form A also requires you to confirm that you have read and understand this Code, that you understand that it applies to you and members of your FAMILY/HOUSEHOLD and that you understand that you are an ACCESS PERSON and, if applicable, an INVESTMENT PERSON under the Code.
2. QUARTERLY TRANSACTION REPORTS. No later than 10 days after the end each quarter, you must file with the CODE OFFICER a Quarterly Personal Transactions and Brokerage Accounts Report on Form B.
Form B requires you to list all transactions during the most recent calendar quarter in COVERED SECURITIES, in which you or a member of your FAMILY/HOUSEHOLD had BENEFICIAL OWNERSHIP. It also requires you to list all brokers, dealers and banks where you or a member of your FAMILY/HOUSEHOLD established an account in which any securities (not just COVERED SECURITIES) were held during the quarter for the direct or indirect benefit of you or a member of your FAMILY/HOUSEHOLD.
3. ANNUAL HOLDINGS REPORTS. By January 31 of each year, you must file with the CODE OFFICER a Certification of Compliance and Inventory Report on Form C.
Form C requires you to list all COVERED SECURITIES in which you or a member of your FAMILY/HOUSEHOLD had BENEFICIAL OWNERSHIP as of January 1 of that year. It also requires you to list all brokers, dealers and banks where you or a member of your FAMILY/HOUSEHOLD maintained an account in which any securities (not just COVERED SECURITIES) were held for the direct or indirect benefit of you or a member of your FAMILY/HOUSEHOLD on January 1 of that year.
Form C also requires you to reaffirm that you have read and understand this Code, that you understand that it applies to you and members of your FAMILY/HOUSEHOLD and that you understand that you are an ACCESS PERSON and, if applicable, an INVESTMENT PERSON under the Code.
4. DUPLICATE CONFIRMATION STATEMENTS. If you or any member of your FAMILY/HOUSEHOLD has a securities account with any broker, dealer or bank, you, or your FAMILY/HOUSEHOLD member must direct that broker, dealer or bank to send, directly to WCM's CODE OFFICER, contemporaneous duplicate copies of all transaction confirmation statements and all account statements relating to that account.
B. TRANSACTIONAL RESTRICTIONS
1. RESTRICTIONS APPLICABLE TO ACCESS PERSONS. The following transaction restrictions apply to ALL ACCESS PERSONS (including all INVESTMENT PERSONS), except Members of WCM's Board who are not employees of WCM.
a. Preclearance
You and members of your FAMILY/HOUSEHOLD are prohibited from engaging in any transaction in a COVERED SECURITY for any account in which you or a member of your FAMILY/HOUSEHOLD has any BENEFICIAL OWNERSHIP, unless you obtain, in advance of the transaction, written preclearance for that transaction from the CODE OFFICER. The written preclearance form is attached to this Code as Form D.
Once obtained, preclearance is valid only for the day on which it is granted. The CODE OFFICER may revoke a preclearance any time after it is granted and before you execute the transaction. The CODE OFFICER may deny or revoke preclearance for any reason.
b. Black-Out Periods
An ACCESS PERSON should not place an order to enter into a personal transaction during any of the following times:
(i) When the ACCESS PERSON knows, or has reason to believe, that the Security may in the near future be recommended for action or acted upon by the Company for any client account; or
(ii) For a period of ten (10) business days after a Security has been recommended for action by the Company for any client account; or
(iii) When the Access Person knows, or has reason to believe, that an affiliate is purchasing, selling or actively negotiating with respect to a particular Security or other investment in an issuer of Securities.
c. Initial Public Offerings and Private Placements
Neither you nor any member of your FAMILY/HOUSEHOLD may acquire BENEFICIAL OWNERSHIP in any COVERED SECURITY in a private placement transaction or an initial public offering, except with the specific, advance written approval of the, CODE OFFICER on a case-by-case basis, which the CODE OFFICER may deny for any reason. The CODE OFFICER will make a written record of any decision, and the reasons supporting the decision, to approve any such transaction.
2. RESTRICTIONS APPLICABLE TO INVESTMENT PERSONS. The following transaction restrictions apply to all INVESTMENT PERSONS, except members of WCM's board who are not employees of WCM.
a. Prohibition on Short-Term Trading
Neither you nor any member of your FAMILY/HOUSEHOLD may realize a profit from any transaction involving the purchase and sale, or sale and purchase, of the same COVERED SECURITY (or any closely related security, such as an option or a related convertible or exchangeable security) within any period of 30 calendar days. For purposes of this rule, transactions will be reviewed on a first-in-first-out basis. If any such transactions occur without approval, WCM will require any profits from the transactions to be disgorged for donation by WCM to charity.
b. Prohibition on Front-Running
An INVESTMENT PERSON (including any member of the FAMILY/HOUSEHOLD of such INVESTMENT PERSON) may not purchase or sell a COVERED SECURITY within a period of seven (7) calendar days before or after a client account managed by a WCM INVESTMENT PERSON (of similar a product style) purchases or sells that COVERED SECURITY. Please note that the total blackout period is 15 days (the day of the client trade, plus seven days before and seven days after).
(i) If any such transactions occur, WCM will generally require any profits from the transactions to be disgorged for donation by WCM to charity.
(ii) It sometimes happens that an INVESTMENT PERSON who is responsible for making investment recommendations or decisions for client accounts (such as a portfolio manager or analyst) determines within the seven calendar days after the day he or she (or a member of his or her FAMILY/HOUSEHOLD) has purchased or sold for his or her own account a COVERED SECURITY that was not, to the INVESTMENT PERSON's knowledge, then under consideration for purchase by any client account--that it would be desirable for client accounts as to which the INVESTMENT PERSON is responsible for making investment recommendations or decisions to purchase or sell the same COVERED SECURITY (or a closely related security). In this situation, the INVESTMENT PERSON MUST put the clients' interests
first, and promptly make the investment recommendation or decision in the clients' interest, rather than delaying the recommendation or decision for clients until after the seventh day following the day of the transaction for the INVESTMENT PERSON's (or FAMILY/HOUSEHOLD member's) own account to avoid conflict with the blackout provisions of this Code. WCM recognizes that this situation may occur in entire good faith, and may not require disgorgement of profits in such instances if it appears that the INVESTMENT PERSON acted in good faith and in the best interests of WCM's clients.
3. EXEMPTIONS.
a. Preclearance. The preclearance requirements in Section II.B.1(a), do not apply to the following categories of transactions:
(i) Transactions in Securities issued or guaranteed by any national government that is a member of the Organization for Economic Cooperation and Development, or any agency or authority thereof;
(ii) Transactions in derivatives tied to the performance of a broad-based index, and transactions in SPDR's and shares of other UIT's or vehicles the performance of which is designed to track closely the performance of a broad-based index;
(iii) Transactions in futures and options contracts on interest rate instruments or broad-based indexes, and options on such contracts;
(iv) Transactions that occur by operation of law or under any other circumstance in which neither the ACCESS PERSON nor any member of his or her FAMILY/HOUSEHOLD exercises any discretion to buy or sell or makes recommendations to a person who exercises such discretion;
(v) Purchases of COVERED SECURITIES pursuant to an automatic dividend reinvestment plan;
(vi) Transactions in other Securities determined by the CODE OFFICER to present a similarly low potential for impropriety or the appearance of impropriety; and
(vii) Purchases pursuant to the exercise of rights issued pro rata to all holders of the class of COVERED SECURITIES held by the ACCESS PERSON (or FAMILY/HOUSEHOLD member) and received by the ACCESS PERSON (or FAMILY/HOUSEHOLD member) from the issuer.
b. Complete Exemption. The reporting requirements in Section II.A and the prohibitions and restrictions in Section II.B, the shall not apply to:
(i) Any transaction in an instrument that is not included in the definition of "COVERED SECURITY".
(ii) Transactions effected for any account which is a Personal Account solely because it is directly or indirectly influenced or controlled by an ACCESS PERSON's immediate family member sharing the same household, so long as neither the ACCESS PERSON nor the family member has any BENEFICIAL OWNERSHIP of Securities in the Account and so long as the ACCESS PERSON agrees in writing not to discuss with the family member any specific investment ideas or transactions arising in the course of the ACCESS PERSON's employment with the Company.
(iii) Transactions effected for any account over which neither the ACCESS PERSON nor any immediate family member sharing the same household has any direct or indirect influence or control; provided that in the case of an account exempted because it is under the discretionary management of another person (including an interest in an hedge fund or investment partnership or enterprise but not including an interest in a trust that is not revocable by the ACCESS PERSON or an immediate family member sharing the same household), the ACCESS PERSON must enter into a letter agreement with that person at the later of the time the account is opened or the ACCESS PERSON joins the Company, and on an annual basis thereafter, and the ACCESS PERSON must provide an annual inventory of the Securities in such account.
c. WCM Sub-Advised Funds Exemption. The prohibitions of Section
II.B, shall not apply but the reporting requirements in Section
II.A.3 shall continue to apply to trades in WCM Sub-Advised
Funds.
d. Large Cap Stock Exemption. The prohibitions of Section II.B.1 (b)
and Section II.B.2 (a) shall not apply (but the prohibitions in
Section II.B.2 (b), Prohibition on Front-Running, to the
pre-clearance requirements in Section II.B and the reporting
requirements in Section II.A shall continue to apply) to equity
Securities with a market capitalization of $3 BILLION or greater
at the time of the pre-clearance request.
* * *
SECTION III
A. DEFINITIONS
These following terms have special meanings in this Code:
o ACCESS PERSON
o BENEFICIAL OWNERSHIP
o CODE OFFICER(S)
o COVERED SECURITY
o FAMILY/HOUSEHOLD
o INVESTMENT PERSON
The special meanings of these terms as used in this Code are explained below. Some of these terms (such as "BENEFICIAL OWNERSHIP") are sometimes used in other contexts, not related to Codes of Ethics, where they have different meanings. For example, "BENEFICIAL OWNERSHIP" has a different meaning in this Code than it does in the SEC's rules for proxy statement disclosure of corporate directors' and officers' stockholdings, or in determining whether an investor has to file 13D or 13G reports with the SEC.
IMPORTANT: IF YOU HAVE ANY DOUBT OR QUESTION ABOUT WHETHER AN INVESTMENT, ACCOUNT OR PERSON IS COVERED BY ANY OF THESE DEFINITIONS, ASK THE CODE OFFICER. DON'T JUST GUESS AT THE ANSWER.
ACCESS PERSON includes:
o Every member of WCM's board, even those board members that are not employees of WCM;
o Every officer of WCM; and
o Every employee of WCM (or of any company that directly or indirectly has a 25% or greater interest in WCM) who, in connection with his or her regular functions or duties, makes, participates in or obtains information regarding the purchase or sale of a COVERED SECURITY for any client account, or whose functions relate to the making of any recommendations with respect to purchases and sales.
BENEFICIAL OWNERSHIP means:
o Any opportunity, directly or indirectly, to profit or share in the profit from any transaction in securities. It also includes transactions over which you exercise investment discretion (other than for a client of WCM), even if you don't share in the profits. BENEFICIAL OWNERSHIP is a very broad concept. Some examples of forms of BENEFICIAL OWNERSHIP include:
o Securities held in a person's own name, or that are held for the person's benefit in nominee, custodial or "street name" accounts.
o Securities owned by or for a partnership in which the person is a general partner (whether the ownership is under the name of that partner, another partner or the partnership or through a nominee, custodial or "street name" account).
o Securities that are being managed for a person's benefit on a discretionary basis by an investment adviser, broker, bank, trust company or other manager, unless the securities are held in a "blind trust" or similar arrangement under which the person is prohibited by contract from communicating with the manager of the account and the manager is prohibited from disclosing to the person what investments are held in the account. (Just putting securities into a discretionary account is not enough to remove them from a person's BENEFICIAL OWNERSHIP. This is because, unless the account is a "blind trust" or similar arrangement, the owner of the account can still communicate with the manager about the account and potentially influence the manager's investment decisions.)
o Securities in a person's individual retirement account.
o Securities in a person's account in a 401(k) or similar retirement plan, even if the person has chosen to give someone else investment discretion over the account.
o Securities owned by a trust of which the person is either a trustee or a beneficiary.
o Securities owned by a corporation, partnership or other entity that the person controls (whether the ownership is under the name of that person, under the name of the entity or through a nominee, custodial or "street name" account).
This is not a complete list of the forms of ownership that could constitute BENEFICIAL OWNERSHIP for purposes of this Code. You should ask the CODE OFFICER if you have any questions or doubts at all about whether you or a member of your FAMILY/HOUSEHOLD would be considered to have BENEFICIAL OWNERSHIP in any particular situation.
CODE OFFICER means
o Karen DiGravio, or when she is not available, Kathleen Hallisey. These individuals are to perform the functions of CODE OFFICER.
o For purposes of reviewing the CODE OFFICER's own transactions and reports under this Code the functions of the CODE OFFICER are performed by Kathleen Hallisey.
COVERED SECURITY means
o Anything that is considered a "security" under the Investment Company Act of 1940, except:
o Direct obligations of the U.S. Government;
o Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt obligations, including repurchase agreements; and
o Shares of open-end investment companies that are registered under the Investment Company Act (mutual funds).
This is a very broad definition of security. It includes most kinds of investment instruments, including things that you might not ordinarily think of as "securities," such as:
o Options on securities, on indexes and on currencies;
o Investments in all kinds of limited partnerships;
o Investments in foreign unit trusts and foreign mutual funds; and
o Investments in private investment funds, hedge funds and investment clubs.
FAMILY/HOUSEHOLD members include:
o Your spouse or domestic partner (unless they do not live in the same household as you and you do not contribute in any way to their support);
o Your children under the age of 18;
o Your children who are 18 or older (unless they do not live in the same household as you and you do not contribute in any way to their support); and
o Any of these people who live in your household: your stepchildren, grandchildren, parents, stepparents, grandparents, brothers, sisters, parents-in-law, sons-in-law, daughters-in-law, brothers-in-law and sisters-in-law, including adoptive relationships.
There are a number of reasons why this Code covers transactions in which members of your FAMILY/HOUSEHOLD have BENEFICIAL OWNERSHIP. First, the SEC regards any benefit to a person that you help support financially as indirectly benefiting you, because it could reduce the amount that you might otherwise contribute to that person's support. Second, members of your household could, in some circumstances, learn of information regarding WCM's trading or recommendations for client accounts, and must not be allowed to benefit from that information.
INVESTMENT PERSON means:
o Any employee of WCM (or of any company that directly or indirectly has a 25% or greater interest in WCM) who, in connection with his or her regular functions or duties, makes, participates in or obtains information regarding the purchase or sale of any securities (even if they're not COVERED SECURITIES) for any client account, or whose functions relate to the making of any recommendations with respect to purchases and sales; and any natural person who directly or indirectly has a 25% or greater interest in WCM and obtains information concerning recommendations made to any client of WCM regarding the purchase or sale of any securities (even if they're not COVERED SECURITIES) by the client.
* * *
WESTFIELD CAPITAL MANAGEMENT COMPANY, LLC
INITIAL HOLDINGS REPORT
FOR THE MONTH ENDING ___________, 20_____
Underlined terms have the meaning assigned to them in Westfield Capital Management Co., LLC Code dated June 22, 2004.
To CODE OFFICER(s): Karen DiGravio and/or Kathleen Hallisey:
As an ACCESS PERSON, I am disclosing all COVERED SECURITIES in which I (or members of my FAMILY/HOUSEHOLD) have BENEFICIAL OWNERSHIP. I also list all brokers, dealers and banks where I maintain an account in which any securities (not just COVERED SECURITIES) were held for the direct or indirect benefit of me or a member of my FAMILY/HOUSEHOLD on the date I became an ACCESS PERSON.
Check Box 1 or 2, and box 3, as applicable.
1. [ ] I certify that I have no COVERED SECURITIES holdings that require the specified reporting for the year ending __________, 20____.
2. [ ] I certify that the attached list details all COVERED SECURITIES in which I or members of my FAMILY/HOUSEHOLD have BENEFICIAL OWNERSHIP. I also certify that all brokers, dealers and banks where I maintain an account with any securities for the direct or indirect benefit for me or a member of my FAMILY/HOUSEHOLD is listed as well.
3. [ ] I certify that I have read and understand this Code and that it applies to me and to members of my FAMILY/HOUSEHOLD and that I am an ACCESS PERSON and if applicable, an INVESTMENT PERSON as defined by the Code.
Dated: ___________________
Acknowledged:
WESTFIELD CAPITAL MANAGEMENT COMPANY, LLC
CODE OF ETHICS
Name of Officer, Director, or Employee: ______________________________________ Quarter End: ________________________
Instructions: PLEASE DATE AND SIGN YOUR NAME AT THE END OF THE REPORT
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PRICE PER
TRADE DATE BUY/SELL TICKER ISSUE NAME ACCOUNT NUMBER NAME OF BROKER/DEALER SHARES SHARE
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PLEASE CHOOSE ONE OF THE FOLLOWING BELOW:
[ ] I certify that the above referenced trade details and/or new or closed brokerage accounts are the only transactions that took place in my personal brokerage account(s) applicable under WCM's Code.
[ ] I certify that the attached confirm and/or brokerage statements reflect the only transactions that took place in my personal brokerage accounts applicable under WCM's Code. See statements and/or confirms.
[ ] I certify that I do not have any securities or brokerage accounts applicable under WCM's Code.
DATE: _______________________________
SIGNATURE: _______________________________
WESTFIELD CAPITAL MANAGEMENT COMPANY, LLC
CODE OF ETHICS
Underlined terms have the meaning assigned to them in Westfield Capital Management Company, LLC's Code, as amended from time to time.
As an INVESTMENT PERSON or ACCESS PERSON, I certify that I have read and understand the Code. I further certify that I have complied with the requirements of the Code and that I have disclosed or reported all COVERED SECURITIES holdings and/or transactions required to be reported by the Code as of January 1 of the current year by attaching a list as requested in Section II of the Code under the Annual Holding Reports Section.
Signature: ________________________
Print name: _______________________
Dated: ____________________________
WESTFIELD CAPITAL MANAGEMENT COMPANY, LLC
CODE OF ETHICS
PLEASE NOTE THAT THIS PRECLEARANCE IS VALID ONLY FOR THE DATE SET FORTH
UNDER THE AUTHORIZATION BLOCK
(1) Name of employee requesting authorization: ___________________________
(2) If different from #1, name of the account
where the trade will occur: ___________________________
(3) Relationship of (2) to (1): ___________________________
(4) Name of WCM at which the account is held: ___________________________
(5) Name of Security: ___________________________
(6) Maximum number of shares or units to be
purchased or sold or amount of bond: ___________________________
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(7) Check those that are applicable:
__Purchase __Sale __Market Order __Limit Order
(Price of Limit Order:____)
If the answer to any of the following questions is made by checking the answer in Column I, the Compliance Officer may have to reject the proposed transaction:
COLUMN I COLUMN II
(8) Do you possess material nonpublic information regarding the security or the issuer of the security?(1) _____ Yes _____ No
(9) To your knowledge, are the securities or "equivalent securities" (i.e., securities issued by the same entity as the issuer of a security, and all related derivative instruments, such as options and warrants) held by any investment companies or other accounts managed by Westfield Capital Management Company, LLC (the "Company") _____ Yes _____ No
(10) To your knowledge, are there any outstanding purchase or sell orders for this security or any equivalent security by or on behalf of any Company client, including but not limited to any investment company managed by the Company? _____ Yes _____ No
(11) To your knowledge, are the securities or equivalent securities being considered for purchase or sale by or
on behalf of one or more investment
companies or other accounts managed by
the Company? _____ Yes _____ No
(12) Are the securities being acquired in
an initial public offering?(2) _____ Yes _____ No
(13) Are the securities being acquired in a
private placement?(3) _____ Yes _____ No
(14) If you are a Portfolio Manager(4), has any
account you manage purchased or sold
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these securities or equivalent securities within the past seven calendar days or do you expect any such account to purchase or sell these securities or equivalent securities within seven calendar days after your proposed purchase or sale?(5) _____ Yes _____ No
I have read Westfield Capital Management Company, LLC's Code and Policy and Procedures Designed to Detect and Prevent Insider Trading within the prior 12 months and believe that the proposed trade fully complies with the requirements of each. I acknowledge that the authorization granted pursuant to this form is valid only on the date on which the authorization is granted (as set forth immediately below, the "Authorized by" signature block).
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Print Name Employee Signature
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Date Submitted
Authorized by: _____________________
Date: ______________________________
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(2) Please note that Persons (as defined in the Company's Code) are not permitted to acquire securities in an initial public offering for their own or related accounts absent prior written approval from the CODE OFFICER (as defined in the Company's Code) on a case-by-case basis.
(3) Please note that ACCESS PERSONS (as defined in the Company's Code) are not permitted to acquire securities in a private placement for their own or related accounts absent prior written approval from the CODE OFFICER (as defined in the Company's Code) on a case-by-case basis.
(4) Please see your Code Officer if you are not sure whether or not you are a Portfolio Manager.
(5) Please note that, if you determine within the seven calendar days after you or a member of your family has purchased or sold these securities-that it would be desirable for a client account you manage to purchase or sell these securities (or equivalent securities), you MUST put the client's interests first, and promptly make the investment recommendation or decision in the client's interest, rather than delaying the recommendation or decision for client until after the seventh day following your purchase or sale. The Company will not impose any disciplinary actions in such instances if it appears that you acted in good faith and in the best interests of the client.
Navellier & Associates, Inc.
Code of Ethics
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This Code of Ethics ("Code") has been adopted by Navellier & Associates, Inc., a registered investment adviser ("the Advisor"), acting as investment adviser to privately managed accounts and funds, in compliance with Rule 17j-1 under the Investment Company Act of 1940 to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments and investment intentions of the Advisor may abuse their fiduciary duties to fund or clients and to deal with other types of conflict of interest situations.
Statement of General Principles
This Code is adopted in recognition of the general fiduciary principles that govern personal investment activities of all individuals associated with the Adviser.
It is the duty of all individuals associated with the Adviser at all times to place the interests of the Trust's shareholders first. Priority must be given to the Trust's trades over personal securities trades.
Individuals are prohibited from trading on the basis of material non-public information as defined by federal courts and the SEC in interpreting Rule 10b-5 under the Securities Exchange Act of 1934. Individuals are also prohibited from trading in their personal accounts before trades in a Portfolio under management of the Advisor for the same security ("front-running").
All personal securities transactions must be conducted consistent with this Code and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility.
Individuals should not take advantage of their positions with the Adviser.
TABLE OF CONTENTS
Page
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1. General Prohibitions 1
2. Definitions 1
Access Person 1
Advisory Person 1
Beneficial Interest 1
Blind Trust 2
Compliance Department 2
Day 2
For his or her own account 2
Immediate Family 2
Investment Company 2
Investment Personnel 2
Related Issuer 2
Security 2
3. Required Compliance Procedures 3
3.1 Preclearance of Securities Transactions by Access Persons 3
3.2 Post-Trade Monitoring of Precleared Transactions 3
3.3 Disclosure of Personal Holdings 3
3.4 Certification of Compliance With Code of Ethics 4
4. Restrictions and Disclosure Requirements 4
4.1 Initial Public Offerings 4
4.2 Private Placements 4
4.3 Blackout Periods 4
4.5 Same Day Price Switch 5
4.6 Gifts 6
4.7 Service as Director of Publicly Traded Companies 6
4.8 Insider Trading - Prevention of Misuse of Non-Public Information 6
5. Procedures with Regard to Dissemination of Information 7
6. Reporting by Access Persons 7
6.1 General Requirement 7
6.2 Contents 7
7. Compliance Department 8
8. Annual Report to Board of Trustees 8
9. Implementation 9
9.1 Forms 9
9.2 Exceptions 9
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1. General Prohibitions No individual associated with the Adviser in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired by the Trust, shall: |
Employ any device, scheme or artifice to defraud such Trust;
Make to the Trust any untrue statement of a material fact or omit to state to the Trust a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such Portfolio of the Trust;
Engage in any manipulative practice with respect to such Portfolio;
Engage in any transaction in a security while in possession of material nonpublic information regarding the security or the issuer of the security; or
Engage in any transaction intended to raise, lower, or maintain the price of any security or to create a false appearance of active trading.
2. Definitions
The following words have the following meanings, regardless of whether such terms are capitalized or not in this Code:
Access Person - all directors, officers, or Advisory Persons of the Adviser.
Advisory Person - any employee of the Adviser, (or of any company in a control relationship to the Adviser) who in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by any Portfolio of the Trust, or whose functions relate to the making of any recommendations with respect to such purchases or sales.
Beneficial Interest - a person has a beneficial interest in an account in which he or she may profit or share in the profit from transactions. Without limiting the foregoing, a person has a beneficial interest when the securities in the account are held:
(i) in his or her name;
(ii) in the name of any of his or her Immediate Family;
(iii) in his or her name as trustee for himself or herself or for his or her Immediate Family;
(iv) in a trust in which he or she has a beneficial interest or is the settlor with a power to revoke;
(v) by another person and he or she has a contract or an understanding with such person that the securities held in that person's name are for his or her benefit;
(vi) in the form of a right to acquisition of such security through the exercise of warrants, options, rights, or conversion rights;
(vii) by a partnership of which he or she is a member;
(viii) by a corporation which he or she uses as a personal trading medium;
(ix) by a holding company which he or she controls; or
(x) any other relationship in which a person would have beneficial ownership under Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial interest shall apply to all securities which an Access Person has or acquires.
Any person who wishes to disclaim a beneficial interest in any securities must submit a written request to the Compliance Department explaining the reasons therefor. Any disclaimers granted by the Compliance Department must be made in writing. Without limiting the foregoing, if a disclaimer is granted to any person with respect to shares held by a member or members of his or her Immediate Family, the provisions of this Code of Ethics applicable to such person shall not apply to any member or members of his or her Immediate Family for which such disclaimer was granted.
Blind Trust - a trust in which an Access Person or employee has a beneficial interest or is the settlor with a power to revoke, with respect to which the Compliance Department has determined that such Access Person or employee has no direct or indirect influence or control and no knowledge of transactions therein, provided, however, that direct or indirect influence or control of such trust is held by a person or entity not associated with Adviser or any affiliate of Adviser and not a relative of such Access Person or employee.
Compliance Department - Adviser's Compliance Department.
Day - a calendar day.
For his or her own account - transactions in securities held in an individual's own name or for any account in which he or she has a beneficial interest.
Immediate Family - any of the following relatives sharing the same household with an individual: child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, including adoptive relationships.
Investment Company - each registered investment company and series thereof for which the Adviser is the investment adviser.
Investment Personnel - any Access Person who, in connection with his or her regular functions or duties, provides information and advice to the Trust or advisory accounts or who helps execute the Adviser's decisions.
Related Issuer - an issuer with respect to which an Investment Personnel
or his or her Immediate Family: (i) has a business relationship with such issuer
or any promoter, underwriter, officer, director, or employee of such issuer; or
(ii) is related to any officer, director or employee of such issuer.
Security - any option, stock or option thereon, instrument, bond, debenture, pre-organization certificate, investment contract, any other interest commonly known as a security, and any security or instrument related to, but not necessarily the same as, those held or to be acquired by a Portfolio; provided, however, that the following shall not be considered a "security": securities issued by the United States Government, bankers' acceptances, bank certificates of deposit, commercial paper, shares of registered open-end investment companies, commodities, futures, and options on futures.
3. Required Compliance Procedures
3.1 Preclearance of Securities Transactions by Access Persons.
(a) Every Access Person and member of his or her Immediate Family must obtain prior approval from the Compliance Department before executing any personal securities transaction for his or her own account. Before executing any such transaction, the Compliance Department shall determine that:
(i) No Investment Company has a pending "buy" or "sell" order in that security;
(ii) The security does not appear on any "restricted" list of the Adviser; and
(iii) Such transaction is not short selling or option trading that is economically opposite any pending transaction for any Investment Company.
(b) The following securities are exempt from preclearance requirements:
(i) Securities transactions where neither the Access Person nor his or her Immediate Family knows of the transaction before it is completed;
(ii) The acquisition of securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of securities;
(iii) The acquisition of securities through the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent the rights were acquired in the issue, and sales of such rights so acquired;
(iv) Repurchase agreements;
(v) Options on the Standard & Poor's "500" Composite Stock Price Index; and
(vi) Other securities that may from time to time be so designated in writing by the Compliance Department.
(c) Obtaining preclearance approval does not constitute a waiver of any prohibitions, restrictions, or disclosure requirements in this Code of Ethics.
3.2 Post-Trade Monitoring of Precleared Transactions.
After the Compliance Department has granted preclearance to an Access Person or member of his or her Immediate Family with respect to any personal securities transaction, the investment activity of such Access Person and member of his or her Immediate Family shall be monitored by the Compliance Department to ascertain that such activity conforms to the preclearance so granted and the provisions of this Code.
3.3 Disclosure of Personal Holdings.
All Investment Personnel are required to disclose all their personal securities holdings and those of their Immediate Family to the Compliance Department upon commencement of employment and thereafter on an annual basis.
3.4 Certification of Compliance With Code of Ethics.
All Access Persons are required to certify annually in writing that they have:
(a) read and understand the Code of Ethics and recognize that they are subject thereto;
(b) complied with the requirements of the Code of Ethics;
(c) disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of the Code; and
(d) with respect to any blind trusts in which such person has a beneficial interest, that such person has no direct or indirect influence or control and no knowledge of any transactions therein.
4. Restrictions and Disclosure Requirements
4.1 Initial Public Offerings.
All Investment Personnel and members of their Immediate Family are prohibited from acquiring any securities in an initial public offering, in order to preclude any possibility of their profiting improperly from their positions on behalf of a Portfolio.
4.2 Private Placements.
(a) No Investment Personnel or member of his or her Immediate Family may acquire any securities in private placements without prior written approval by the Compliance Department.
(b) Prior approval shall take into account, among other factors, whether the investment opportunity should be reserved for a Trust or Portfolio and its shareholders and whether the opportunity is being offered to an individual by virtue of his or her position or relationship to the Adviser.
(c) An Investment Personnel who has (or a member of whose Immediate Family has) acquired securities in a private placement is required to disclose such investment to the Compliance Department when such Investment Personnel plays a part in any subsequent consideration of an investment in the issuer for any Portfolio of the Trust. In any such circumstances, the decision to purchase securities of the issuer for a Portfolio of the Trust is subject to an independent review by Investment Personnel with no personal interest in the issuer. Such independent review shall be made in writing and furnished to the Compliance Department.
4.3 Blackout Periods.
(a) No Access Person or member of his or her Immediate Family may execute a securities transaction on a day during which any Investment Company has a pending "buy" or "sell" order in that same security until that order is executed or withdrawn; provided, however, that this prohibition shall not apply to an Access Person for de minimis transactions (e.g., transactions involving a relatively small number of shares of a company with a large market capitalization and high average daily trading volume).
(b) No Portfolio Manager or member of his or her Immediate Family may buy or sell a security for his or her own account within seven (7) Days before or after a portfolio that he or she manages trades in that security, provided, however, that this prohibition shall not apply to:
(i) Securities transactions effected in any account over which such employee has no direct or indirect influence or control, including blind trusts;
(ii) Securities transactions that are non-volitional on the part of either the Access Person or the managed accounts;
(iii) Securities transactions where neither the Portfolio Manager nor his or her Immediate Family knows of the transaction before it is completed;
(iv) The acquisition of securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of securities;
(v) The acquisition of securities through the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent the rights were acquired in the issue, and sales of such rights so acquired;
(vi) Repurchase agreements;
(vii) Options on the Standard & Poor's "500" Composite Stock Price Index; and
(viii) Other securities that may from time to time be so designated in writing by the Compliance Department.
(c) Any profits on trades within the proscribed periods shall be disgorged to the clients.
(d) The foregoing blackout periods should not operate to the detriment of any Investment Company. Without limiting the scope or meaning of this statement, the following procedure is to be implemented under extraordinary situations:
(i) If a Portfolio Manager of a portfolio or member of his or her Immediate Family has executed a transaction in a security for his or her own account and within seven (7) Days thereafter such security is considered for purchase or sale by such portfolio, such Portfolio Manager shall submit a written memorandum to the Compliance Department prior to the entering of the purchase or sale order for the managed accounts. Such memorandum shall describe the circumstances underlying the consideration of such transaction for the managed accounts.
(ii) Based on such memorandum and other factors it deems relevant under the specific circumstances, the Compliance Department shall have authority to determine that the prior transaction by the Portfolio Manager or member of his or Immediate Family for his or her own account shall not be considered a violation of the provisions of paragraph (b) of this section.
(iii) The Compliance Department shall make a written record of any determination made under paragraph (d)(ii) of this section, including the reasons therefor. The Compliance Department shall maintain records of any such memoranda and determinations.
4.5 Same Day Price Switch.
(a) If any employee of the Adviser or member of his or her Immediate Family purchases a security (other than a fixed income security) for his or her own account, and subsequent thereto a portfolio purchases the same security during the same day, then, to the extent that the price paid per share by the managed accounts for such purchase is less favorable than the price paid per share by such employee, the managed accounts shall have the benefit of the more favorable price per share.
(b) If any such employee or member of his or her Immediate Family sells a security for his or her own account and subsequent thereto a portfolio sells the same security during the same day, then, to the extent that the price per share received by the managed accounts for such sale is less favorable than the price per share received by the employee, the managed accounts shall have the benefit of the more favorable price per share.
(c) An amount of money necessary to effectuate the price adjustment shall be transferred from the account of the employee subject to the price adjustment policies, to the effected managed accounts. The price adjustment shall be limited to the number of shares purchased or sold by the employee or the number of shares purchased or sold by the managed accounts, whichever is smaller.
(d) Notwithstanding the foregoing, price switching shall not apply to:
(i) Securities transactions effected in any account over which such employee has no direct or indirect influence or control, including blind trusts;
(ii) Securities transactions that are non-volitional on the part of either the Access Person or the managed accounts;
(iii) Securities transactions where neither the employee nor his or her Immediate Family knows of the transaction before it is completed;
(iv) The acquisition of securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of securities;
(v) The acquisition of securities through the exercise of rights issued by an issuer pro rata to all holders of a class of securities, to the extent the rights were acquired in the issue, and sales of such rights so acquired;
(vi) Repurchase agreements;
(vii) Options on the Standard & Poor's "500" Composite Stock Price Index; or
(viii) Other securities that may from time to time be so designated in writing by the Compliance Department.
4.6 Gifts.
(a) All Access Persons and employees are prohibited from receiving any gift or other thing of more than de minimis value from any person or entity that does business with or on behalf of the Trust in any one year.
(b) All gifts must be reported in writing to the Compliance Department no more than 30 days after the end of each calendar quarter.
(c) The foregoing restrictions do not apply to customary and occasional
(i) business meals, (ii) tickets to sports or cultural events, or (iii) business
entertainment.
4.7 Service as Director of Publicly Traded Companies.
Investment Personnel are prohibited from serving on the Boards of Directors of publicly traded companies, absent prior authorization based upon the determination that such board service would not be inconsistent with the interests of the Trust and its shareholders.
4.8 Insider Trading - Prevention of Misuse of Non-Public Information
In accordance with Section 204A of the Investment Advisers Act of 1940, the following procedures are adopted to prevent the misuse of non-public information.
All employees of the Adviser are prohibited from trading on material non-public information, as defined by federal courts and the SEC interpreting Rule 10b-5 under the Securities Exchange Act of 1934 for their personal accounts or on behalf of the Trust or any advisory accounts. Neither will such employee disclose such information to anyone other than legal counsel.
"Material non-public information" is any information: (i) about a company, or (ii) the market for the company's securities, (iii) which has come directly or indirectly from the company or from an outsider to the company in a position to influence the market for the securities of the company, (iv) which has not been disclosed generally to the marketplace, (v) the dissemination of which is likely to affect the market price of any of the company's securities or is likely to be considered important by a reasonable investor in determining whether to trade in such securities.
"Material information" is generally defined as information which there is a substantial likelihood that a reasonable investor would consider is important in making his or her investment decisions, or information which is reasonably certain to have an effect on the price of a company's securities. Employees should assume that information is "material" if it relates to such matters as dividend increases or decreases, earnings estimates, significant expansion or curtailment of operations, significant increase or decline in orders for products of the company, significant merger or acquisition proposals or agreements, significant new products or discoveries, extraordinary management changes or the purchase or sale of substantial assets.
Material information can, of course, come directly from the company or its affiliates, professional advisers or others associated with the company who may be considered "insiders" ("inside information"). However, it can also come from a complete outsider to the company who is in a position to affect the market price of the securities of the company ("market information"). For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates when reports on various companies would appear in the Wall Street Journal and whether those reports would be favorable or not.
"Non-Public information" is information about a company which is known to a select number of people and has not been disclosed to the public generally. An employee should consider material information to be non-public unless he or she can identify the manner in which the information has been made public; for example, its being announced on the broad tape, contained in a report filed with the SEC, or published in a trade journal or a widely circulated newspaper.
5. Procedures with Regard to Dissemination of Information.
Access Persons are prohibited from revealing information relating to current or anticipated investment intentions, portfolio transactions or activities of Portfolios except to persons whose responsibilities require knowledge of the information.
6. Reporting by Access Persons.
6.1 General Requirement.
Every Access Person shall report to the Compliance Department the information described in Section 6.2 with respect to transactions in any security in which such Access Person or member of his or her Immediate Family has, or by reason of such transaction acquires, any direct or indirect beneficial interest; provided, however, that no report is required with respect to transactions effected for any account over which such person does not have any direct or indirect influence or control.
6.2 Contents.
Every report shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares, and the principal amount of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(iii) The price at which the transaction was effected; and
(iv) The name of the broker, dealer or bank with or through whom the transaction was effected.
Unless otherwise stated, no report shall be construed as an admission by the person making such report that he or she has any direct or indirect beneficial interest in the security to which the report relates.
7. Compliance Department
The Adviser's Compliance Department shall be responsible for implementation of this Code of Ethics.
Any person who has knowledge of any violation of this Code shall report said violation to the Compliance Department.
The Compliance Department shall provide the management of the Adviser with such reports as are required herein or as are requested by management.
A quarterly report shall be provided to the Trustees of the Trust certifying that except as specifically disclosed to the Compliance Department, the Compliance Department knows of no violation of this Code. A representative of the Compliance Department shall attend meetings of the Trustees no less frequently than quarterly to report on the implementation of this Code.
The Adviser shall have authority to impose sanctions for violations of this Code. Such recommendations may include a letter of censure, suspension or termination of the employment of the violator, forfeiture of profits, forfeiture of personal trading privileges, forfeiture of gifts, or any other penalty the officer designated by the Adviser deems to be appropriate. All such recommendations shall be submitted to the management of the Adviser.
8. Annual Report to Board of Trustees.
The Adviser shall prepare an annual report to the Board of Trustees of the Trust that:
(i) summarizes existing procedures concerning personal investing and any changes in the procedures made during the past year;
(ii) identifies any violations requiring significant remedial action during the past year; and
(iii) identifies any recommended changes in existing restrictions or procedures based upon the Adviser's experience under the Code of Ethics, evolving industry practices, or developments in applicable laws or regulations.
9. Implementation.
9.1 Forms.
The Compliance Department is authorized, with the advice of counsel, to prepare written forms for use in implementing this Code. Such forms shall be attached as an Appendix to this Code and shall be disseminated to all individuals subject to the Code.
9.2 Exceptions.
Exceptions to the requirements of this Code shall rarely, if ever, be granted. However, the Compliance Department shall have authority to grant exceptions on a case-by-case basis. Any exceptions granted must be in writing and reported to the Compliance Department.