UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number | 811-04347 | ||||||||
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GMO Trust, on behalf of the following series: (the “Covered Series”) — attached Schedule A | |||||||||
(Exact name of registrant as specified in charter) | |||||||||
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40 Rowes Wharf, Boston, MA |
| 02110 | |||||||
(Address of principal executive offices) |
| (Zip code) | |||||||
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Scott Eston, Chief Executive Officer, 40 Rowes Wharf, Boston, MA 02110 | |||||||||
(Name and address of agent for service) | |||||||||
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Registrant’s telephone number, including area code: | 617-346-7646 |
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Date of fiscal year end: | 02/28/06 |
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Date of reporting period: | 02/28/06 |
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Except as otherwise noted, the information included in this filing (including related certifications) relates solely to the Covered Series. GMO Trust has submitted a Form 12b-25 notification with respect to the other series of GMO Trust, and will supply information relating to such other series in a subsequent filing.
Schedule A - (the “Covered Series”) |
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| |
| GMO Tax-Managed Small/Mid Cap Fund |
| GMO U.S. Sector Fund |
| GMO Short-Duration Investment Fund |
| GMO International Small Companies Fund |
| GMO Domestic Bond Fund |
| GMO World Opportunity Overlay Fund |
| GMO Tax-Managed U.S. Equities Fund |
| GMO Currency Hedged International Equity Fund |
| GMO Tax-Managed International Equities Fund |
| GMO International Bond Fund |
| GMO U.S. Quality Equity Fund |
| GMO Emerging Country Debt Fund |
| GMO Tobacco-Free Core Fund |
| GMO Emerging Markets Fund |
| GMO Taiwan Fund |
| GMO Alternative Asset Opportunity Fund |
| GMO Global Growth Fund |
| GMO Emerging Country Debt Share Fund |
| GMO Inflation Indexed Bond Fund |
| GMO Special Purpose Holding Fund |
| GMO Foreign Fund |
| GMO International Equity Allocation Fund |
| GMO Currency Hedged International Bond Fund |
| GMO Global Balanced Asset Allocation Fund |
| GMO Foreign Small Companies Fund |
| GMO Global (U.S.+) Equity Allocation Fund |
| GMO Emerging Markets Quality Fund |
| GMO Benchmark-Free Allocation Fund |
| GMO Short-Duration Collateral Fund |
| GMO World Opportunities Equity Allocation Fund |
| GMO Core Plus Bond Fund |
| GMO Strategic Balanced Allocation Fund |
| GMO Global Bond Fund |
| GMO Alpha Only Fund |
| GMO International Intrinsic Value Fund |
| GMO Real Estate Fund |
| GMO Developed World Stock Fund |
| GMO Emerging Countries Fund |
Item 1. Reports to Stockholders.
The annual reports for each Covered Series of the registrant for the period from March 1, 2005 through February 28, 2006 are filed herewith.
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Tax-Managed Small/Mid Cap Fund
(Formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Tax-Managed Small/Mid Cap Fund returned +13.3% for the fiscal year ended February 28, 2006, as compared to +17.0% for the Russell 2500 Index. On an after-tax basis, the Fund returned +13.1% compared to the benchmark's +16.8% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period.
The portfolio's underperformance of the benchmark is attributed to both sector selection and stock selection. By sector, an overweight in automotive stocks, which underperformed, was the primary detractor from positive returns. An underweight in technology stocks, which performed well during the period, also worked against the portfolio.
Within sectors, stock selection had mixed results. Overweights in home building stocks, including Toll Brothers and MDC Holdings, underperformed. Selection within healthcare and transportation stocks, however, was a strong positive factor for the fiscal year. The portfolio also benefited from positive selection within retail and oil and gas related stocks, however selection was weaker within the financial services and consumer discretionary sectors.
For the fiscal year, valuation-based stock selection strategies were the primary source of negative relative performance for the fund. The momentum-based stock selection strategy, however, also underperformed over the fiscal year period.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* Returns do not reflect the tax effect a shareholder would pay on Fund distributions or the redemption of Fund shares.
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.0 | % | |||||
Short-Term Investment(s) | 0.9 | ||||||
Other | 1.1 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Financial | 17.1 | % | |||||
Construction | 14.1 | ||||||
Technology | 13.1 | ||||||
Health Care | 10.4 | ||||||
Services | 8.7 | ||||||
Retail Stores | 7.9 | ||||||
Utility | 4.9 | ||||||
Consumer Goods | 4.5 | ||||||
Oil & Gas | 3.5 | ||||||
Automotive | 3.3 | ||||||
Primary Process Industry | 2.7 | ||||||
Manufacturing | 2.6 | ||||||
Machinery | 2.5 | ||||||
Transportation | 2.0 | ||||||
Food & Beverage | 1.9 | ||||||
Metals & Mining | 0.8 | ||||||
100.0 | % |
1
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.0% | |||||||||||
Automotive — 3.2% | |||||||||||
4,400 | American Axle & Manufacturing Holdings, Inc. | 71,368 | |||||||||
5,725 | ArvinMeritor, Inc. | 95,836 | |||||||||
1,800 | BorgWarner, Inc. | 100,386 | |||||||||
14,300 | Goodyear Tire & Rubber Co. (The) * | 204,919 | |||||||||
6,100 | Lear Corp. | 127,246 | |||||||||
2,300 | Navistar International Corp. * | 67,505 | |||||||||
1,700 | Oshkosh Truck Corp. | 96,441 | |||||||||
1,700 | Superior Industries International, Inc. | 36,635 | |||||||||
4,600 | Tenneco Automotive, Inc. * | 104,190 | |||||||||
2,200 | TRW Automotive Holdings Corp. * | 56,320 | |||||||||
13,700 | Visteon Corp. * | 63,842 | |||||||||
1,024,688 | |||||||||||
Construction — 13.8% | |||||||||||
1,400 | AMB Property Corp. REIT | 75,110 | |||||||||
2,500 | American Home Mortgage Acceptance Corp. REIT | 71,250 | |||||||||
5,000 | Anthracite Capital, Inc. REIT | 53,600 | |||||||||
3,800 | Anworth Mortgage Asset Corp. REIT | 28,538 | |||||||||
1,300 | Apartment Investment & Management Co. | 57,603 | |||||||||
1,100 | Arden Realty, Inc. REIT | 49,896 | |||||||||
900 | AvalonBay Communities, Inc. REIT | 92,700 | |||||||||
2,700 | Beazer Homes USA, Inc. | 171,315 | |||||||||
600 | BRE Properties, Inc. | 32,622 | |||||||||
1,800 | CBL & Associates Properties, Inc. REIT | 76,680 | |||||||||
500 | Centerpoint Properties Corp. REIT | 24,925 | |||||||||
1,000 | Drew Industries, Inc. * | 32,450 | |||||||||
2,400 | EMCOR Group, Inc. * | 104,616 | |||||||||
900 | Equity Lifestyle Properties, Inc. REIT | 42,921 | |||||||||
2,300 | FelCor Lodging Trust, Inc. REIT | 45,655 | |||||||||
750 | Florida Rock Industries, Inc. | 43,207 | |||||||||
500 | Fluor Corp. | 43,150 | |||||||||
1,000 | Forest City Enterprises, Inc.-Class A | 40,510 |
See accompanying notes to the financial statements.
2
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Construction — continued | |||||||||||
1,900 | Highwoods Properties, Inc. REIT | 61,465 | |||||||||
3,100 | Hovnanian Enterprises, Inc. * | 142,941 | |||||||||
2,200 | Jacobs Engineering Group, Inc. * | 188,628 | |||||||||
4,000 | KB Home | 268,120 | |||||||||
1,500 | Kilroy Realty Corp. REIT | 112,230 | |||||||||
1,700 | Lafarge North America, Inc. | 140,879 | |||||||||
2,000 | Lennox International, Inc. | 64,300 | |||||||||
1,000 | M/I Schottenstein Homes, Inc. | 42,120 | |||||||||
1,900 | Martin Marietta Materials, Inc. | 185,250 | |||||||||
3,174 | MDC Holdings, Inc. | 194,534 | |||||||||
2,000 | Meritage Homes Corp. * | 117,060 | |||||||||
9,700 | MFA Mortgage Investments, Inc. REIT | 57,424 | |||||||||
1,600 | Mission West Properties REIT | 17,120 | |||||||||
2,900 | National Health Investors, Inc. REIT | 77,198 | |||||||||
3,250 | New Century Financial Corp. | 125,937 | |||||||||
200 | NVR, Inc. * | 150,600 | |||||||||
600 | Pan Pacific Retail Properties, Inc. REIT | 41,526 | |||||||||
3,600 | Ryland Group, Inc. | 251,100 | |||||||||
500 | Simpson Manufacturing Co., Inc. | 19,545 | |||||||||
4,600 | Standard-Pacific Corp. | 151,110 | |||||||||
2,100 | Technical Olympic USA, Inc. | 44,478 | |||||||||
7,800 | Thornburg Mortgage, Inc. REIT | 202,566 | |||||||||
3,900 | Toll Brothers, Inc. * | 126,204 | |||||||||
3,800 | USG Corp. * | 321,024 | |||||||||
300 | Walter Industries, Inc. | 19,749 | |||||||||
900 | Washington Group International, Inc. | 52,533 | |||||||||
1,100 | Watsco, Inc. | 76,582 | |||||||||
500 | William Lyon Homes, Inc. * | 42,550 | |||||||||
4,381,521 | |||||||||||
Consumer Goods — 4.4% | |||||||||||
2,500 | Columbia Sportswear Co. * | 125,900 | |||||||||
1,600 | Ethan Allen Interiors, Inc. | 65,136 | |||||||||
3,400 | Fossil, Inc. * | 57,868 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Consumer Goods — continued | |||||||||||
4,300 | Furniture Brands International, Inc. | 106,296 | |||||||||
1,300 | Herman Miller, Inc. | 39,247 | |||||||||
1,500 | HNI Corp. | 87,435 | |||||||||
900 | Kellwood Co. | 23,166 | |||||||||
1,700 | K-Swiss, Inc.-Class A | 49,606 | |||||||||
3,000 | La-Z-Boy, Inc. | 47,850 | |||||||||
5,800 | Liz Claiborne, Inc. | 208,974 | |||||||||
1,000 | Matthews International Corp.-Class A | 37,140 | |||||||||
3,000 | Maytag Corp. | 51,600 | |||||||||
1,100 | Oakley, Inc. | 16,742 | |||||||||
4,300 | Playtex Products, Inc. * | 45,150 | |||||||||
1,900 | Russell Corp. | 27,132 | |||||||||
700 | Select Comfort Corp. * | 25,585 | |||||||||
2,500 | Steven Madden, Ltd. | 80,125 | |||||||||
3,700 | Timberland Co.-Class A * | 129,685 | |||||||||
3,900 | Tupperware Corp. | 82,641 | |||||||||
1,800 | Universal Corp. | 73,206 | |||||||||
1,800 | Vector Group, Ltd. | 33,498 | |||||||||
1,413,982 | |||||||||||
Financial — 16.8% | |||||||||||
800 | AG Edwards, Inc. | 35,760 | |||||||||
900 | Amcore Financial, Inc. | 26,919 | |||||||||
2,500 | American Capital Strategies, Ltd. | 89,250 | |||||||||
4,600 | American Financial Group, Inc. | 190,440 | |||||||||
3,800 | AmeriCredit Corp. * | 112,100 | |||||||||
3,000 | AmerUs Group Co. | 180,750 | |||||||||
1,300 | Arthur J. Gallagher & Co. | 38,337 | |||||||||
1,400 | Associated Banc Corp. | 48,258 | |||||||||
5,250 | Astoria Financial Corp. | 150,518 | |||||||||
1,600 | Bancorpsouth, Inc. | 38,432 | |||||||||
700 | Camden National Corp. | 23,366 | |||||||||
1,725 | Chittenden Corp. | 49,663 | |||||||||
900 | City National Corp. | 68,364 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
1,340 | Commerce Bancshares, Inc. | 69,077 | |||||||||
1,900 | Commerce Group, Inc. | 102,619 | |||||||||
1,500 | CompuCredit Corp. * | 56,700 | |||||||||
1,804 | Delphi Financial Group, Inc.-Class A | 93,952 | |||||||||
800 | Dollar Thrifty Automotive Group, Inc. * | 32,304 | |||||||||
800 | Downey Financial Corp. | 50,840 | |||||||||
6,600 | First American Corp. | 278,256 | |||||||||
1,100 | First Midwest Bancorp, Inc. | 36,993 | |||||||||
600 | FirstFed Financial Corp. * | 36,006 | |||||||||
2,700 | FirstMerit Corp. | 66,798 | |||||||||
5,600 | Flagstar Bancorp, Inc. | 86,520 | |||||||||
4,900 | Fremont General Corp. | 116,228 | |||||||||
1,700 | GATX Corp. | 67,490 | |||||||||
500 | Genworth Financial, Inc.-Class A | 15,910 | |||||||||
1,000 | Great Southern Bancorp, Inc. | 28,170 | |||||||||
3,100 | Greater Bay Bancorp | 83,390 | |||||||||
1,300 | Hanover Insurance Group (The), Inc. | 62,985 | |||||||||
2,650 | HCC Insurance Holdings, Inc. | 85,304 | |||||||||
9,900 | IMPAC Mortgage Holdings, Inc. REIT | 82,269 | |||||||||
4,300 | IndyMac Bancorp, Inc. | 166,926 | |||||||||
1,500 | Investors Financial Services Corp. | 67,665 | |||||||||
900 | Kansas City Life Insurance Co. | 45,360 | |||||||||
1,900 | LaBranche & Co., Inc. * | 26,885 | |||||||||
1,300 | Landamerica Financial Group, Inc. | 86,710 | |||||||||
700 | MAF Bancorp, Inc. | 30,002 | |||||||||
1,000 | Mercury General Corp. | 55,900 | |||||||||
800 | Nara Bancorp, Inc. | 13,976 | |||||||||
2,100 | Nasdaq Stock Market, Inc. * | 85,071 | |||||||||
3,800 | Nationwide Financial Services, Inc.-Class A | 162,868 | |||||||||
1,600 | Novastar Financial, Inc. REIT | 49,040 | |||||||||
4,100 | Old Republic International Corp. | 87,289 | |||||||||
1,900 | People's Bank | 58,786 | |||||||||
4,900 | PMI Group (The), Inc. | 212,170 | |||||||||
1,100 | Pre-Paid Legal Services, Inc. | 39,721 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
4,200 | Protective Life Corp. | 204,750 | |||||||||
1,800 | Radian Group, Inc. | 102,150 | |||||||||
900 | Raymond James Financial, Inc. | 38,682 | |||||||||
500 | Redwood Trust, Inc. REIT | 20,730 | |||||||||
3,000 | Reinsurance Group of America, Inc. | 138,690 | |||||||||
1,300 | Ryder Systems, Inc. | 57,642 | |||||||||
2,500 | StanCorp Financial Group, Inc. | 135,250 | |||||||||
1,200 | Stewart Information Services Corp. | 56,340 | |||||||||
600 | Student Loan Corp. | 131,694 | |||||||||
3,200 | TCF Financial Corp. | 81,152 | |||||||||
300 | Transatlantic Holdings, Inc. | 18,342 | |||||||||
3,400 | Trustmark Corp. | 102,510 | |||||||||
1,200 | United Fire & Casualty Co. | 42,948 | |||||||||
1,000 | United Rentals, Inc. * | 32,600 | |||||||||
2,506 | Washington Federal, Inc. | 59,292 | |||||||||
2,300 | Webster Financial Corp. | 108,445 | |||||||||
1,300 | Westamerica Bancorporation | 70,512 | |||||||||
200 | Westcorp | 14,370 | |||||||||
300 | WFS Financial, Inc. * | 24,699 | |||||||||
1,400 | Wilmington Trust Corp. | 59,934 | |||||||||
2,400 | WR Berkley Corp. | 138,936 | |||||||||
5,332,005 | |||||||||||
Food & Beverage — 1.8% | |||||||||||
700 | Brown-Forman Corp.-Class B | 49,252 | |||||||||
1,900 | Flowers Foods, Inc. | 52,250 | |||||||||
1,000 | Hansen Natural Corp. * | 93,340 | |||||||||
1,600 | Lancaster Colony Corp. | 64,224 | |||||||||
1,300 | Natures Sunshine Products, Inc. | 22,061 | |||||||||
2,800 | NBTY, Inc. * | 61,320 | |||||||||
4,800 | Smithfield Foods, Inc. * | 126,864 | |||||||||
8,300 | Tyson Foods, Inc.-Class A | 112,299 | |||||||||
581,610 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Health Care — 10.2% | |||||||||||
3,000 | Apria Healthcare Group * | 68,970 | |||||||||
3,700 | Cerner Corp. * | 154,031 | |||||||||
1,000 | Community Health Systems, Inc. * | 37,920 | |||||||||
300 | Diagnostic Products Corp. | 13,845 | |||||||||
800 | Haemonetics Corp. * | 41,440 | |||||||||
7,900 | Health Net, Inc. * | 378,805 | |||||||||
2,200 | Henry Schein, Inc. * | 102,630 | |||||||||
1,100 | Hi-Tech Pharmacal Co., Inc. * | 27,104 | |||||||||
1,700 | Hologic, Inc. * | 81,311 | |||||||||
2,900 | Human Genome Sciences, Inc. * | 36,308 | |||||||||
4,000 | Humana, Inc. * | 206,680 | |||||||||
500 | ICU Medical, Inc. * | 17,550 | |||||||||
2,000 | Idexx Laboratories, Inc. * | 157,160 | |||||||||
11,100 | King Pharmaceuticals, Inc. * | 180,375 | |||||||||
2,100 | Kyphon, Inc. * | 74,991 | |||||||||
600 | LCA-Vision, Inc. | 26,160 | |||||||||
5,800 | Lincare Holdings, Inc. * | 237,220 | |||||||||
1,500 | Mentor Corp. | 64,560 | |||||||||
1,500 | Odyssey HealthCare, Inc. * | 28,230 | |||||||||
2,800 | Omnicare, Inc. | 170,380 | |||||||||
2,700 | OraSure Technologies, Inc. * | 25,704 | |||||||||
2,200 | Owens & Minor, Inc. | 70,158 | |||||||||
1,900 | Per-Se Technologies, Inc. * | 47,994 | |||||||||
3,000 | Pharmaceutical Product Development, Inc. | 208,770 | |||||||||
1,300 | PolyMedica Corp. | 52,572 | |||||||||
2,400 | Regeneron Pharmaceuticals, Inc. * | 39,288 | |||||||||
800 | Renal Care Group, Inc. * | 38,168 | |||||||||
2,300 | Res-Care, Inc. * | 42,067 | |||||||||
1,200 | ResMed, Inc. * | 48,708 | |||||||||
2,400 | Respironics, Inc. * | 87,264 | |||||||||
2,800 | Spectranetics Corp. * | 32,088 | |||||||||
1,500 | Sunrise Senior Living, Inc. * | 53,190 | |||||||||
2,800 | Techne Corp. * | 166,516 | |||||||||
1,300 | United Surgical Partners International, Inc. * | 45,695 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
2,600 | Universal Health Services, Inc.-Class B | 130,598 | |||||||||
1,600 | VCA Antech, Inc. * | 44,720 | |||||||||
3,239,170 | |||||||||||
Machinery — 2.5% | |||||||||||
3,200 | AGCO Corp. * | 62,560 | |||||||||
900 | Carbo Ceramics, Inc. | 49,275 | |||||||||
1,000 | Columbus McKinnon Corp. * | 26,900 | |||||||||
200 | Cummins, Inc. | 21,656 | |||||||||
2,400 | Flowserve Corp. * | 123,360 | |||||||||
1,000 | FMC Technologies, Inc. * | 46,920 | |||||||||
1,000 | Grant Prideco, Inc. * | 40,470 | |||||||||
800 | Lincoln Electric Holdings, Inc. | 36,928 | |||||||||
600 | Lufkin Industries, Inc. | 31,056 | |||||||||
700 | Maverick Tube Corp. * | 32,571 | |||||||||
800 | Oceaneering International, Inc. * | 44,112 | |||||||||
2,600 | Oil States International, Inc. * | 89,778 | |||||||||
1,200 | RPC, Inc. | 25,428 | |||||||||
1,900 | Superior Energy Services, Inc. * | 49,400 | |||||||||
600 | Terex Corp. * | 47,490 | |||||||||
2,900 | Transmontaigne, Inc. * | 21,866 | |||||||||
900 | W-H Energy Services, Inc. * | 35,550 | |||||||||
785,320 | |||||||||||
Manufacturing — 2.6% | |||||||||||
1,000 | Barnes Group, Inc. | 38,380 | |||||||||
800 | Clarcor, Inc. | 27,080 | |||||||||
800 | Dynamic Materials Corp. | 26,160 | |||||||||
800 | Greif, Inc.-Class A | 46,328 | |||||||||
700 | Harsco Corp. | 55,846 | |||||||||
1,900 | Kaman Corp.-Class A | 43,149 | |||||||||
800 | Mobile Mini, Inc. * | 43,584 | |||||||||
1,400 | Myers Industries, Inc. | 22,400 | |||||||||
3,600 | Owens-IIlinois, Inc. * | 67,464 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Manufacturing — continued | |||||||||||
1,200 | Shaw Group (The), Inc. * | 40,020 | |||||||||
2,000 | Sonoco Products Co. | 65,440 | |||||||||
2,200 | SPX Corp. | 108,350 | |||||||||
1,500 | Standex International Corp. | 47,805 | |||||||||
1,700 | Temple-Inland, Inc. | 72,539 | |||||||||
1,200 | Trinity Industries, Inc. | 63,600 | |||||||||
1,700 | Wabtec Corp. | 56,151 | |||||||||
824,296 | |||||||||||
Metals & Mining — 0.7% | |||||||||||
2,900 | CONSOL Energy, Inc. | 185,658 | |||||||||
1,100 | Royal Gold, Inc. | 34,573 | |||||||||
400 | RTI International Metals, Inc. * | 16,820 | |||||||||
237,051 | |||||||||||
Oil & Gas — 3.5% | |||||||||||
600 | Ashland, Inc. | 39,162 | |||||||||
500 | �� | Crosstex Energy, Inc. | 39,785 | ||||||||
2,600 | Frontier Oil Corp. | 120,250 | |||||||||
1,100 | Giant Industries, Inc. * | 64,020 | |||||||||
2,100 | Helmerich & Payne, Inc. | 138,117 | |||||||||
1,700 | Holly Corp. | 101,490 | |||||||||
6,900 | Patterson-UTI Energy, Inc. | 190,095 | |||||||||
700 | Remington Oil & Gas Corp. * | 29,330 | |||||||||
2,500 | Stone Energy Corp. * | 103,500 | |||||||||
4,600 | Tesoro Corp. | 277,886 | |||||||||
1,103,635 | |||||||||||
Primary Process Industry — 2.7% | |||||||||||
700 | Airgas, Inc. | 25,473 | |||||||||
6,400 | AK Steel Holding Corp. * | 71,040 | |||||||||
600 | Chaparral Steel Co. * | 27,486 | |||||||||
4,800 | Commercial Metals Co. | 217,392 | |||||||||
1,200 | FMC Corp. * | 72,972 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Primary Process Industry — continued | |||||||||||
2,000 | Metal Management, Inc. | 56,420 | |||||||||
1,500 | Millipore Corp. * | 103,995 | |||||||||
600 | NS Group, Inc. * | 24,474 | |||||||||
1,000 | Olympic Steel, Inc. | 26,360 | |||||||||
900 | OM Group, Inc. * | 19,089 | |||||||||
3,200 | Ryerson Tull, Inc. | 80,768 | |||||||||
1,100 | Steel Technologies, Inc. | 30,349 | |||||||||
400 | United States Steel Corp. | 21,800 | |||||||||
3,600 | Worthington Industries, Inc. | 70,560 | |||||||||
848,178 | |||||||||||
Retail Stores — 7.7% | |||||||||||
800 | Abercrombie & Fitch Co. -Class A | 53,856 | |||||||||
2,200 | Advance Auto Parts * | 90,970 | |||||||||
2,400 | American Eagle Outfitters, Inc. | 61,056 | |||||||||
3,200 | BJ's Wholesale Club, Inc. * | 101,312 | |||||||||
900 | Building Materials Holding Corp. | 60,570 | |||||||||
1,500 | Casey's General Stores, Inc. | 39,345 | |||||||||
900 | Cato Corp.-Class A | 18,783 | |||||||||
1,700 | Chico's FAS, Inc. * | 79,985 | |||||||||
1,000 | Conn's, Inc. * | 37,250 | |||||||||
6,300 | Dollar Tree Stores, Inc. * | 172,746 | |||||||||
1,700 | Fastenal Co. | 74,647 | |||||||||
600 | Gamestop Corp.-Class A * | 24,018 | |||||||||
3,600 | Great Atlantic & Pacific Tea Co. * | 116,136 | |||||||||
1,500 | Group 1 Automotive, Inc. | 57,420 | |||||||||
1,950 | Hibbett Sporting Goods, Inc. * | 62,556 | |||||||||
1,700 | Ingles Markets, Inc.-Class A | 28,067 | |||||||||
2,500 | Insight Enterprises, Inc. * | 53,825 | |||||||||
750 | Jos. A. Bank Clothiers, Inc. * | 33,458 | |||||||||
1,000 | Lithia Motors, Inc.-Class A | 32,040 | |||||||||
1,000 | Longs Drug Stores Corp. | 38,370 | |||||||||
700 | Men's Wearhouse, Inc. * | 21,924 | |||||||||
1,100 | NetFlix, Inc. * | 29,491 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
7,000 | O'Reilly Automotive, Inc. * | 229,040 | |||||||||
1,500 | Pantry (The), Inc. * | 88,755 | |||||||||
3,300 | Payless Shoesource, Inc. * | 78,210 | |||||||||
5,850 | Rent-A-Center, Inc. * | 136,539 | |||||||||
3,000 | Ross Stores, Inc. | 84,960 | |||||||||
600 | Ruddick Corp. | 14,508 | |||||||||
2,500 | Sonic Automotive, Inc. | 66,225 | |||||||||
3,600 | Supervalu, Inc. | 113,760 | |||||||||
1,800 | Talbots, Inc. | 47,988 | |||||||||
600 | Too, Inc. * | 18,258 | |||||||||
3,900 | United Auto Group, Inc. | 168,636 | |||||||||
3,000 | Williams-Sonoma, Inc. * | 121,470 | |||||||||
2,456,174 | |||||||||||
Services — 8.5% | |||||||||||
5,650 | Applebee's International, Inc. | 130,741 | |||||||||
1,350 | Applied Industrial Technologies, Inc. | 57,753 | |||||||||
666 | Aqua America, Inc. | 19,141 | |||||||||
1,500 | Banta Corp. | 73,065 | |||||||||
6,800 | BearingPoint, Inc. * | 60,588 | |||||||||
1,600 | Bob Evans Farms, Inc. | 46,672 | |||||||||
1,400 | Bright Horizons Family Solutions, Inc. * | 46,914 | |||||||||
4,600 | Brinker International, Inc. | 191,590 | |||||||||
900 | California Pizza Kitchen, Inc. * | 27,054 | |||||||||
1,800 | Career Education Corp. * | 59,112 | |||||||||
800 | CBRL Group, Inc. | 35,544 | |||||||||
2,200 | Cenveo, Inc. * | 30,998 | |||||||||
2,500 | Darden Restaurants, Inc. | 104,850 | |||||||||
2,950 | Factset Research Systems, Inc. | 115,493 | |||||||||
3,100 | Iron Mountain, Inc. * | 135,470 | |||||||||
2,900 | ITT Educational Services, Inc. * | 179,800 | |||||||||
2,800 | Jack in the Box, Inc. * | 112,000 | |||||||||
3,600 | Krispy Kreme Doughnuts Inc. * | 24,300 | |||||||||
3,100 | Manpower, Inc. | 166,284 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Services — continued | |||||||||||
4,800 | Mediacom Communications Corp. * | 27,072 | |||||||||
2,000 | Nash Finch Co. | 62,000 | |||||||||
1,000 | O'Charley's, Inc. * | 17,760 | |||||||||
3,700 | Outback Steakhouse, Inc. | 154,697 | |||||||||
700 | Panera Bread Co.-Class A * | 49,602 | |||||||||
3,000 | Papa John's International, Inc. * | 98,700 | |||||||||
2,400 | Performance Food Group Co. * | 70,488 | |||||||||
400 | Portfolio Recovery Associates, Inc. * | 19,564 | |||||||||
1,300 | Rare Hospitality International, Inc. * | 41,600 | |||||||||
800 | Regis Corp. | 30,624 | |||||||||
2,300 | Ruby Tuesday, Inc. | 65,665 | |||||||||
1,100 | Ryan's Restaurant Group, Inc. * | 14,531 | |||||||||
2,000 | Sabre Holdings Corp. | 48,260 | |||||||||
4,300 | Service Corp. International | 34,185 | |||||||||
3,400 | Sinclair Broadcast Group-Class A | 24,446 | |||||||||
2,150 | Sonic Corp. * | 67,962 | |||||||||
1,000 | Stericycle, Inc. * | 60,450 | |||||||||
3,800 | Valassis Communications, Inc. * | 104,690 | |||||||||
2,900 | World Fuel Services Corp. | 87,870 | |||||||||
2,697,535 | |||||||||||
Technology — 12.8% | |||||||||||
2,100 | AAR Corp. * | 53,151 | |||||||||
1,100 | Ade Corp./Mass * | 36,388 | |||||||||
3,500 | ADTRAN, Inc. | 96,320 | |||||||||
2,500 | Advanced Energy Industries, Inc. * | 35,800 | |||||||||
700 | Agilysys, Inc. | 10,003 | |||||||||
1,000 | Alliant Techsystems, Inc. * | 76,420 | |||||||||
800 | Amphenol Corp.-Class A | 40,184 | |||||||||
900 | Ansys, Inc. * | 42,678 | |||||||||
1,600 | Anteon International Corp. * | 88,464 | |||||||||
1,000 | AO Smith Corp. | 46,300 | |||||||||
5,000 | Arrow Electronics, Inc. * | 173,950 | |||||||||
8,700 | Avnet, Inc. * | 218,631 | |||||||||
4,000 | AVX Corp. | 66,240 |
See accompanying notes to the financial statements.
12
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
1,000 | Bankrate, Inc. * | 36,150 | |||||||||
3,900 | BEA Systems, Inc. * | 44,733 | |||||||||
5,000 | Bell Microproducts, Inc. * | 30,050 | |||||||||
800 | Black Box Corp. | 38,224 | |||||||||
5,005 | Brightpoint, Inc. * | 141,591 | |||||||||
6,800 | CNET Networks, Inc. * | 94,112 | |||||||||
900 | Computer Programs & Systems, Inc. | 41,364 | |||||||||
2,200 | Concur Technologies, Inc. * | 33,352 | |||||||||
4,600 | Convergys Corp. * | 79,902 | |||||||||
5,800 | Cypress Semiconductor Corp. * | 103,008 | |||||||||
2,500 | Digital Insight Corp. * | 82,625 | |||||||||
2,800 | Distributed Energy Systems Corp. * | 26,124 | |||||||||
1,900 | Electronics for Imaging * | 50,958 | |||||||||
2,000 | Greatbatch, Inc. * | 44,220 | |||||||||
3,600 | Harris Corp. | 164,448 | |||||||||
13,600 | Ingram Micro, Inc.-Class A * | 269,008 | |||||||||
2,500 | Intersil Corp.-Class A | 70,850 | |||||||||
2,300 | JDA Software Group, Inc. * | 31,579 | |||||||||
1,000 | Komag, Inc. * | 46,840 | |||||||||
6,400 | Kopin Corp. * | 27,840 | |||||||||
2,200 | Lightbridge, Inc. * | 21,582 | |||||||||
2,000 | Mantech International Corp.-Class A * | 56,200 | |||||||||
1,100 | Maximus, Inc. | 40,161 | |||||||||
1,300 | Micrel, Inc. * | 18,161 | |||||||||
500 | Micros Systems, Inc. * | 21,645 | |||||||||
3,400 | Microsemi Corp. * | 104,550 | |||||||||
300 | MTS Systems Corp. | 11,856 | |||||||||
1,400 | Neoware Systems, Inc. * | 34,342 | |||||||||
3,000 | Plexus Corp. * | 100,680 | |||||||||
1,600 | Power Integrations, Inc. * | 39,728 | |||||||||
3,000 | QLogic Corp. * | 123,420 | |||||||||
900 | Quality Systems, Inc. | 62,298 | |||||||||
3,600 | Red Hat, Inc. * | 96,732 | |||||||||
1,700 | Silicon Laboratories, Inc. * | 81,566 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
1,600 | SYKES Enterprises, Inc. * | 21,312 | |||||||||
1,300 | Synopsys, Inc. * | 28,431 | |||||||||
2,300 | Syntel, Inc. | 39,100 | |||||||||
3,900 | Tech Data Corp. * | 161,967 | |||||||||
3,000 | Teradyne, Inc. * | 50,370 | |||||||||
2,000 | Transaction Systems Architects, Inc. * | 66,720 | |||||||||
2,900 | Unisys Corp. * | 19,372 | |||||||||
1,900 | United Stationers, Inc. * | 94,050 | |||||||||
900 | Varian Semiconductor Equipment Associates, Inc. * | 42,444 | |||||||||
400 | Websense, Inc. * | 24,724 | |||||||||
1,600 | WESCO International, Inc. * | 91,712 | |||||||||
8,300 | Western Digital Corp. * | 184,675 | |||||||||
4,079,305 | |||||||||||
Transportation — 2.0% | |||||||||||
11,700 | AMR Corp. * | 293,670 | |||||||||
7,700 | Continental Airlines, Inc.-Class B * | 179,410 | |||||||||
1,200 | EGL, Inc. * | 48,540 | |||||||||
6,100 | ExpressJet Holdings, Inc. * | 45,872 | |||||||||
450 | Forward Air Corp. | 15,966 | |||||||||
1,443 | US Airways Group, Inc. * | 47,749 | |||||||||
631,207 | |||||||||||
Utility — 4.8% | |||||||||||
2,300 | Allegheny Energy, Inc. * | 82,248 | |||||||||
800 | Alliant Energy Corp. | 26,480 | |||||||||
22,400 | Centerpoint Energy, Inc. | 290,528 | |||||||||
2,000 | Centurytel, Inc. | 71,960 | |||||||||
6,800 | CMS Energy Corp. * | 95,744 | |||||||||
3,100 | Duquesne Light Holdings, Inc. | 53,785 | |||||||||
2,700 | Great Plains Energy, Inc. | 76,680 | |||||||||
500 | j2 Global Communications, Inc. * | 21,800 | |||||||||
1,300 | MDU Resources Group, Inc. | 45,825 | |||||||||
400 | National Fuel Gas Co. | 12,952 |
See accompanying notes to the financial statements.
14
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
Utility — continued | |||||||||||
2,500 | NII Holdings, Inc.-Class B * | 128,050 | |||||||||
2,400 | NSTAR | 70,464 | |||||||||
1,400 | OGE Energy Corp. | 40,250 | |||||||||
5,300 | Pepco Holdings, Inc. | 125,981 | |||||||||
600 | Pinnacle West Capital Corp. | 24,630 | |||||||||
2,500 | Puget Energy, Inc. | 53,900 | |||||||||
10,700 | TECO Energy, Inc. | 182,542 | |||||||||
3,900 | Time Warner Telecom, Inc.-Class A * | 49,257 | |||||||||
3,700 | Ubiquitel, Inc. * | 36,149 | |||||||||
1,100 | Wisconsin Energy Corp. | 44,956 | |||||||||
1,534,181 | |||||||||||
TOTAL COMMON STOCKS (COST $23,685,777) | 31,169,858 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.9% | |||||||||||
274,567 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $274,590 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest of $280,058. | 274,567 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $274,567) | 274,567 | ||||||||||
TOTAL INVESTMENTS — 98.9% (Cost $23,960,344) | 31,444,425 | ||||||||||
Other Assets and Liabilities (net) — 1.1% | 345,472 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 31,789,897 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
15
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $23,960,344) (Note 2) | $ | 31,444,425 | |||||
Receivable for investments sold | 836,648 | ||||||
Dividends and interest receivable | 29,277 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,619 | ||||||
Total assets | 32,316,969 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 468,887 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 13,511 | ||||||
Shareholder service fee | 3,685 | ||||||
Trustees and Chief Compliance Officer fees | 47 | ||||||
Accrued expenses | 40,942 | ||||||
Total liabilities | 527,072 | ||||||
Net assets | $ | 31,789,897 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 26,774,291 | |||||
Accumulated undistributed net investment income | 18,415 | ||||||
Accumulated net realized loss | (2,486,890 | ) | |||||
Net unrealized appreciation | 7,484,081 | ||||||
$ | 31,789,897 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 31,789,897 | |||||
Shares outstanding: | |||||||
Class III | 1,666,850 | ||||||
Net asset value per share: | |||||||
Class III | $ | 19.07 |
See accompanying notes to the financial statements.
16
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends | $ | 315,435 | |||||
Interest | 10,488 | ||||||
Total investment income | 325,923 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 136,089 | ||||||
Shareholder service fee – Class III (Note 3) | 37,115 | ||||||
Custodian, fund accounting agent and transfer agent fees | 22,592 | ||||||
Audit and tax fees | 42,754 | ||||||
Legal fees | 441 | ||||||
Trustees fees and related expenses (Note 3) | 505 | ||||||
Registration fees | 1,129 | ||||||
Miscellaneous | 455 | ||||||
Total expenses | 241,080 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (67,100 | ) | |||||
Net expenses | 173,980 | ||||||
Net investment income (loss) | 151,943 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 3,519,371 | ||||||
Closed futures contracts | (4,929 | ) | |||||
Net realized gain (loss) | 3,514,442 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (963,742 | ) | |||||
Net realized and unrealized gain (loss) | 2,550,700 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 2,702,643 |
See accompanying notes to the financial statements.
17
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 151,943 | $ | 140,011 | |||||||
Net realized gain (loss) | 3,514,442 | 2,855,401 | |||||||||
Change in net unrealized appreciation (depreciation) | (963,742 | ) | 631,650 | ||||||||
Net increase (decrease) in net assets from operations | 2,702,643 | 3,627,062 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (144,604 | ) | (114,932 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | 2,106,548 | (960,466 | ) | ||||||||
Purchase premiums (Notes 2 and 7): | |||||||||||
Class III | 40,000 | 5,000 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums | 2,146,548 | (955,466 | ) | ||||||||
Total increase (decrease) in net assets | 4,704,587 | 2,556,664 | |||||||||
Net assets: | |||||||||||
Beginning of period | 27,085,310 | 24,528,646 | |||||||||
End of period (including accumulated undistributed net investment income of $18,415 and $18,995, respectively) | $ | 31,789,897 | $ | 27,085,310 |
See accompanying notes to the financial statements.
18
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 16.94 | $ | 14.80 | $ | 9.66 | $ | 11.76 | $ | 10.54 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.11 | † | 0.08 | † | 0.08 | 0.11 | 0.15 | ||||||||||||||||
Net realized and unrealized gain (loss) | 2.13 | 2.13 | 5.14 | (2.10 | ) | 1.23 | |||||||||||||||||
Total from investment operations | 2.24 | 2.21 | 5.22 | (1.99 | ) | 1.38 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.07 | ) | (0.08 | ) | (0.11 | ) | (0.16 | ) | |||||||||||||
Total distributions | (0.11 | ) | (0.07 | ) | (0.08 | ) | (0.11 | ) | (0.16 | ) | |||||||||||||
Net asset value, end of period | $ | 19.07 | $ | 16.94 | $ | 14.80 | $ | 9.66 | $ | 11.76 | |||||||||||||
Total Return(a) | 13.25 | % | 14.99 | % | 54.21 | % | (17.00 | )% | 13.25 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 31,790 | $ | 27,085 | $ | 24,529 | $ | 20,723 | $ | 37,544 | |||||||||||||
Net expenses to average daily net assets | 0.70 | % | 0.70 | % | 0.70 | % | 0.71 | % | 0.70 | % | |||||||||||||
Net investment income to average daily net assets | 0.61 | % | 0.56 | % | 0.62 | % | 0.90 | % | 1.30 | % | |||||||||||||
Portfolio turnover rate | �� | 78 | % | 90 | % | 66 | % | 55 | % | 65 | % | ||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.27 | % | 0.25 | % | 0.31 | % | 0.18 | % | 0.20 | % | |||||||||||||
Purchase premiums consisted of the following per share amounts:† | $ | 0.03 | — | (b) | — | $ | 0.01 | — | (b) |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums which are borne by the shareholders.
(b) Purchase premiums were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
19
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Tax-Managed Small/Mid Cap Fund (the "Fund") (formerly GMO Tax-Managed Small Companies Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks to maximize after-tax total return through investment in common stocks of small and mid-cap companies principally traded in the U.S. The Fund's benchmark is the Russell 2500 Index (after-tax), which is computed by the Manager by applying the maximum historical applicable individual federal income tax rate to the Russell 2500 Index's dividend yield.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains
20
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if t he Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of
21
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in
22
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income — $144,604 and $114,932, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $18,415 of undistributed ordinary income.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $505,333, $1,587,943, and $393,614 expiring in 2009, 2010, and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 23,960,344 | $ | 7,874,488 | $ | (390,407 | ) | $ | 7,484,081 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to redemption in-kind transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | (7,919 | ) | $ | (1,437,362 | ) | $ | 1,445,281 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
23
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases of Fund shares was 0.50% of the amount invested. If the Manager determines that any portion of a cash purchase is offset by a corresponding cash redemption occurring on the same day, it will waive the purchase premium in an amount appropriately equal to the fee with respect to that portion. In addition, the purchase premium charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $40,000 and $5,000 in purchase premiums, respectively. There is no fee for redemptions, reinvested distributions or in-kind transactions.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.55% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $279 and $155, respectively. No remuneration was paid to any other officer of the Trust.
24
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $20,738,953 and $19,070,502, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 69.5% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 1.0% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 413,504 | $ | 7,960,000 | 67,779 | $ | 995,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,224 | 56,937 | 3,237 | 48,181 | |||||||||||||||
Shares repurchased | (348,898 | ) | (5,910,389 | ) | (129,455 | ) | (2,003,647 | ) | |||||||||||
Purchase premiums and redemption fees | — | 40,000 | — | 5,000 | |||||||||||||||
Net increase (decrease) | 67,830 | $ | 2,146,548 | (58,439 | ) | $ | (955,466 | ) |
25
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed Small/Mid Cap Fund (formerly GMO Tax-Managed Small Companies Fund) (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordan ce with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
26
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.70 | % | $ | 1,000.00 | $ | 1,055.30 | $ | 3.57 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.32 | $ | 3.51 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
27
GMO Tax-Managed Small/Mid Cap Fund
(formerly GMO Tax-Managed Small Companies Fund)
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
For taxable, non-corporate shareholders, 92.22% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $1,037 or if determined to be different, the qualified interest income of such year.
28
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
29
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee3. | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
30
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
31
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003– present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer,October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
32
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Short-Duration Investment Fund returned +3.8% for the fiscal year ended February 28, 2006, as compared to +3.3% for the Citigroup 3-Month Treasury Bill Index.
The Fund outperformed the benchmark during the fiscal year by 0.5%. This outperformance was attributable to instrument selection. The Fund's duration at fiscal year-end was 0.3 years.
At fiscal year-end, approximately 68% of the Fund was invested in AAA asset-backed securities, 13% in U.S. Treasury notes and cash, 1% in corporate bonds, 10% in U.S. Government-backed bonds, 7% in collateralized bond obligations, and less than 1% in non-AAA asset-backed securities.
The asset-backed holdings included issues backed by consumer receivables such as residential mortgages, credit card, and auto loans as well as commercial/corporate mortgages and receivables. The Fund's exposure to its cash assets is achieved both directly and indirectly through its investment in the GMO Short-Duration Collateral Fund.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Short Duration Investment Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 96.7 | % | |||||
Short-Term Investment(s) | 2.2 | ||||||
Mutual Fund | 0.5 | ||||||
Swaps | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Other | 0.5 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 19.5% | |||||||||||
U.S. Government — 10.8% | |||||||||||
3,001,300 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) | 3,175,281 | |||||||||
U.S. Government Agency — 8.7% | |||||||||||
163,333 | Agency for International Development Floater (Support of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.15%, due 10/01/12 | 162,721 | |||||||||
1,051,200 | Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.15%, due 10/01/12 | 1,047,258 | |||||||||
1,003,657 | Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 4.49%, due 10/01/11 | 996,757 | |||||||||
50,993 | Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 5.10%, due 05/01/14 | 50,642 | |||||||||
301,030 | Small Business Administration Pool #502320, Variable Rate, Prime - 2.18%, 5.06%, due 08/25/18 | 301,578 | |||||||||
2,558,956 | |||||||||||
TOTAL DEBT OBLIGATION(S) (COST $5,793,608) | 5,734,237 | ||||||||||
MUTUAL FUNDS — 80.1% | |||||||||||
Affiliated Issuer(s) — 80.1% | |||||||||||
918,586 | GMO Short-Duration Collateral Fund | 23,515,802 | |||||||||
9,192 | GMO Special Purpose Holding Fund | 75,649 | |||||||||
TOTAL MUTUAL FUNDS (COST $23,395,363) | 23,591,451 | ||||||||||
TOTAL INVESTMENTS — 99.6% (Cost $29,188,971) | 29,325,688 | ||||||||||
Other Assets and Liabilities (net) — 0.4% | 128,579 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 29,454,267 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Notes to Schedule of Investments:
C.A.B.E.I. - Central American Bank of Economic Integration
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
See accompanying notes to the financial statements.
3
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $5,793,608) (Note 2) | $ | 5,734,237 | |||||
Investments in affiliated issuers, at value (cost $23,395,363) (Notes 2 and 8) | 23,591,451 | ||||||
Cash | 98,937 | ||||||
Receivable for investments sold | 2,943 | ||||||
Interest receivable | 52,459 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 2,947 | ||||||
Total assets | 29,482,974 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 1,128 | ||||||
Shareholder service fee | 3,387 | ||||||
Trustees and Chief Compliance Officer fees | 124 | ||||||
Accrued expenses | 24,068 | ||||||
Total liabilities | 28,707 | ||||||
Net assets | $ | 29,454,267 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 34,475,086 | |||||
Distributions in excess of net investment income | (3,009 | ) | |||||
Accumulated net realized loss | (5,154,527 | ) | |||||
Net unrealized appreciation | 136,717 | ||||||
$ | 29,454,267 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 29,454,267 | |||||
Shares outstanding: | |||||||
Class III | 3,340,900 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.82 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 627,527 | |||||
Interest | 314,637 | ||||||
Total investment income | 942,164 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 14,671 | ||||||
Shareholder service fee – Class III (Note 3) | 44,012 | ||||||
Custodian, fund accounting agent and transfer agent fees | 4,701 | ||||||
Audit and tax fees | 28,711 | ||||||
Legal fees | 591 | ||||||
Trustees fees and related expenses (Note 3) | 610 | ||||||
Registration fees | 3,901 | ||||||
Miscellaneous | 1,753 | ||||||
Total expenses | 98,950 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (39,321 | ) | |||||
Net expenses | 59,629 | ||||||
Net investment income (loss) | 882,535 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 34,529 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 89,029 | ||||||
Net realized gain (loss) | 123,558 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 86,398 | ||||||
Net realized and unrealized gain (loss) | 209,956 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,092,491 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 882,535 | $ | 980,024 | |||||||
Net realized gain (loss) | 123,558 | (275,265 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 86,398 | 214,502 | |||||||||
Net increase (decrease) in net assets from operations | 1,092,491 | 919,261 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (933,424 | ) | (979,106 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | (311,728 | ) | (14,488,949 | ) | |||||||
Total increase (decrease) in net assets | (152,661 | ) | (14,548,794 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 29,606,928 | 44,155,722 | |||||||||
End of period (including distributions in excess of net investment income of $3,009 and accumulated undistributed net investment income of $941, respectively) | $ | 29,454,267 | $ | 29,606,928 |
See accompanying notes to the financial statements.
6
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 8.77 | $ | 8.75 | $ | 8.68 | $ | 9.62 | $ | 9.92 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.27 | 0.23 | 0.12 | 0.08 | 0.30 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.07 | (0.01 | ) | 0.07 | (0.54 | ) | 0.07 | ||||||||||||||||
Total from investment operations | 0.34 | 0.22 | 0.19 | (0.46 | ) | 0.37 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.29 | ) | (0.20 | ) | (0.12 | ) | (0.33 | ) | (0.39 | ) | |||||||||||||
From net realized gains | — | — | — | (0.15 | ) | (0.28 | ) | ||||||||||||||||
Return of capital | — | — | (0.00 | )(b) | — | — | |||||||||||||||||
Total distributions | (0.29 | ) | (0.20 | ) | (0.12 | ) | (0.48 | ) | (0.67 | ) | |||||||||||||
Net asset value, end of period | $ | 8.82 | $ | 8.77 | �� | $ | 8.75 | $ | 8.68 | $ | 9.62 | ||||||||||||
Total Return(c) | 3.83 | % | 2.49 | % | 2.24 | % | (4.91 | )% | 3.73 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 29,454 | $ | 29,607 | $ | 44,156 | $ | 55,316 | $ | 48,347 | |||||||||||||
Net expenses to average daily net assets(d) | 0.20 | % | 0.20 | % | 0.21 | % | 0.21 | % | 0.20 | % | |||||||||||||
Net investment income to average daily net assets(a) | 3.01 | % | 2.57 | % | 1.36 | % | 0.88 | % | 3.04 | % | |||||||||||||
Portfolio turnover rate | 17 | % | 101 | % | 4 | % | 43 | % | 91 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.13 | % | 0.10 | % | 0.10 | % | 0.08 | % | 0.12 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) Return of capital was less than $0.01.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
7
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Short-Duration Investment Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks to provide current income through direct and indirect investments in high-quality fixed income instruments and other funds of the Trust ("underlying fund(s)") primarily GMO Short-Duration Collateral Fund. The Fund's benchmark is the Citigroup 3-Month Treasury Bill Index.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). Shares of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
8
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund or the underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 33.3% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $57,329 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $319,134 (approximately $0.09 per share as of April 18, 2006) in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such re coveries may be material to the net asset value of the Fund.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
9
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $933,424 and $979,106, respectively.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $1,151,233, $708 and $7,530,888 expiring in 2012, 2013 and 2014, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
10
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 25,843,678 | $ | 3,541,381 | $ | (59,371 | ) | $ | 3,482,010 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions In Excess Of Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | 46,939 | $ | (930 | ) | $ | (46,009 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
11
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of Class III of the Fund at the annual rate of 0.15%.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.05% of the average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net (excluding shareholder service fees and interest expense) | Expenses Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.007 | % | 0.000 | % | 0.010 | % | 0.017 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $316 and $268, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | — | |||||||
Investments (non-U.S. Government securities) | 4,927,527 | 5,215,957 |
12
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 49.2% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 5.0% of the Fund's shares were held by twelve related parties comprised of certain GMO employee accounts, and 19.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 240,607 | $ | 2,120,775 | 3,218,676 | $ | 28,316,339 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 104,071 | 920,420 | 110,887 | 968,904 | |||||||||||||||
Shares repurchased | (379,864 | ) | (3,352,923 | ) | (4,997,291 | ) | (43,774,192 | ) | |||||||||||
Net increase (decrease) | (35,186 | ) | $ | (311,728 | ) | (1,667,728 | ) | $ | (14,488,949 | ) |
13
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 22,935,783 | $ | 4,927,527 | $ | 4,600,000 | $ | 627,527 | $ | — | $ | 23,515,802 | |||||||||||||||
GMO Special Purpose Holding Fund | 142,566 | — | — | — | 89,029 | 75,649 | * | ||||||||||||||||||||
Totals | $ | 23,078,349 | $ | 4,927,527 | $ | 4,600,000 | $ | 627,527 | $ | 89,029 | $ | 23,591,451 |
* After the effect of return of capital distributions of $50,673 and $5,302 on April 5, 2005 and February 21, 2006, respectively.
14
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Short-Duration Investment Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Short-Duration Investment Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Acc ounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
15
GMO Short Duration Investment Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.23 | % | $ | 1,000.00 | $ | 1,018.90 | $ | 1.15 | ||||||||||
2) Hypothetical | 0.23 | % | $ | 1,000.00 | $ | 1,023.65 | $ | 1.15 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
16
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Year Ended February 28, 2006
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $589,410 or if determined to be different, the qualified interest income of such year.
17
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
18
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
19
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
21
GMO Domestic Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Domestic Bond Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Domestic Bond Fund returned +3.0% for the fiscal year ended February 28, 2006, as compared to +2.7% for the Lehman Brothers U.S. Government Index.
The Fund outperformed the benchmark during the fiscal year by 0.3%. At fiscal year-end, in excess of 90% of the Benchmark's return was achieved through total return swaps. The Fund's cash was invested 78% in AAA asset-backed securities; 13% in securities of the U.S. Government, its agencies, and cash; 8% in collateralized debt obligations; and less than 1% in both corporate bonds and non-AAA asset backed securities.
The asset-backed holdings included issues backed by consumer receivables such as residential mortgages, credit card, and auto loans as well as commercial/corporate mortgages and receivables. The Fund's exposure to its cash assets is achieved both directly and indirectly through its investment in the GMO Short-Duration Collateral Fund.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class VI shares will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Domestic Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 96.2 | % | |||||
Short-Term Investment(s) | 2.5 | ||||||
Mutual Fund | 0.9 | ||||||
Preferred Stocks | 0.6 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Swaps | (0.2 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 8.6% | |||||||||||
Corporate Debt — 0.6% | |||||||||||
2,500,000 | Bank Austria Creditanstalt AG, 144A, 7.25%, due 02/15/17 | 2,893,475 | |||||||||
U.S. Government — 2.4% | |||||||||||
2,339,780 | U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (a) (b) | 2,547,070 | |||||||||
8,521,207 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) | 9,015,171 | |||||||||
11,562,241 | |||||||||||
U.S. Government Agency — 5.6% | |||||||||||
10,000,000 | Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 4.79%, due 02/01/27 | 9,925,000 | |||||||||
4,500,000 | Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. LIBOR + .30%, 5.24%, due 12/01/14 | 4,505,625 | |||||||||
4,244,853 | Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 5.50%, due 03/30/19 | 4,258,118 | |||||||||
4,517,500 | Agency for International Development Floater (Support of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20%, 5.14%, due 06/15/12 | 4,506,206 | |||||||||
4,400,004 | Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 4.82%, due 01/01/12 | 4,347,754 | |||||||||
27,542,703 | |||||||||||
TOTAL DEBT OBLIGATION(S) (COST $41,703,539) | 41,998,419 | ||||||||||
PREFERRED STOCKS — 0.6% | |||||||||||
Banking — 0.6% | |||||||||||
10,000 | Home Ownership Funding 2 Preferred 144A, 13.338% | 2,791,760 | |||||||||
TOTAL PREFERRED STOCKS (COST $3,755,855) | 2,791,760 |
See accompanying notes to the financial statements.
2
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 91.0% | |||||||||||
17,191,238 | GMO Short-Duration Collateral Fund (c) | 440,095,699 | |||||||||
1,483 | GMO Special Purpose Holding Fund (c) | 12,202 | |||||||||
1,228,482 | Merrimac Cash Series, Premium Class | 1,228,482 | |||||||||
TOTAL MUTUAL FUNDS (COST $438,383,730) | 441,336,383 | ||||||||||
TOTAL INVESTMENTS — 100.2% (Cost $483,843,124) | 486,126,562 | ||||||||||
Other Assets and Liabilities (net) — (0.2%) | (980,450 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 485,146,112 |
See accompanying notes to the financial statements.
3
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
49 | U.S. Long Bond | June 2006 | $ | 5,541,594 | $ | (9,350 | ) | ||||||||||||
120 | U.S. Treasury Note 10 Yr. | June 2006 | 12,948,750 | (14,483 | ) | ||||||||||||||
$ | (23,833 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
223 | U.S. Treasury Note 5 Yr. | June 2006 | $ | 23,456,813 | $ | (44,768 | ) |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
38,800,000 | USD | 2/28/2008 | JP Morgan Chase Bank | (Pay) | 4.01 | % | 3 Month LIBOR | $ | 864,666 | ||||||||||||||||||
170,000,000 | USD | 2/28/2010 | JP Morgan Chase Bank | Receive | 4.23 | % | 3 Month LIBOR | (5,425,746 | ) | ||||||||||||||||||
114,000,000 | USD | 2/28/2013 | JP Morgan Chase Bank | (Pay) | 4.49 | % | 3 Month LIBOR | 4,111,405 | |||||||||||||||||||
8,500,000 | USD | 10/24/2013 | JP Morgan Chase Bank | (Pay) | 4.70 | % | 3 Month LIBOR | 200,543 | |||||||||||||||||||
$ | (249,132 | ) |
See accompanying notes to the financial statements.
4
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
25,000,000 | USD | 4/28/2006 | Lehman Brothers | 1 month LIBOR | Return on Lehman | ||||||||||||||||||
–0.05% | Brothers U.S. | ||||||||||||||||||||||
Government Index | $ | (45,789 | ) | ||||||||||||||||||||
177,000,000 | USD | 5/31/2006 | Lehman Brothers | 1 month LIBOR – 0.03% | Return on Lehman Brothers U.S. Government Index | (326,844 | ) | ||||||||||||||||
75,000,000 | USD | 6/30/2006 | Lehman Brothers | 1 month LIBOR – 0.02% | Return on Lehman Brothers U.S. Government Index | (139,056 | ) | ||||||||||||||||
175,000,000 | USD | 7/31/2006 | Lehman Brothers | 1 month LIBOR – 0.05% | Return on Lehman Brothers U.S. Government Index | (320,525 | ) | ||||||||||||||||
$ | (832,214 | ) |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
(a) Index security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
(c) Affiliated issuer (Note 8).
See accompanying notes to the financial statements.
5
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $46,687,876) (Note 2) | $ | 46,018,661 | |||||
Investments in affiliated issuers, at value (cost $437,155,248) (Notes 2 and 8) | 440,107,901 | ||||||
Interest receivable | 271,611 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 22,365 | ||||||
Receivable for open swap contracts (Note 2) | 5,176,614 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 7,734 | ||||||
Total assets | 491,604,886 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 37,579 | ||||||
Shareholder service fee | 30,202 | ||||||
Trustees and Chief Compliance Officer fees | 633 | ||||||
Interest payable for open swap contracts (Note 2) | 73,081 | ||||||
Payable for open swap contracts (Note 2) | 6,257,960 | ||||||
Accrued expenses | 59,319 | ||||||
Total liabilities | 6,458,774 | ||||||
Net assets | $ | 485,146,112 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 487,524,174 | |||||
Distributions in excess of net investment income | (7,816 | ) | |||||
Distributions in excess of net realized gain | (3,503,737 | ) | |||||
Net unrealized appreciation | 1,133,491 | ||||||
$ | 485,146,112 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 125,187,861 | |||||
Class VI shares | $ | 359,958,251 | |||||
Shares outstanding: | |||||||
Class III | 12,764,579 | ||||||
Class VI | 36,654,789 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.81 | |||||
Class VI | $ | 9.82 |
See accompanying notes to the financial statements.
6
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 12,078,216 | |||||
Interest | 1,872,663 | ||||||
Dividends | 236,262 | ||||||
Total investment income | 14,187,141 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 559,462 | ||||||
Shareholder service fee – Class III (Note 3) | 524,123 | ||||||
Shareholder service fee – Class VI (Note 3) | 115,526 | ||||||
Custodian, fund accounting agent and transfer agent fees | 74,349 | ||||||
Audit and tax fees | 46,455 | ||||||
Legal fees | 10,590 | ||||||
Trustees fees and related expenses (Note 3) | 10,295 | ||||||
Registration fees | 4,473 | ||||||
Miscellaneous | 10,327 | ||||||
Total expenses | 1,355,600 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (138,450 | ) | |||||
Net expenses | 1,217,150 | ||||||
Net investment income (loss) | 12,969,991 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 5,645,768 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 12,900 | ||||||
Closed futures contracts | 8,143,279 | ||||||
Closed swap contracts | (8,722,528 | ) | |||||
Net realized gain (loss) | 5,079,419 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,112,039 | ||||||
Open futures contracts | 2,362,394 | ||||||
Open swap contracts | 1,473,240 | ||||||
Net unrealized gain (loss) | 4,947,673 | ||||||
Net realized and unrealized gain (loss) | 10,027,092 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 22,997,083 |
See accompanying notes to the financial statements.
7
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,969,991 | $ | 9,069,721 | |||||||
Net realized gain (loss) | 5,079,419 | 12,152,915 | |||||||||
Change in net unrealized appreciation (depreciation) | 4,947,673 | (7,068,364 | ) | ||||||||
Net increase (decrease) in net assets from operations | 22,997,083 | 14,154,272 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (5,417,082 | ) | (10,756,517 | ) | |||||||
Class VI | (7,425,411 | ) | — | ||||||||
Total distributions from net investment income | (12,842,493 | ) | (10,756,517 | ) | |||||||
Net realized gains | |||||||||||
Class III | (6,661,020 | ) | (17,124,372 | ) | |||||||
Return of capital | |||||||||||
Class III | — | (294,354 | ) | ||||||||
(19,503,513 | ) | (28,175,243 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (618,625,270 | ) | 377,044,636 | ||||||||
Class VI | 363,977,331 | — | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (254,647,939 | ) | 377,044,636 | ||||||||
Total increase (decrease) in net assets | (251,154,369 | ) | 363,023,665 | ||||||||
Net assets: | |||||||||||
Beginning of period | 736,300,481 | 373,276,816 | |||||||||
End of period (including distributions in excess of net investment income of $7,816 and $7,296, respectively) | $ | 485,146,112 | $ | 736,300,481 |
See accompanying notes to the financial statements.
8
GMO Domestic Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 9.84 | $ | 10.07 | $ | 10.08 | $ | 9.68 | $ | 9.98 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.13 | 0.16 | 0.23 | 0.22 | 0.41 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.16 | 0.04 | 0.24 | 0.86 | 0.22 | ||||||||||||||||||
Total from investment operations | 0.29 | 0.20 | 0.47 | 1.08 | 0.63 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.16 | ) | (0.16 | ) | (0.20 | ) | (0.27 | ) | (0.50 | ) | |||||||||||||
From net realized gains | (0.16 | ) | (0.27 | ) | (0.28 | ) | (0.41 | ) | (0.43 | ) | |||||||||||||
Return of capital | — | (0.00 | )(b) | — | — | — | |||||||||||||||||
Total distributions | (0.32 | ) | (0.43 | ) | (0.48 | ) | (0.68 | ) | (0.93 | ) | |||||||||||||
Net asset value, end of period | $ | 9.81 | $ | 9.84 | $ | 10.07 | $ | 10.08 | $ | 9.68 | |||||||||||||
Total Return(c) | 3.02 | % | 2.02 | % | 4.79 | % | 11.43 | % | 6.62 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 125,188 | $ | 736,300 | $ | 373,277 | $ | 113,223 | $ | 155,000 | |||||||||||||
Net expenses to average daily net assets(d) | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | |||||||||||||
Net investment income to average daily net assets(a) | 1.30 | % | 1.57 | % | 2.30 | % | 2.23 | % | 4.16 | % | |||||||||||||
Portfolio turnover rate | 24 | % | 11 | % | 15 | % | 71 | % | 19 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | % | 0.03 | % | 0.06 | % | 0.05 | % | 0.05 | % |
(a) Net investment income is affected by timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) Return of capital is less than $0.01.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
9
GMO Domestic Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Period from July 26, 2005 (commencement of operations) through February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 9.93 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.24 | ||||||
Net realized and unrealized gain (loss)(b) | (0.14 | ) | |||||
Total from investment operations | 0.10 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.21 | ) | |||||
Total distributions | (0.21 | ) | |||||
Net asset value, end of period | $ | 9.82 | |||||
Total Return(c) | 0.97 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 359,958 | |||||
Net expenses to average daily net assets(d) | 0.16 | %* | |||||
Net investment income to average daily net assets(a) | 2.38 | %(e) | |||||
Portfolio turnover rate | 24 | %†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* |
(a) Net investment income is affected by timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) The total return would have been lower had certain expenses not been reimbursed during the period shown.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(e) The ratio for the period ended February 28, 2006 has not been annualized since the Fund believes it would not be appropriate because the Fund's net income is not earned ratably throughout the fiscal year.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2006.
See accompanying notes to the financial statements.
10
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investment in U.S. investment grade securities and by investing in other fund(s) of the Trust ("underlying fund(s)"), primarily GMO Short-Duration Collateral Fund. The Fund's benchmark is the Lehman Brothers U.S. Government Bond Index.
As of February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class VI. Class VI commenced operations on July 26, 2005. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). Shares of the GMO Short-Duration Collateral Fund and the GMO Special Purpose Holding Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's
11
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund or the underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 34.0% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $9,247 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $51,475 in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the
12
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures or securities. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future or security transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future or security may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future or security underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Loan agreements
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation,
13
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. As of February 28, 2006, the Fund did not enter into any loan agreements.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and forward swap spread lock swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap sp read lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of
14
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
15
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $12,842,493 and $19,993,585, respectively, long-term capital gains – $6,661,020 and $7,887,304, respectively and returns of capital – $0 and $294,534, respectively.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $3,814,789.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 483,608,489 | $ | 3,732,196 | $ | (1,214,123 | ) | $ | 2,518,073 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Distributions in Excess of Net Realized Gains | Paid-in Capital | |||||||||
$ | (128,018 | ) | $ | (107,836 | ) | $ | 235,854 |
16
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See No te 3).
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.10% of the average daily net assets.
17
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund incurs fees and expenses indirectly as a shareholder of the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.003 | % | 0.000 | % | 0.012 | % | 0.015 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $5,434 and $3,065, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 1,279,702 | $ | 2,242,765 | |||||||
Investments (non-U.S. Government securities) | 131,178,216 | 387,730,000 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 72.7% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. One of the shareholders is another fund of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
18
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, less than 0.1% of the Fund's shares were held by four related parties comprised of certain GMO employee accounts, and 88.5% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 6,195,721 | $ | 61,645,760 | 35,887,871 | $ | 358,929,046 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,168,276 | 11,658,232 | 2,835,823 | 27,861,769 | |||||||||||||||
Shares repurchased | (69,417,895 | ) | (691,929,262 | ) | (979,771 | ) | (9,746,179 | ) | |||||||||||
Net increase (decrease) | (62,053,898 | ) | $ | (618,625,270 | ) | 37,743,923 | $ | 377,044,636 | |||||||||||
Period from July 26, 2005 (commencement of operations) through February 28, 2006 | |||||||||||||||||||
Class VI: | Shares | Amount | |||||||||||||||||
Shares sold | 35,958,245 | $ | 357,126,330 | ||||||||||||||||
Shares issued to shareholders in reinvestment of distributions | 755,089 | 7,425,412 | |||||||||||||||||
Shares repurchased | (58,545 | ) | (574,411 | ) | |||||||||||||||
Net increase (decrease) | 36,654,789 | $ | 363,977,331 |
19
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 689,586,013 | $ | 131,178,216 | $ | 387,730,000 | $ | 12,078,216 | $ | — | $ | 440,095,699 | |||||||||||||||
GMO Special Purpose Holding Fund | 22,996 | — | — | — | $ | 12,900 | 12,202 | * | |||||||||||||||||||
Totals | $ | 689,609,009 | $ | 131,178,216 | $ | 387,730,000 | $ | 12,078,216 | $ | 12,900 | $ | 440,107,901 |
* After the effect of return of capital distributions of $8,173 and $2,311 on April 5, 2005 and February 21, 2006, respectively.
20
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Domestic Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Domestic Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Over sight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
21
GMO Domestic Bond Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.27 | % | $ | 1,000.00 | $ | 997.20 | $ | 1.34 | |||||||||||
2) Hypothetical | 0.27 | % | $ | 1,000.00 | $ | 1,023.46 | $ | 1.35 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.18 | % | $ | 1,000.00 | $ | 997.60 | $ | 0.89 | |||||||||||
2) Hypothetical | 0.18 | % | $ | 1,000.00 | $ | 1,023.90 | $ | 0.90 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
22
GMO Domestic Bond Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $6,661,020 from long-term capital gains.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $4,324,894 and $2,997,775, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
23
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
24
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
25
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
26
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
27
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Tax-Managed U.S. Equities Fund returned +7.5% for the fiscal year ended February 28, 2006, as compared to +8.4% for the S&P 500. On an after-tax basis, the Fund returned +7.2% compared to the benchmark's +8.2% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period.
The Fund's underperformance for the fiscal year is primarily attributed to sector selection. An overweight in automotive stocks was the primary detractor, as these companies faltered during the latter half of the year. The Fund benefited from an overweight in utilities, and underweights in services, food and beverage, and manufacturing. Underweights in technology and machinery, which outpaced the market, detracted from returns.
Stock selection had mixed results for the fiscal year. Selection within healthcare stocks was quite strong, with selections including UnitedHealth Group and McKesson adding to returns. Selections within technology, including Dell and Intel, were disappointments. Gains from positive selections within retail and oil and gas stocks were balanced by losses from weaker selections within financial services and construction.
For the fiscal year, valuation-based stock selection strategies underperformed, as the strategies' explicit credit to companies with strong financial quality (high, stable profitability and low debt) put the portfolio at odds with a market environment in which low quality stocks once again posted the highest returns. The momentum-based strategy finished the period on par with the benchmark.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* Returns do not reflect the tax effect a shareholder would pay on Fund distributions or the redemption of Fund shares.
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.1 | % | |||||
Short-Term Investment(s) | 1.8 | ||||||
Other | 0.1 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Health Care | 22.5 | % | |||||
Financial | 15.9 | ||||||
Retail Stores | 14.7 | ||||||
Technology | 14.3 | ||||||
Utility | 10.0 | ||||||
Oil & Gas | 6.4 | ||||||
Consumer Goods | 5.8 | ||||||
Food & Beverage | 2.4 | ||||||
Services | 2.4 | ||||||
Construction | 1.6 | ||||||
Automotive | 1.2 | ||||||
Transportation | 1.1 | ||||||
Machinery | 1.0 | ||||||
Primary Process Industry | 0.4 | ||||||
Manufacturing | 0.3 | ||||||
100.0 | % |
1
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.1% | |||||||||||
Automotive — 1.2% | |||||||||||
43,469 | Ford Motor Co. | 346,448 | |||||||||
100 | Genuine Parts Co. | 4,452 | |||||||||
10,200 | Harley-Davidson, Inc. | 535,602 | |||||||||
3,400 | Johnson Controls, Inc. | 242,318 | |||||||||
4,800 | Paccar, Inc. | 335,376 | |||||||||
1,464,196 | |||||||||||
Construction — 1.6% | |||||||||||
5,700 | Centex Corp. | 385,377 | |||||||||
14,033 | D.R. Horton, Inc. | 478,666 | |||||||||
1,000 | Fluor Corp. | 86,300 | |||||||||
6,300 | KB Home | 422,289 | |||||||||
3,100 | Lennar Corp.-Class A | 185,566 | |||||||||
100 | NVR, Inc. * | 75,300 | |||||||||
5,400 | Pulte Homes, Inc. | 207,414 | |||||||||
1,700 | Ryland Group, Inc. | 118,575 | |||||||||
1,959,487 | |||||||||||
Consumer Goods — 5.7% | |||||||||||
64,200 | Altria Group, Inc. | 4,615,980 | |||||||||
1,700 | Black & Decker Corp. | 145,486 | |||||||||
4,000 | Colgate-Palmolive Co. | 217,920 | |||||||||
16,200 | Eastman Kodak Co. | 454,410 | |||||||||
5,500 | Jones Apparel Group, Inc. | 159,060 | |||||||||
8,400 | Liz Claiborne, Inc. | 302,652 | |||||||||
9,100 | Mattel Co. | 153,335 | |||||||||
4,600 | Mohawk Industries, Inc. * | 397,946 | |||||||||
5,500 | Whirlpool Corp. | 493,845 | |||||||||
6,940,634 |
See accompanying notes to the financial statements.
2
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Financial — 15.6% | |||||||||||
21,900 | Aflac, Inc. | 1,012,875 | |||||||||
400 | Allstate Corp. (The) | 21,912 | |||||||||
4,950 | AMBAC Financial Group, Inc. | 371,993 | |||||||||
18,600 | American International Group, Inc. | 1,234,296 | |||||||||
7,200 | AON Corp. | 285,192 | |||||||||
27,108 | Bank of America Corp. | 1,242,902 | |||||||||
7,900 | BB&T Corp. | 312,287 | |||||||||
1,600 | Capital One Financial Corp. | 140,160 | |||||||||
36,400 | Charles Schwab Corp. (The) | 590,044 | |||||||||
2,100 | Chubb Corp. | 201,075 | |||||||||
20,700 | Citigroup, Inc. | 959,859 | |||||||||
2,700 | Comerica, Inc. | 154,764 | |||||||||
3,100 | E*Trade Financial Corp. * | 79,298 | |||||||||
3,900 | Equifax, Inc. | 142,896 | |||||||||
900 | Erie Indemnity Co.-Class A | 47,763 | |||||||||
40,000 | Fannie Mae | 2,187,200 | |||||||||
8,057 | Fidelity National Financial, Inc. | 304,232 | |||||||||
1,812 | Fidelity National Title Group, Inc.-Class A | 42,944 | |||||||||
1,400 | First American Corp. | 59,024 | |||||||||
4,700 | Franklin Resources, Inc. | 482,596 | |||||||||
6,800 | Freddie Mac | 458,252 | |||||||||
1,600 | Goldman Sachs Group, Inc. | 226,064 | |||||||||
1,700 | Hartford Financial Services Group, Inc. | 140,046 | |||||||||
1,300 | Jefferson Pilot Corp. | 78,325 | |||||||||
10 | JPMorgan Chase & Co. | 411 | |||||||||
2,400 | Legg Mason, Inc. | 313,416 | |||||||||
3,900 | Lehman Brothers Holdings, Inc. | 569,205 | |||||||||
6,000 | Lincoln National Corp. | 340,620 | |||||||||
4,700 | Loews Corp. | 433,622 | |||||||||
9,400 | Marsh & McLennan Cos., Inc. | 290,554 | |||||||||
3,500 | MBIA, Inc. | 205,590 | |||||||||
3,200 | Metlife, Inc. | 160,384 | |||||||||
6,300 | MGIC Investment Corp. | 401,625 | |||||||||
12,900 | National City Corp. | 448,920 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
11,187 | Old Republic International Corp. | 238,171 | |||||||||
6,600 | PMI Group (The), Inc. | 285,780 | |||||||||
5,300 | PNC Financial Services Group, Inc. | 372,855 | |||||||||
1,200 | Principal Financial Group | 58,464 | |||||||||
6,100 | Progressive Corp. (The) | 655,445 | |||||||||
5,400 | Prudential Financial, Inc. | 416,016 | |||||||||
3,000 | Radian Group, Inc. | 170,250 | |||||||||
11,600 | St. Paul Travelers Cos. (The), Inc. | 498,568 | |||||||||
4,500 | State Street Corp. | 281,160 | |||||||||
4,200 | TD Ameritrade Holding Corp. | 91,392 | |||||||||
4,800 | Torchmark Corp. | 262,416 | |||||||||
13,000 | UnumProvident Corp. | 268,970 | |||||||||
31,245 | Washington Mutual, Inc. | 1,334,162 | |||||||||
18,873,995 | |||||||||||
Food & Beverage — 2.3% | |||||||||||
7,900 | Archer-Daniels-Midland Co. | 250,588 | |||||||||
36,800 | Coca-Cola Co. (The) | 1,544,496 | |||||||||
5,700 | Dean Foods Co. * | 213,579 | |||||||||
1,700 | General Mills Co. | 83,725 | |||||||||
4,500 | PepsiCo, Inc. | 265,995 | |||||||||
15,600 | Sara Lee Corp. | 275,652 | |||||||||
14,200 | Tyson Foods, Inc.-Class A | 192,126 | |||||||||
2,826,161 | |||||||||||
Health Care — 22.0% | |||||||||||
15,700 | Abbott Laboratories | 693,626 | |||||||||
17,800 | Aetna, Inc. | 907,800 | |||||||||
2,400 | Allergan, Inc. | 259,824 | |||||||||
23,200 | AmerisourceBergen Corp. | 1,066,968 | |||||||||
33,200 | Bristol-Myers Squibb Co. | 766,920 | |||||||||
14,300 | Cardinal Health, Inc. | 1,038,180 | |||||||||
8,500 | Cigna Corp. | 1,043,375 | |||||||||
9,700 | Express Scripts, Inc. * | 846,519 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
13,700 | Forest Laboratories, Inc. * | 628,830 | |||||||||
7,400 | Genentech, Inc. * | 634,106 | |||||||||
6,300 | HCA, Inc. | 301,770 | |||||||||
4,200 | Health Net, Inc. * | 201,390 | |||||||||
4,100 | Humana, Inc. * | 211,847 | |||||||||
53,200 | Johnson & Johnson | 3,066,980 | |||||||||
4,800 | Lincare Holdings, Inc. * | 196,320 | |||||||||
25,800 | McKesson Corp. | 1,396,554 | |||||||||
5,500 | Medco Health Solutions, Inc. * | 306,460 | |||||||||
4,200 | Medtronic, Inc. | 226,590 | |||||||||
74,500 | Merck & Co., Inc. | 2,597,070 | |||||||||
192,730 | Pfizer, Inc. | 5,047,599 | |||||||||
1,000 | St. Jude Medical, Inc. * | 45,600 | |||||||||
56,100 | UnitedHealth Group, Inc. | 3,266,703 | |||||||||
6,478 | WellPoint, Inc. * | 497,446 | |||||||||
30,100 | Wyeth | 1,498,980 | |||||||||
26,747,457 | |||||||||||
Machinery — 1.0% | |||||||||||
1,900 | Baker Hughes, Inc. | 129,143 | |||||||||
14,400 | Caterpillar, Inc. | 1,052,352 | |||||||||
1,181,495 | |||||||||||
Manufacturing — 0.3% | |||||||||||
1,300 | American Standard Cos., Inc. | 51,454 | |||||||||
2,000 | ITT Industries, Inc. | 105,000 | |||||||||
3,100 | United Technologies Corp. | 181,350 | |||||||||
337,804 | |||||||||||
Oil & Gas — 6.3% | |||||||||||
600 | Amerada Hess Corp. | 82,986 | |||||||||
7,600 | Anadarko Petroleum Corp. | 753,616 | |||||||||
3,100 | Apache Corp. | 207,452 | |||||||||
10,500 | Burlington Resources, Inc. | 946,890 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Oil & Gas — continued | |||||||||||
26,500 | ConocoPhillips | 1,615,440 | |||||||||
11,000 | Devon Energy Corp. | 644,930 | |||||||||
1,900 | EOG Resources, Inc. | 128,060 | |||||||||
22,600 | Exxon Mobil Corp. | 1,341,762 | |||||||||
5,600 | Marathon Oil Corp. | 395,360 | |||||||||
300 | Murphy Oil Corp. | 14,061 | |||||||||
10,900 | Occidental Petroleum Corp. | 997,786 | |||||||||
3,400 | Patterson-UTI Energy, Inc. | 93,670 | |||||||||
4,800 | Sunoco, Inc. | 355,680 | |||||||||
1,800 | Valero Energy Corp. | 96,822 | |||||||||
7,674,515 | |||||||||||
Primary Process Industry — 0.4% | |||||||||||
1,800 | Air Products & Chemicals, Inc. | 115,488 | |||||||||
1,900 | Dow Chemical Co. | 81,757 | |||||||||
2,100 | Nucor Corp. | 180,705 | |||||||||
1,400 | PPG Industries, Inc. | 84,882 | |||||||||
462,832 | |||||||||||
Retail Stores — 14.4% | |||||||||||
4,400 | Advance Auto Parts * | 181,940 | |||||||||
17,900 | Albertson's, Inc. | 455,376 | |||||||||
14,400 | Autonation, Inc. * | 301,104 | |||||||||
4,500 | Autozone, Inc. * | 435,060 | |||||||||
17,200 | Bed Bath & Beyond, Inc. * | 619,888 | |||||||||
2,800 | Best Buy, Inc. | 150,808 | |||||||||
6,300 | Chico's FAS, Inc. * | 296,415 | |||||||||
4,000 | Costco Wholesale Corp. | 205,120 | |||||||||
7,500 | CVS Corp. | 212,475 | |||||||||
13,900 | Dollar General Corp. | 242,138 | |||||||||
5,100 | Federated Department Stores, Inc. | 362,304 | |||||||||
108,600 | Home Depot, Inc. | 4,577,490 | |||||||||
36,500 | Kroger Co. (The) * | 731,460 | |||||||||
46,200 | Lowe's Cos., Inc. | 3,149,916 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
9,700 | Nordstrom, Inc. | 368,600 | |||||||||
14,100 | Office Depot, Inc. * | 503,088 | |||||||||
7,100 | Ross Stores, Inc. | 201,072 | |||||||||
29,700 | Safeway, Inc. | 722,007 | |||||||||
4,900 | Staples, Inc. | 120,246 | |||||||||
9,700 | Supervalu, Inc. | 306,520 | |||||||||
3,000 | Target Corp. | 163,200 | |||||||||
2,200 | Tiffany & Co. | 81,686 | |||||||||
10,900 | TJX Cos., Inc. | 266,941 | |||||||||
37,000 | Walgreen Co. | 1,659,820 | |||||||||
26,000 | Wal-Mart Stores, Inc. | 1,179,360 | |||||||||
600 | Whole Foods Market, Inc. | 38,328 | |||||||||
17,532,362 | |||||||||||
Services — 2.4% | |||||||||||
6,100 | Brinker International, Inc. | 254,065 | |||||||||
12,000 | Darden Restaurants, Inc. | 503,280 | |||||||||
2,700 | Gannett Co., Inc. | 167,832 | |||||||||
8,500 | Interpublic Group of Cos., Inc. * | 88,060 | |||||||||
5,500 | Marriott International, Inc.-Class A | 376,200 | �� | ||||||||
1,000 | McDonald's Corp. | 34,910 | |||||||||
3,200 | MGM Mirage * | 118,304 | |||||||||
2,200 | Moody's Corp. | 147,400 | |||||||||
2,300 | Omnicom Group | 183,586 | |||||||||
4,600 | Starbucks Corp. * | 167,072 | |||||||||
12,600 | Sysco Corp. | 379,134 | |||||||||
5,200 | Wendy's International, Inc. | 301,080 | |||||||||
3,100 | Yum! Brands, Inc. | 147,870 | |||||||||
2,868,793 | |||||||||||
Technology — 14.0% | |||||||||||
13,300 | Adobe Systems, Inc. | 513,646 | |||||||||
6,300 | Affiliated Computer Services, Inc.-Class A * | 396,396 | |||||||||
4,300 | Agilent Technologies, Inc. * | 154,800 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
9,700 | American Power Conversion Corp. | 198,171 | |||||||||
1,700 | Applera Corp.-Applied Biosystems Group | 48,059 | |||||||||
8,200 | Autodesk, Inc. | 308,730 | |||||||||
2,200 | Avnet, Inc. * | 55,286 | |||||||||
2,700 | Boeing Co. | 196,263 | |||||||||
22,300 | Corning, Inc. * | 544,343 | |||||||||
52,700 | Dell, Inc. * | 1,528,300 | |||||||||
3,100 | Diebold, Inc. | 124,000 | |||||||||
11,400 | EMC Corp. * | 159,828 | |||||||||
23,100 | First Data Corp. | 1,042,503 | |||||||||
4,600 | Fiserv, Inc. * | 190,900 | |||||||||
1,700 | General Dynamics Corp. | 209,559 | |||||||||
2,800 | Goodrich Corp. | 117,152 | |||||||||
1,200 | Google, Inc.-Class A * | 435,144 | |||||||||
2,300 | Harris Corp. | 105,064 | |||||||||
100,900 | Hewlett-Packard Co. | 3,310,529 | |||||||||
121,500 | Intel Corp. | 2,502,900 | |||||||||
5,600 | Intuit, Inc. * | 272,048 | |||||||||
2,300 | Jabil Circuit, Inc. * | 87,055 | |||||||||
9,000 | Lockheed Martin Corp. | 655,830 | |||||||||
1,000 | Microchip Technology, Inc. | 35,200 | |||||||||
32,600 | Motorola, Inc. | 697,640 | |||||||||
5,000 | National Semiconductor Corp. | 140,250 | |||||||||
1,900 | NCR Corp. * | 76,171 | |||||||||
3,400 | Nvidia Corp. * | 160,242 | |||||||||
26,400 | Oracle Corp. * | 327,888 | |||||||||
400 | Pitney Bowes, Inc. | 17,096 | |||||||||
5,400 | Qualcomm, Inc. | 254,934 | |||||||||
4,100 | Rockwell Automation, Inc. | 279,497 | |||||||||
4,400 | Rockwell Collins, Inc. | 233,860 | |||||||||
4,100 | SanDisk Corp. * | 247,394 | |||||||||
41,600 | Texas Instruments, Inc. | 1,241,760 | |||||||||
2,300 | W.W. Grainger, Inc. | 170,292 | |||||||||
17,038,730 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Transportation — 1.1% | |||||||||||
9,500 | Burlington Northern Santa Fe Corp. | 747,080 | |||||||||
4,000 | C.H. Robinson Worldwide, Inc. | 179,280 | |||||||||
500 | FedEx Corp. | 53,620 | |||||||||
1,700 | JB Hunt Transport Services, Inc. | 40,222 | |||||||||
3,100 | Union Pacific Corp. | 274,505 | |||||||||
1,294,707 | |||||||||||
Utility — 9.8% | |||||||||||
17,800 | AES Corp. (The) * | 307,940 | |||||||||
9,700 | Alltel Corp. | 612,555 | |||||||||
9,500 | American Electric Power Co., Inc. | 346,750 | |||||||||
116,763 | AT&T, Inc. | 3,221,491 | |||||||||
22,900 | BellSouth Corp. | 723,182 | |||||||||
9,700 | Centerpoint Energy, Inc. | 125,809 | |||||||||
1,400 | Centurytel, Inc. | 50,372 | |||||||||
2,700 | Constellation Energy Group, Inc. | 158,598 | |||||||||
7,900 | Duke Energy Corp. | 224,360 | |||||||||
4,300 | Edison International | 190,748 | |||||||||
12,000 | El Paso Corp. | 156,960 | |||||||||
9,400 | Exelon Corp. | 536,834 | |||||||||
4,400 | FirstEnergy Corp. | 224,752 | |||||||||
5,600 | FPL Group, Inc. | 234,808 | |||||||||
5,400 | Kinder Morgan, Inc. | 501,012 | |||||||||
6,100 | Nextel Partners, Inc.-Class A * | 171,166 | |||||||||
2,400 | NII Holdings, Inc.-Class B * | 122,928 | |||||||||
300 | Progress Energy, Inc. | 13,314 | |||||||||
1,800 | Public Service Enterprise Group, Inc. | 124,902 | |||||||||
1,600 | Questar Corp. | 117,200 | |||||||||
3,300 | TXU Corp. | 172,887 | |||||||||
105,442 | Verizon Communications, Inc. | 3,553,395 | |||||||||
800 | Xcel Energy, Inc. | 14,848 | |||||||||
11,906,811 | |||||||||||
TOTAL COMMON STOCKS (COST $108,411,405) | 119,109,979 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENT(S) — 1.8% | |||||||||||
2,151,882 | Citigroup Global Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $2,152,062 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $2,194,920. | 2,151,882 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $2,151,882) | 2,151,882 | ||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $110,563,287) | 121,261,861 | ||||||||||
Other Assets and Liabilities (net) — 0.1% | 77,493 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 121,339,354 |
Notes to Schedule of Investments:
* Non-income producing security.
See accompanying notes to the financial statements.
10
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $110,563,287) (Note 2) | $ | 121,261,861 | |||||
Dividends and interest receivable | 158,025 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,103 | ||||||
Total assets | 121,425,989 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 30,624 | ||||||
Shareholder service fee | 13,920 | ||||||
Trustees and Chief Compliance Officer fees | 141 | ||||||
Accrued expenses | 41,950 | ||||||
Total liabilities | 86,635 | ||||||
Net assets | $ | 121,339,354 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 114,889,089 | |||||
Accumulated undistributed net investment income | 215,608 | ||||||
Accumulated net realized loss | (4,463,917 | ) | |||||
Net unrealized appreciation | 10,698,574 | ||||||
$ | 121,339,354 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 121,339,354 | |||||
Shares outstanding: | |||||||
Class III | 9,458,131 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.83 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends | $ | 1,902,988 | |||||
Interest | 41,429 | ||||||
Total investment income | 1,944,417 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 301,431 | ||||||
Shareholder service fee – Class III (Note 3) | 137,014 | ||||||
Custodian, fund accounting agent and transfer agent fees | 25,755 | ||||||
Audit and tax fees | 43,626 | ||||||
Legal fees | 1,410 | ||||||
Trustees fees and related expenses (Note 3) | 1,688 | ||||||
Registration fees | 1,398 | ||||||
Miscellaneous | 1,578 | ||||||
Total expenses | 513,900 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (72,985 | ) | |||||
Net expenses | 440,915 | ||||||
Net investment income (loss) | 1,503,502 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 2,538,684 | ||||||
Closed futures contracts | 1,989 | ||||||
Net realized gain (loss) | 2,540,673 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 2,939,967 | ||||||
Net realized and unrealized gain (loss) | 5,480,640 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 6,984,142 |
See accompanying notes to the financial statements.
12
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,503,502 | $ | 1,308,839 | |||||||
Net realized gain (loss) | 2,540,673 | 7,043,189 | |||||||||
Change in net unrealized appreciation (depreciation) | 2,939,967 | (1,829,315 | ) | ||||||||
Net increase (decrease) in net assets from operations | 6,984,142 | 6,522,713 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,452,459 | ) | (1,236,900 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | 34,433,458 | 14,061,792 | |||||||||
Total increase (decrease) in net assets | 39,965,141 | 19,347,605 | |||||||||
Net assets: | |||||||||||
Beginning of period | 81,374,213 | 62,026,608 | |||||||||
End of period (including accumulated undistributed net investment income of $215,608 and $168,428, respectively) | $ | 121,339,354 | $ | 81,374,213 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 12.14 | $ | 11.58 | $ | 8.62 | $ | 11.24 | $ | 12.08 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.16 | 0.14 | 0.14 | 0.16 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.69 | 0.54 | 2.96 | (2.64 | ) | (0.86 | ) | ||||||||||||||||
Total from investment operations | 0.89 | 0.70 | 3.10 | (2.50 | ) | (0.70 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.20 | ) | (0.14 | ) | (0.14 | ) | (0.12 | ) | (0.14 | ) | |||||||||||||
Total distributions | (0.20 | ) | (0.14 | ) | (0.14 | ) | (0.12 | ) | (0.14 | ) | |||||||||||||
Net asset value, end of period | $ | 12.83 | $ | 12.14 | $ | 11.58 | $ | 8.62 | $ | 11.24 | |||||||||||||
Total Return(a) | 7.46 | % | 6.12 | %(b) | 36.21 | % | (22.33 | )% | (5.78 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 121,339 | $ | 81,374 | $ | 62,027 | $ | 40,347 | $ | 27,495 | |||||||||||||
Net expenses to average daily net assets | 0.48 | % | 0.48 | % | 0.48 | % | 0.49 | % | 0.48 | % | |||||||||||||
Net investment income to average daily net assets | 1.65 | % | 1.39 | % | 1.34 | % | 1.41 | % | 1.36 | % | |||||||||||||
Portfolio turnover rate | 62 | % | 87 | % | 70 | % | 63 | % | 45 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | % | 0.08 | % | 0.13 | % | 0.16 | % | 0.36 | % |
† Calculated using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(b) The effect of losses in the amount of $15,989 resulting from compliance violations and the Manager's reimbursement of such losses had no effect on total return.
See accompanying notes to the financial statements.
14
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Tax-Managed U.S. Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high after-tax total return primarily through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index (after-tax), which is computed by the Manager by applying the maximum historical applicable individual federal tax rate to the S&P 500 Index's dividend yield and to its estimated short-term and long-term realized capital gains (losses) (arising from changes in the constituents of the S&P 500 Index).
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets
15
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liqu idation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these
16
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
17
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $1,452,459 and $1,236,900, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $215,608 of undistributed ordinary income.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $2,626,902 and $1,837,015 expiring in 2011 and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 110,563,287 | $ | 13,140,092 | $ | (2,441,518 | ) | $ | 10,698,574 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to redemption in-kind transactions. Net gains resulting from in-kind transactions were $850,888. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | (3,863 | ) | $ | (847,025 | ) | $ | 850,888 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities
18
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.33% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $939 and $552, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $88,392,150 and $56,239,384, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be
19
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related party
As of February 28, 2006, 70.9% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 2.4% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,129,868 | $ | 39,103,839 | 3,788,864 | $ | 43,065,447 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 72,670 | 886,419 | 48,491 | 557,513 | |||||||||||||||
Shares repurchased | (447,033 | ) | (5,556,800 | ) | (2,488,925 | ) | (29,561,168 | ) | |||||||||||
Net increase (decrease) | 2,755,505 | $ | 34,433,458 | 1,348,430 | $ | 14,061,792 |
20
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed U.S. Equities Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed U.S. Equities Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Acco unting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
21
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 1,054.80 | $ | 2.45 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.41 | $ | 2.41 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
22
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
For taxable, non-corporate shareholders, 97.94% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $8,960 or if determined to be different, the qualified interest income of such year.
23
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
24
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
25
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
26
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003– present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
27
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Tax-Managed International Equities Fund returned +20.0% for the fiscal year ended February 28, 2006, as compared to +17.4% for the MSCI EAFE Index. On an after-tax basis, the Fund returned +19.6% compared to the benchmark's +16.3% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in international equity securities throughout the period.
Country selection was a moderate positive factor for the year. The portfolio's allocation to emerging equities continued to add to relative performance, as emerging equities outpaced developed international equities for yet another year. The portfolio also benefited from overweights in resource-heavy Norway and Canada. An underweight in Switzerland, which posted strong returns for the fiscal year, worked against the portfolio.
Sector selection was also a positive factor for the fiscal year. An underweight in telecommunication services was the primary positive factor, as these stocks suffered during the year. An underweight in financial services stocks was a moderate detractor for the period.
Stock selection was the primary contributor to performance for the year, as the portfolio benefited from strong selection within both the developed and emerging markets. The momentum-based stock selection strategy posted the year's strongest results. The quality-adjusted value strategy posted negative relative returns, but was balanced by positive relative returns by the intrinsic value stock selection strategy.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* Returns do not reflect the tax effect a shareholder would pay on Fund distributions or the redemption of Fund shares.
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.1 | % | |||||
Preferred Stocks | 1.1 | ||||||
Debt Obligation(s) | 0.1 | ||||||
Futures | 0.0 | ||||||
Swaps | 0.0 | ||||||
Short-Term Investment(s) | 0.6 | ||||||
Other | 2.1 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Investments* | ||||||
Financials | 25.8 | % | |||||
Consumer Discretionary | 14.2 | ||||||
Energy | 11.7 | ||||||
Health Care | 11.4 | ||||||
Industrials | 8.9 | ||||||
Materials | 8.9 | ||||||
Consumer Staples | 6.4 | ||||||
Utilities | 6.0 | ||||||
Information Technology | 3.9 | ||||||
Telecommunication Services | 2.8 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
1
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary | % of Investments* | ||||||
Japan | 25.9 | % | |||||
United Kingdom | 21.1 | ||||||
Germany | 8.6 | ||||||
France | 8.0 | ||||||
Netherlands | 6.1 | ||||||
Switzerland | 4.5 | ||||||
Italy | 3.1 | ||||||
Finland | 2.8 | ||||||
Australia | 2.3 | ||||||
Norway | 1.6 | ||||||
Canada | 1.6 | ||||||
South Korea | 1.5 | ||||||
Belgium | 1.5 | ||||||
Spain | 1.4 | ||||||
Sweden | 1.3 | ||||||
Taiwan | 1.1 | ||||||
Austria | 1.1 | ||||||
Brazil | 1.1 | ||||||
Singapore | 0.9 | ||||||
Hong Kong | 0.8 | ||||||
Ireland | 0.8 | ||||||
China | 0.6 | ||||||
Russia | 0.5 | ||||||
Mexico | 0.5 | ||||||
South Africa | 0.4 | ||||||
Denmark | 0.2 | ||||||
Greece | 0.2 | ||||||
Israel | 0.2 | ||||||
United States | 0.1 | ||||||
Thailand | 0.1 | ||||||
Turkey | 0.1 | ||||||
Malaysia | 0.0 | ||||||
India | 0.0 | ||||||
Poland | 0.0 | ||||||
Philippines | 0.0 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
2
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) |
COMMON STOCKS — 96.1% | |||||||||||
Australia — 2.2% | |||||||||||
84,857 | Australia and New Zealand Banking Group Ltd | 1,613,913 | |||||||||
127,516 | BHP Billiton Ltd | 2,294,557 | |||||||||
104,004 | Boral Ltd | 675,029 | |||||||||
45,208 | Commonwealth Bank of Australia | 1,500,734 | |||||||||
156,685 | General Property Trust Units | 481,549 | |||||||||
30,192 | Macquarie Bank Ltd | 1,428,090 | |||||||||
135,109 | National Australia Bank Ltd | 3,667,110 | |||||||||
85,756 | Rinker Group Ltd | 1,126,626 | |||||||||
130,965 | Santos Ltd | 1,100,774 | |||||||||
437,095 | Telstra Corp Ltd | 1,243,779 | |||||||||
49,785 | Woodside Petroleum Ltd | 1,494,462 | |||||||||
141,450 | Woolworths Ltd | 1,926,440 | |||||||||
18,553,063 | |||||||||||
Austria — 1.1% | |||||||||||
5,938 | Boehler Uddeholm (Bearer) | 1,113,981 | |||||||||
5,929 | Flughafen Wien AG | 478,181 | |||||||||
444 | Lenzing AG | 97,956 | |||||||||
87,050 | OMV AG | 5,398,775 | |||||||||
14,945 | Voestalpine AG | 1,741,846 | |||||||||
8,830,739 | |||||||||||
Belgium — 1.5% | |||||||||||
6,470 | Colruyt SA | 932,065 | |||||||||
18,354 | Delhaize Group | 1,224,420 | |||||||||
115,924 | Dexia | 2,879,099 | |||||||||
147,719 | Fortis | 5,261,937 | |||||||||
40,452 | UCB SA | 1,916,071 | |||||||||
12,213,592 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Brazil — 0.4% | |||||||||||
8,719 | Banco do Brasil SA | 225,787 | |||||||||
40,800 | Companhia de Concessoes Rodoviarias | 385,232 | |||||||||
8,000 | Compania Vale do Rio Doce | 393,501 | |||||||||
7,992,200 | Electrobras (Centro) | 169,328 | |||||||||
35,400 | Petroleo Brasileiro SA (Petrobras) | 810,191 | |||||||||
3,200 | Petroleo Brasileiro SA (Petrobras) ADR | 280,128 | |||||||||
7,600 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 668,420 | |||||||||
2,932,587 | |||||||||||
Canada — 1.5% | |||||||||||
86,664 | Canadian Natural Resources | 4,734,892 | |||||||||
41,864 | EnCana Corp | 1,731,363 | |||||||||
15,700 | National Bank of Canada | 895,209 | |||||||||
71,200 | Petro - Canada | 3,261,623 | |||||||||
24,500 | Royal Bank of Canada | 2,047,182 | |||||||||
12,670,269 | |||||||||||
China — 0.6% | |||||||||||
114,000 | Aluminum Corp of China Ltd | 116,172 | |||||||||
340,000 | Bank of Communications Co Ltd 144A * | 203,928 | |||||||||
888,000 | China Construction Bank Class H 144A * | 414,932 | |||||||||
168,000 | China Life Insurance Co Ltd * | 190,550 | |||||||||
234,000 | China Mobile Ltd | 1,130,604 | |||||||||
1,310,000 | China Petroleum & Chemical Corp Class H | 779,374 | |||||||||
6,300 | China Telecom Corp Ltd ADR | 231,147 | |||||||||
288,300 | China Telecom Corp Ltd Class H | 105,351 | |||||||||
526,000 | CNOOC Ltd | 435,905 | |||||||||
1,108,000 | PetroChina Co Ltd Class H | 1,077,536 | |||||||||
4,685,499 | |||||||||||
Denmark — 0.2% | |||||||||||
210 | AP Moller - Maersk A/S Class B | 1,924,749 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Finland — 2.8% | |||||||||||
86,600 | Fortum Oyj | 2,095,120 | |||||||||
23,000 | Kemira Oyj | 398,053 | |||||||||
60,900 | Metso Oyj | 2,244,104 | |||||||||
523,550 | Nokia Oyj | 9,742,200 | |||||||||
25,300 | Orion-Yhtymae Oyj | 544,918 | |||||||||
70,750 | Rautaruukki Oyj | 2,384,229 | |||||||||
208,062 | Sampo Oyj Class A | 4,170,140 | |||||||||
28,500 | Yit Yhtymae Oyj | 1,446,024 | |||||||||
23,024,788 | |||||||||||
France — 7.8% | |||||||||||
110,301 | Arcelor | 4,030,544 | |||||||||
55,125 | Axa | 1,949,125 | |||||||||
116,949 | BNP Paribas | 10,823,267 | |||||||||
4,173 | Bongrain SA | 264,693 | |||||||||
33,351 | Business Objects SA * | 1,237,825 | |||||||||
24,046 | Carrefour SA | 1,193,689 | |||||||||
5,024 | Chargeurs International SA | 120,519 | |||||||||
36,812 | Cie de Saint-Gobain | 2,455,875 | |||||||||
693 | Elf Gabon | 534,739 | |||||||||
2,228 | Esso S.A.F. | 473,713 | |||||||||
21,176 | L'Oreal SA | 1,872,321 | |||||||||
21,643 | LVMH Moet Hennessy Louis Vuitton SA | 1,966,012 | |||||||||
86,816 | Peugeot SA | 5,061,146 | |||||||||
46,569 | Renault SA | 4,474,957 | |||||||||
57,493 | Sanofi-Aventis | 4,894,105 | |||||||||
20,533 | Schneider Electric SA | 2,098,121 | |||||||||
21,654 | Societe Generale | 3,066,506 | |||||||||
16,784 | Suez Lyon des Eaux VVPR Strip * | 200 | |||||||||
16,784 | Suez SA Class B | 615,338 | |||||||||
70,941 | Total SA | 17,841,574 | |||||||||
64,974,269 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — 8.0% | |||||||||||
10,784 | Adidas-Salomon AG | 2,107,494 | |||||||||
22,500 | Allianz AG (Registered) | 3,633,865 | |||||||||
33,857 | Altana AG | 1,818,357 | |||||||||
22,888 | Bayer AG | 923,183 | |||||||||
93,052 | Bayerische Motoren Werke AG | 4,473,431 | |||||||||
67,000 | Commerzbank AG | 2,448,069 | |||||||||
78,072 | DaimlerChrysler AG (Registered) | 4,338,273 | |||||||||
36,500 | Deutsche Bank AG (Registered) | 4,038,060 | |||||||||
24,100 | Deutsche Boerse AG | 3,027,561 | |||||||||
71,870 | E. On AG | 7,970,973 | |||||||||
12,000 | IWKA AG | 323,090 | |||||||||
36,900 | MAN AG | 2,328,399 | |||||||||
30,200 | Merck KGaA | 3,024,299 | |||||||||
35,800 | Muenchener Rueckversicherungs AG (Registered) | 4,860,022 | |||||||||
30,800 | RWE AG | 2,648,459 | |||||||||
28,028 | Salzgitter AG | 1,904,544 | |||||||||
40,800 | Schering AG | 2,926,359 | |||||||||
51,761 | Suedzucker AG | 1,367,546 | |||||||||
197,886 | ThyssenKrupp AG | 5,012,590 | |||||||||
124,500 | TUI AG | 2,458,890 | |||||||||
71,671 | Volkswagen AG | 5,019,242 | |||||||||
66,652,706 | |||||||||||
Greece — 0.2% | |||||||||||
31,935 | National Bank of Greece SA | 1,640,542 | |||||||||
Hong Kong — 0.8% | |||||||||||
168,000 | Cheung Kong Holdings Ltd | 1,761,002 | |||||||||
320,400 | CLP Holdings Ltd | 1,831,829 | |||||||||
320,000 | Hang Lung Group Co Ltd | 704,723 | |||||||||
425,500 | Hong Kong Electric Holdings Ltd | 1,959,300 | |||||||||
6,256,854 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
India — 0.0% | |||||||||||
10,400 | Reliance Industries Ltd GDR 144A | 331,760 | |||||||||
Ireland — 0.7% | |||||||||||
84,208 | Anglo Irish Bank Corp | 1,380,696 | |||||||||
88,246 | Bank of Ireland | 1,569,913 | |||||||||
89,154 | CRH Plc | 2,924,403 | |||||||||
79,446 | Greencore Group | 325,633 | |||||||||
6,200,645 | |||||||||||
Israel — 0.2% | |||||||||||
71,000 | Bank Hapoalim B.M. | 324,935 | |||||||||
11,000 | Check Point Software Technologies Ltd * | 233,860 | |||||||||
24,100 | Teva Pharmaceutical Industries ADR | 1,011,959 | |||||||||
1,570,754 | |||||||||||
Italy — 2.9% | |||||||||||
222,250 | Banca Intesa SPA - Di RISP | 1,222,002 | |||||||||
333,754 | Banca Monte dei Paschi di Siena SPA | 1,726,310 | |||||||||
83,500 | Banca Popolare di Milano | 1,055,426 | |||||||||
222,000 | Capitalia SPA | 1,676,798 | |||||||||
482,760 | ENI SPA | 13,801,195 | |||||||||
166,303 | Fiat SPA * | 1,800,287 | |||||||||
58,812 | Mediobanca SPA | 1,229,992 | |||||||||
69,931 | Sanpaolo IMI SPA | 1,234,073 | |||||||||
23,746,083 | |||||||||||
Japan — 25.2% | |||||||||||
16,270 | Acom Co Ltd | 997,264 | |||||||||
92,400 | Aeon Co Ltd | 2,204,375 | |||||||||
153,000 | AIOI Insurance Co Ltd | 1,129,091 | |||||||||
52,000 | Chiyoda Corp | 1,253,736 | |||||||||
131,900 | Chubu Electric Power Co Inc | 3,496,280 | |||||||||
25,200 | Chugoku Electric Power Co Inc | 545,828 | |||||||||
182,000 | Cosmo Oil Co Ltd | 925,327 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
62,350 | Daiei Inc * | 1,720,113 | |||||||||
127,941 | Daiichi Sankyo Co Ltd * | 2,641,605 | |||||||||
181,000 | Daikyo Inc * | 952,741 | |||||||||
28,400 | Daito Trust Construction Co Ltd | 1,329,925 | |||||||||
72,000 | Daiwa Securities Co Ltd | 854,795 | |||||||||
72,800 | Eisai Co Ltd | 3,366,807 | |||||||||
28,300 | Fanuc Ltd | 2,386,397 | |||||||||
322,000 | Fuji Heavy Industries Ltd | 1,744,816 | |||||||||
268,000 | Furukawa Electric Co Ltd * | 2,091,341 | |||||||||
713,000 | Haseko Corp * | 2,484,391 | |||||||||
212,500 | Honda Motor Co Ltd | 12,412,187 | |||||||||
57,000 | Hoya Corp | 2,261,427 | |||||||||
47,000 | Ibiden Co Ltd | 2,202,395 | |||||||||
675,000 | Ishikawajima-Harima Heavy Industries Co Ltd * | 2,046,903 | |||||||||
426,000 | Isuzu Motors Ltd | 1,466,910 | |||||||||
595,000 | Itochu Corp | 4,945,354 | |||||||||
66,000 | JACCS Co Ltd | 652,090 | |||||||||
158,000 | Japan Steel Works Ltd | 977,547 | |||||||||
187 | Japan Tobacco Inc | 3,212,715 | |||||||||
58,000 | Kamigumi Co Ltd | 442,627 | |||||||||
34,000 | Kandenko Co | 244,860 | |||||||||
93,700 | Kansai Electric Power Co Inc | 2,180,382 | |||||||||
100,000 | Kao Corp | 2,716,246 | |||||||||
658,000 | Kobe Steel Ltd | 2,500,583 | |||||||||
193,000 | Komatsu Ltd | 3,422,774 | |||||||||
36,000 | Kyudenko Corp | 227,294 | |||||||||
74,300 | Kyushu Electric Power Co Inc | 1,792,244 | |||||||||
566,000 | Marubeni Corp | 2,807,176 | |||||||||
93,000 | Matsushita Electric Industrial Co Ltd | 1,955,736 | |||||||||
473,000 | Mazda Motor Corp | 2,690,077 | |||||||||
312,400 | Mitsubishi Corp | 7,248,037 | |||||||||
100,000 | Mitsubishi Estate Co Ltd | 2,108,880 | |||||||||
173,000 | Mitsubishi Heavy Industries | 812,540 | |||||||||
1,219,000 | Mitsubishi Motors Corp * | 2,520,726 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
288 | Mitsubishi Tokyo Financial Group Inc | 4,276,037 | |||||||||
162,000 | Mitsui & Co | 2,216,398 | |||||||||
158,000 | Mitsui OSK Lines Ltd | 1,152,050 | |||||||||
308,284 | Mitsui Trust Holding Inc | 4,519,980 | |||||||||
670 | Mizuho Financial Group Inc | 5,340,716 | |||||||||
47,000 | Nagase & Co | 600,540 | |||||||||
76,000 | Nikon Corp | 1,292,482 | |||||||||
43,000 | Nippon Corp | 339,225 | |||||||||
146,000 | Nippon Shinpan Co Ltd | 1,401,332 | |||||||||
499,000 | Nippon Steel Corp | 1,988,675 | |||||||||
904 | Nippon Telegraph & Telephone Corp | 3,903,399 | |||||||||
228,000 | Nippon Yusen KK | 1,483,190 | |||||||||
107,000 | Nissan Chemical Industries Ltd | 1,760,687 | |||||||||
710,700 | Nissan Motor Co | 8,158,649 | |||||||||
78,100 | Nisshin Seifun Group Inc | 792,704 | |||||||||
37,400 | Nitto Denko Corp | 3,209,500 | |||||||||
381 | NTT Data Corp | 1,761,562 | |||||||||
845 | NTT Docomo Inc | 1,250,227 | |||||||||
21,000 | Ono Pharmaceutical Co Ltd | 939,256 | |||||||||
13,100 | ORIX Corp | 3,448,845 | |||||||||
22,700 | Promise Co Ltd | 1,369,865 | |||||||||
1,663 | Resona Holdings Inc * | 5,864,086 | |||||||||
78,000 | Ricoh Company Ltd | 1,444,197 | |||||||||
13,800 | Ryosan Co | 376,456 | |||||||||
22,500 | Secom Co | 1,116,379 | |||||||||
192,000 | Shimizu Corp | 1,347,788 | |||||||||
24,700 | Shin-Etsu Chemical Co Ltd | 1,315,100 | |||||||||
11,600 | Shinko Electric Industries | 849,622 | |||||||||
9,400 | SMC Corp | 1,327,865 | |||||||||
49,300 | Softbank Corp. | 1,507,548 | |||||||||
213,000 | Sumitomo Heavy Industries Ltd | 1,904,901 | |||||||||
886,000 | Sumitomo Metal Industries Ltd | 3,933,366 | |||||||||
259,000 | Taiheiyo Cement Co Ltd | 1,114,452 | |||||||||
63,000 | Taisho Pharmaceutical Co Ltd | 1,333,568 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
313,900 | Takeda Pharmaceutical Co Ltd | 17,485,631 | |||||||||
79,800 | Tohoku Electric Power Co Inc | 1,805,671 | |||||||||
87,000 | Tokuyama Corp | 1,297,992 | |||||||||
68,400 | Tokyo Electric Power Co Inc | 1,846,412 | |||||||||
127,000 | Tokyu Land Corp | 1,107,740 | |||||||||
108,000 | TonenGeneral Sekiyu KK | 1,079,433 | |||||||||
174,300 | Toyota Motor Corp | 9,291,488 | |||||||||
451,000 | Ube Industries Ltd | 1,330,770 | |||||||||
150,000 | Urban Corp | 2,197,880 | |||||||||
23,900 | Yamada Denki Co Ltd | 2,560,521 | |||||||||
73,000 | Yaskawa Electric Corp * | 795,063 | |||||||||
209,411,790 | |||||||||||
Malaysia — 0.0% | |||||||||||
49,000 | Malakoff Berhad | 115,908 | |||||||||
54,700 | Maxis Communications Berhad | 128,033 | |||||||||
55,120 | MISC Berhad | 143,790 | |||||||||
387,731 | |||||||||||
Mexico — 0.5% | |||||||||||
19,000 | America Movil SA de CV Class L ADR | 659,870 | |||||||||
195,320 | Cemex SA de CV CPO | 1,209,026 | |||||||||
51,000 | Fomento Economico Mexicano SA de CV | 440,621 | |||||||||
86,000 | Grupo Financiero Banorte SA de CV | 209,848 | |||||||||
120,000 | Grupo Mexico SA Class B | 307,589 | |||||||||
44,000 | Grupo Televisa SA (Participating Certificates) | 174,782 | |||||||||
30,500 | Telefonos de Mexico SA de CV Class L ADR | 682,895 | |||||||||
70,000 | Wal-Mart de Mexico SA de CV Class V | 199,943 | |||||||||
3,884,574 | |||||||||||
Netherlands — 5.9% | |||||||||||
491,287 | ABN Amro Holdings NV | 14,316,479 | |||||||||
370,837 | Aegon NV | 6,115,265 | |||||||||
43,981 | Akzo Nobel NV | 2,232,721 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Netherlands — continued | |||||||||||
5,579 | Boskalis Westminster NV | 353,382 | |||||||||
45,860 | DSM NV | 1,907,262 | |||||||||
2,671 | Gamma Holdings NV | 119,370 | |||||||||
60,607 | Heineken NV | 2,282,112 | |||||||||
532,822 | ING Groep NV | 20,026,626 | |||||||||
2,252 | Koninklijke Ten Cate | 253,312 | |||||||||
19,535 | Koninklijke Wessanen NV | 307,302 | |||||||||
19,206 | Van Ommeren Vopak NV | 611,112 | |||||||||
7,608 | Wereldhave NV | 811,066 | |||||||||
49,336,009 | |||||||||||
Norway — 1.6% | |||||||||||
40,860 | DnB NOR ASA | 495,761 | |||||||||
21,304 | Frontline Ltd | 819,737 | |||||||||
45,861 | Norsk Hydro ASA | 5,371,837 | |||||||||
61,600 | Orkla ASA | 2,685,012 | |||||||||
138,865 | Statoil ASA | 3,556,162 | |||||||||
12,928,509 | |||||||||||
Philippines — 0.0% | |||||||||||
4,240 | Philippine Long Distance Telephone | 145,548 | |||||||||
Poland — 0.0% | |||||||||||
9,300 | Polski Koncern Naftowy Orlen SA | 171,029 | |||||||||
Russia — 0.5% | |||||||||||
6,400 | JSC Mining & Smelting Co ADR | 569,600 | |||||||||
26,700 | Lukoil ADR | 2,136,000 | |||||||||
5,000 | Mobile Telesystems ADR | 180,350 | |||||||||
5,300 | OAO Gazprom ADR | 448,380 | |||||||||
5,600 | Polyus Gold Co ZAO ADR * | 201,600 | |||||||||
6,900 | Unified Energy Systems GDR | 475,755 | |||||||||
4,011,685 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Singapore — 0.9% | |||||||||||
529,000 | Capitaland Ltd | 1,362,750 | |||||||||
304,000 | DBS Group Holdings Ltd | 3,057,612 | |||||||||
53,500 | Fraser & Neave Ltd | 627,126 | |||||||||
130,000 | Keppel Corp Ltd | 1,117,231 | |||||||||
610,380 | Singapore Telecommunications | 978,489 | |||||||||
7,143,208 | |||||||||||
South Africa — 0.4% | |||||||||||
43,900 | AVI Ltd | 118,964 | |||||||||
119,696 | FirstRand Ltd | 360,840 | |||||||||
3,000 | Impala Platinum Holdings Ltd | 509,369 | |||||||||
6,492 | Imperial Holdings Ltd * | 162,414 | |||||||||
9,219 | Nedcor Ltd | 177,946 | |||||||||
13,600 | Remgro Ltd | 285,243 | |||||||||
99,300 | Sanlam Ltd | 257,058 | |||||||||
12,100 | Sasol Ltd | 414,362 | |||||||||
29,995 | Standard Bank Group Ltd | 382,940 | |||||||||
60,300 | Steinhoff International Holdings | 197,358 | |||||||||
10,300 | Telkom SA Ltd | 270,997 | |||||||||
9,480 | Tiger Brands Ltd | 234,994 | |||||||||
3,372,485 | |||||||||||
South Korea — 1.5% | |||||||||||
24 | Dong-A Pharm | 1,692 | |||||||||
7,500 | Dongkuk Steel Mill | 145,518 | |||||||||
2,660 | GS Engineering & Construction Corp | 144,452 | |||||||||
14,428 | Hana Financial Group Inc | 616,645 | |||||||||
8,400 | Hanjin Shipping | 196,629 | |||||||||
2,200 | Honam Petrochemical Co | 129,152 | |||||||||
12,200 | Hynix Semiconductor Inc * | 411,541 | |||||||||
6,150 | Hyundai Development Co | 279,104 | |||||||||
4,800 | Hyundai Mobis | 403,569 | |||||||||
9,600 | Hyundai Motor Co | 815,901 | |||||||||
700 | KCC Corporation | 139,437 | |||||||||
13,500 | KIA Motors Corp | 289,826 |
See accompanying notes to the financial statements.
12
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
12,200 | Kookmin Bank | 924,726 | |||||||||
17,200 | Korea Electric Power Corp | 733,958 | |||||||||
600 | Korea Express Co Ltd * | 49,814 | |||||||||
13,800 | KT Corp ADR | 281,796 | |||||||||
7,900 | KT Freetel Co Ltd | 210,169 | |||||||||
7,300 | KT&G Corp | 432,749 | |||||||||
4,600 | LG Chemicals Ltd | 230,808 | |||||||||
23,800 | LG Corp | 826,770 | |||||||||
3,200 | LG Electronics Inc | 262,773 | |||||||||
3,490 | Samsung Electronics Co Ltd | 2,446,748 | |||||||||
2,700 | Samsung SDI Co Ltd | 238,572 | |||||||||
14,000 | Shinhan Financial Group Co Ltd | 546,956 | |||||||||
600 | Shinsegae Co Ltd | 284,345 | |||||||||
8,300 | SK Corp | 511,430 | |||||||||
700 | SK Telecom Co Ltd | 145,465 | |||||||||
13,900 | SK Telecom Co Ltd ADR | 335,685 | |||||||||
10,200 | Woori Finance Holdings Co Ltd | 200,363 | |||||||||
12,236,593 | |||||||||||
Spain — 1.4% | |||||||||||
37,706 | ACS Actividades de Construccion y Servicios SA | 1,406,181 | |||||||||
64,911 | Endesa SA | 2,173,561 | |||||||||
148,722 | Iberdrola SA | 4,690,707 | |||||||||
114,883 | Repsol YPF SA | 3,211,155 | |||||||||
11,481,604 | |||||||||||
Sweden — 1.2% | |||||||||||
67,900 | Electrolux AB | 1,877,944 | |||||||||
53,150 | Hennes & Mauritz AB Class B | 1,936,638 | |||||||||
21,200 | Holmen AB Class B | 822,422 | |||||||||
58,800 | Nordea AB | 664,651 | |||||||||
130,100 | Skanska AB Class B | 2,094,574 | |||||||||
87,000 | Swedish Match AB | 1,164,998 | |||||||||
156,300 | Tele2 AB Class B | 1,686,954 | |||||||||
10,248,181 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Switzerland — 4.3% | |||||||||||
227,028 | ABB Ltd * | 2,720,166 | |||||||||
6,497 | Bobst Group AG (Registered) | 277,408 | |||||||||
57,600 | Credit Suisse Group | 3,190,187 | |||||||||
257 | Movenpick Holdings (Bearer) * | 63,671 | |||||||||
22,360 | Nestle SA (Registered) | 6,573,922 | |||||||||
80,668 | Roche Holding AG (Non Voting) | 11,918,450 | |||||||||
2,548 | Swisscom AG (Registered) | 765,192 | |||||||||
1,603 | Valora Holding AG * | 325,739 | |||||||||
43,238 | Zurich Financial Services AG * | 10,210,384 | |||||||||
36,045,119 | |||||||||||
Taiwan — 1.1% | |||||||||||
135,940 | Acer Inc | 300,796 | |||||||||
173,800 | Asustek Computer Inc | 489,814 | |||||||||
363,580 | AU Optronics Corp | 580,900 | |||||||||
249,000 | Chi Mei Optoelectronics Corp | 376,589 | |||||||||
307,000 | China Bills Finance Corp | 100,061 | |||||||||
632,000 | China Development Financial Holding Corp * | 241,989 | |||||||||
492,000 | Chunghwa Picture Tubes Ltd | 127,768 | |||||||||
177,000 | Chunghwa Telecom Co Ltd | 322,238 | |||||||||
264,259 | Compal Electronics Inc | 245,803 | |||||||||
83,547 | Delta Electronics Inc | 198,881 | |||||||||
266,760 | Far Eastern Textile Co Ltd | 196,338 | |||||||||
119,000 | Far Eastone Telecommunications Co Ltd | 145,610 | |||||||||
231,000 | Formosa Chemicals & Fibre Co | 363,158 | |||||||||
85,452 | Formosa Petrochemical Corp | 152,500 | |||||||||
288,850 | Formosa Plastics Corp | 457,077 | |||||||||
18,640 | High Tech Computer Corp | 399,278 | |||||||||
136,334 | Hon Hai Precision Industry Co Ltd | 862,076 | |||||||||
220,604 | Lite-On Technology Corp | 297,300 | |||||||||
585,000 | Mega Financial Holdings Co Ltd | 443,737 | |||||||||
261,000 | Powerchip Semiconductor Corp | 158,687 | |||||||||
151,200 | Quanta Computer Inc | 230,320 | |||||||||
93,400 | Realtek Semiconductor Corp | 102,413 |
See accompanying notes to the financial statements.
14
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
206,099 | Shin Kong Financial Holdings | 178,155 | |||||||||
156,000 | Siliconware Precision Industries Co | 197,729 | |||||||||
396,390 | Taishin Financial Holdings Co Ltd | 240,824 | |||||||||
287,000 | Taiwan Cellular Corp | 264,840 | |||||||||
687,545 | Taiwan Semiconductor Manufacturing Co Ltd | 1,273,992 | |||||||||
5,432 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 52,853 | |||||||||
167,159 | Wan Hai Lines Ltd | 102,702 | |||||||||
9,104,428 | |||||||||||
Thailand — 0.1% | |||||||||||
22,000 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 13,294 | |||||||||
107,950 | Kasikornbank Pcl NVDR (a) | 183,840 | |||||||||
51,000 | Ptt Pcl (Foreign Registered) (a) | 324,886 | |||||||||
522,020 | |||||||||||
Turkey — 0.1% | |||||||||||
40,928 | Akbank TAS | 414,310 | |||||||||
United Kingdom — 20.5% | |||||||||||
54,716 | Alliance & Leicester Plc | 1,025,719 | |||||||||
77,806 | Anglo American Plc | 2,898,483 | |||||||||
309,600 | AstraZeneca Plc | 14,298,202 | |||||||||
316,479 | Aviva Plc | 4,378,800 | |||||||||
274,355 | BAE Systems Plc | 2,019,549 | |||||||||
74,552 | Barclays Plc | 873,228 | |||||||||
210,891 | Barratt Developments Plc | 3,820,463 | |||||||||
226,977 | BBA Group Plc | 1,065,742 | |||||||||
68,876 | Berkeley Group Holdings Plc * | 1,345,509 | |||||||||
91,471 | BG Group Plc | 1,071,384 | |||||||||
138,731 | BHP Billiton Plc | 2,331,469 | |||||||||
128,174 | Boots Group Plc | 1,593,887 | |||||||||
432,894 | BP Plc | 4,788,698 | |||||||||
152,830 | British American Tobacco Plc | 3,641,184 | |||||||||
2,022,113 | BT Group Plc | 7,293,318 |
See accompanying notes to the financial statements.
15
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
271,490 | Cadbury Schweppes Plc | 2,757,936 | |||||||||
940,196 | Centrica Plc | 4,789,270 | |||||||||
654,853 | DSG International Plc | 1,974,692 | |||||||||
100,042 | Gallaher Group Plc | 1,550,188 | |||||||||
938,431 | GlaxoSmithKline Plc | 23,835,225 | |||||||||
131,350 | GUS Plc | 2,417,137 | |||||||||
149,232 | Hanson Plc | 1,821,800 | |||||||||
503,763 | HBOS Plc | 9,381,631 | |||||||||
164,980 | Imperial Tobacco Group Plc | 4,961,761 | |||||||||
26,429 | Inchcape Plc | 1,115,771 | |||||||||
323,002 | J Sainsbury Plc | 1,813,616 | |||||||||
87,537 | Kelda Group Plc | 1,222,462 | |||||||||
402,607 | Kingfisher Plc | 1,610,307 | |||||||||
552,310 | Lloyds TSB Group Plc | 5,365,253 | |||||||||
92,250 | Next Plc | 2,668,179 | |||||||||
312,802 | Northern Foods Plc | 755,376 | |||||||||
236,740 | Rio Tinto Plc | 11,141,494 | |||||||||
1,126,088 | Royal & Sun Alliance Insurance Group | 2,567,655 | |||||||||
213,654 | Royal Bank of Scotland Group | 7,146,498 | |||||||||
327,792 | Royal Dutch Shell Group Class A | 9,882,107 | |||||||||
97,023 | Royal Dutch Shell Plc B Shares | 3,050,451 | |||||||||
153,945 | Scottish & Southern Energy Plc | 3,100,622 | |||||||||
206,775 | Scottish Power Plc | 2,115,145 | |||||||||
145,230 | Tate & Lyle Plc | 1,522,858 | |||||||||
440,156 | Taylor Woodrow Plc | 3,207,983 | |||||||||
30,187 | Whitbread Plc | 560,487 | |||||||||
347,714 | Wimpey (George) Plc | 3,371,178 | |||||||||
81,137 | Wolseley Plc | 2,012,809 | |||||||||
170,165,526 | |||||||||||
TOTAL COMMON STOCKS (COST $600,004,261) | 797,219,248 |
See accompanying notes to the financial statements.
16
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
PREFERRED STOCKS — 1.1% | |||||||||||
Brazil — 0.7% | |||||||||||
21,700 | Banco Bradesco SA 3.66% | 895,182 | |||||||||
18,950 | Banco Itau Holding Financeira SA 2.79% | 613,075 | |||||||||
6,477,900 | Companhia Energetica de Minas Gerais 4.11% | 332,513 | |||||||||
17,919,400 | Companhia Paranaense de Energia 2.89% | 196,620 | |||||||||
9,000 | Companhia Vale do Rio Doce Class A 0.36% | 383,141 | |||||||||
9,364,000 | Electrobras (Centro) SA Class B 8.09% | 205,713 | |||||||||
4,800 | Empresa Brasileira de Aeronautica (Embraer) SA ADR 2.72% | 190,800 | |||||||||
9,900 | Gerdau Metalurgica SA 4.62 | 277,256 | |||||||||
120,754 | Investimentos Itau SA 4.28% | 526,006 | |||||||||
859,307 | Net Servicos de Comunicacoa SA * | 457,272 | |||||||||
70,224 | Petroleo Brasileiro SA (Petrobras) 0.44% | 1,479,879 | |||||||||
5,557,457 | |||||||||||
Germany — 0.3% | |||||||||||
7,491 | RWE AG 2.70% | 589,793 | |||||||||
20,411 | Villeroy & Boch AG (Non Voting) 5.64% | 318,569 | |||||||||
40,841 | Volkswagen AG 2.82% | 2,104,530 | |||||||||
3,012,892 | |||||||||||
Italy — 0.1% | |||||||||||
348,897 | Compagnia Assicuratrice Unipol 5.02% | 913,527 | |||||||||
TOTAL PREFERRED STOCKS (COST $4,623,638) | 9,483,876 | ||||||||||
DEBT OBLIGATION(S) — 0.1% | |||||||||||
United States — 0.1% | |||||||||||
798,113 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (b) | 844,410 | |||||||||
TOTAL DEBT OBLIGATION(S) (COST $844,138) | 844,410 |
See accompanying notes to the financial statements.
17
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENT(S) — 0.6% | |||||||||||
4,400,000 | Bank of Montreal Time Deposit, 4.64%, due 03/01/06 | 4,400,000 | |||||||||
300,000 | U.S. Treasury Bill, 4.64%, due 08/24/06 (c) (d) | 293,404 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $4,693,371) | 4,693,404 | ||||||||||
TOTAL INVESTMENTS — 97.9% (Cost $610,165,408) | 812,240,938 | ||||||||||
Other Assets and Liabilities (net) — 2.1% | 17,341,934 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 829,582,872 |
See accompanying notes to the financial statements.
18
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
8 | CAC 40 | March 2006 | $ | 477,173 | $ | 3,888 | |||||||||||||
3 | DAX | March 2006 | 518,921 | 32,401 | |||||||||||||||
13 | FTSE 100 | March 2006 | 1,314,496 | 19,907 | |||||||||||||||
2 | IBEX 35 | March 2006 | 280,609 | 7,723 | |||||||||||||||
9 | OMXS 30 | March 2006 | 113,058 | (279 | ) | ||||||||||||||
1 | S&P/MIB | March 2006 | 224,788 | 8,387 | |||||||||||||||
4 | SPI 200 | March 2006 | 365,607 | 10,678 | |||||||||||||||
3 | TOPIX | March 2006 | 429,701 | 21,122 | |||||||||||||||
$ | 103,827 |
As of February 28, 2006, the Fund has sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Swap Agreements
Total Return Swaps | |||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
451,825 | USD | 2/2/2007 | Deutsche Bank | 1 month LIBOR + 0.55% | Gazprom | $ | 2,423 | ||||||||||||||||
372,775 | USD | 2/2/2007 | Deutsche Bank | 1 month LIBOR + 0.55% | Gazprom | 2,000 | |||||||||||||||||
$ | 4,423 |
See accompanying notes to the financial statements.
19
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
GDR - Global Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2).
(c) Rate shown represents yield-to-maturity.
(d) All or a portion of this security has been segregated to cover collateral requirements on financial futures contracts and open swap contracts (Note 2).
As of February 28, 2006, 92.8% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor (Note 2).
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
20
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $610,165,408) (Note 2) | $ | 812,240,938 | |||||
Cash | 80,587 | ||||||
Foreign currency, at value (cost $16,094,133) (Note 2) | 16,062,807 | ||||||
Receivable for investments sold | 74,657 | ||||||
Receivable for Fund shares sold | 28,754 | ||||||
Dividends and interest receivable | 1,463,629 | ||||||
Foreign taxes receivable | 247,999 | ||||||
Receivable for open swap contracts (Note 2) | 4,423 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 59,868 | ||||||
Total assets | 830,263,662 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 22,582 | ||||||
Payable for Fund shares repurchased | 10,255 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 342,327 | ||||||
Shareholder service fee | 95,091 | ||||||
Trustees and Chief Compliance Officer fees | 1,123 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 47,455 | ||||||
Accrued expenses | 161,957 | ||||||
Total liabilities | 680,790 | ||||||
Net assets | $ | 829,582,872 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 607,556,736 | |||||
Distributions in excess of net investment income | (343,423 | ) | |||||
Accumulated net realized gain | 20,213,424 | ||||||
Net unrealized appreciation | 202,156,135 | ||||||
$ | 829,582,872 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 829,582,872 | |||||
Shares outstanding: | |||||||
Class III | 45,311,704 | ||||||
Net asset value per share: | |||||||
Class III | $ | 18.31 |
See accompanying notes to the financial statements.
21
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,595,758) | $ | 17,620,965 | |||||
Interest | 606,777 | ||||||
Total investment income | 18,227,742 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 3,524,660 | ||||||
Shareholder service fee – Class III (Note 3) | 979,072 | ||||||
Custodian and fund accounting agent fees | 554,775 | ||||||
Transfer agent fees | 29,119 | ||||||
Audit and tax fees | 55,921 | ||||||
Legal fees | 10,041 | ||||||
Trustees fees and related expenses (Note 3) | 11,973 | ||||||
Registration fees | 18,798 | ||||||
Miscellaneous | 16,728 | ||||||
Total expenses | 5,201,087 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (677,234 | ) | |||||
Net expenses | 4,523,853 | ||||||
Net investment income (loss) | 13,703,889 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of CPMF tax of $1,261) (Note 2) | 36,102,975 | ||||||
Closed futures contracts | 1,715,877 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,620,809 | ) | |||||
Net realized gain (loss) | 36,198,043 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 80,252,435 | ||||||
Open futures contracts | 99,642 | ||||||
Open swap contracts | 4,423 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (188,252 | ) | |||||
Net unrealized gain (loss) | 80,168,248 | ||||||
Net realized and unrealized gain (loss) | 116,366,291 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 130,070,180 |
See accompanying notes to the financial statements.
22
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 13,703,889 | $ | 7,528,584 | |||||||
Net realized gain (loss) | 36,198,043 | 7,597,234 | |||||||||
Change in net unrealized appreciation (depreciation) | 80,168,248 | 78,977,448 | |||||||||
Net increase (decrease) in net assets from operations | 130,070,180 | 94,103,266 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (12,608,317 | ) | (8,725,523 | ) | |||||||
Net realized gains | |||||||||||
Class III | (11,477,247 | ) | — | ||||||||
(24,085,564 | ) | (8,725,523 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 163,686,368 | 183,173,856 | |||||||||
Total increase (decrease) in net assets | 269,670,984 | 268,551,599 | |||||||||
Net assets: | |||||||||||
Beginning of period | 559,911,888 | 291,360,289 | |||||||||
End of period (including distributions in excess of net investment income of $343,423 and $809,833, respectively) | $ | 829,582,872 | $ | 559,911,888 |
See accompanying notes to the financial statements.
23
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.78 | $ | 13.19 | $ | 8.73 | $ | 9.70 | $ | 10.79 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.35 | 0.26 | 0.21 | 0.19 | 0.25 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 2.77 | 2.61 | 4.55 | (0.90 | ) | (1.03 | ) | ||||||||||||||||
Total from investment operations | 3.12 | 2.87 | 4.76 | (0.71 | ) | (0.78 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.31 | ) | (0.28 | ) | (0.30 | ) | (0.26 | ) | (0.31 | ) | |||||||||||||
From net realized gains | (0.28 | ) | — | — | — | — | |||||||||||||||||
Total distributions | (0.59 | ) | (0.28 | ) | (0.30 | ) | (0.26 | ) | (0.31 | ) | |||||||||||||
Net asset value, end of period | $ | 18.31 | $ | 15.78 | $ | 13.19 | $ | 8.73 | $ | 9.70 | |||||||||||||
Total Return(a) | 20.04 | % | 21.94 | % | 54.99 | % | (7.47 | )% | (7.16 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 829,583 | $ | 559,912 | $ | 291,360 | $ | 94,709 | $ | 75,287 | |||||||||||||
Net expenses to average daily net assets | 0.69 | % | 0.69 | % | 0.69 | % | 0.70 | % | 0.69 | % | |||||||||||||
Net investment income to average daily net assets | 2.10 | % | 1.91 | % | 1.87 | % | 1.98 | % | 2.49 | % | |||||||||||||
Portfolio turnover rate | 39 | % | 44 | % | 36 | % | 48 | % | 50 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.10 | % | 0.16 | % | 0.26 | % | 0.45 | % | 0.41 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
24
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Tax-Managed International Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high after-tax total return primarily through investment in non-U.S. equity securities. The Fund's benchmark is the MSCI EAFE Index (after-tax). The Fund's benchmark is computed by the Manager by applying the maximum historical applicable individual federal tax rate to the MSCI EAFE Index's dividend yield and to its estimated short-term and long-term realized capital gains and losses (arising from changes in the constituents of the MSCI EAFE Index).
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held
25
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the
26
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of Februa ry 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
27
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed Securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the
28
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
price of the security or index underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. During the year ended February 28, 2006, the Fund incurred $1,261 in CPMF tax which is included in the net realized gain (loss) on investments in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005,
29
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the tax basis of distributions paid were as follows: ordinary income – $12,608,317 and $8,725,523, respectively and long-term capital gains – $11,477,247 and $0, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $5,020,105 and $17,808,612 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 613,122,335 | $ | 202,405,916 | $ | (3,287,313 | ) | $ | 199,118,603 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to passive foreign investment company and foreign currency transactions. The financial highlights exclude these adjustments.
Distributions In Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (629,162 | ) | $ | 629,162 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
30
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and the independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.54% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $7,218 and $4,324, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $425,610,594 and $246,833,352, respectively.
31
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 21.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 2.8% of the Fund's shares were held by five related parties comprised of certain GMO employee accounts, and 0.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 11,270,432 | $ | 188,430,360 | 14,350,468 | $ | 197,448,337 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 924,678 | 15,871,319 | 229,800 | 3,400,258 | |||||||||||||||
Shares repurchased | (2,369,116 | ) | (40,615,311 | ) | (1,191,283 | ) | (17,674,739 | ) | |||||||||||
Net increase | 9,825,994 | $ | 163,686,368 | 13,388,985 | $ | 183,173,856 |
32
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed International Equities Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed International Equities Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Co mpany Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
33
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.69 | % | $ | 1,000.00 | $ | 1,151.20 | $ | 3.68 | ||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.46 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
34
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year ended February 28, 2006
The Fund's distributions to shareholders include $11,477,247 from long-term capital gains.
During the year ended February 28, 2006, the Fund paid foreign taxes of $1,595,758 and recognized foreign source income of $19,214,414.
For taxable, non-corporate shareholders, 96.77% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $123,069 or if determined to be different, the qualified interest income of such year.
35
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
36
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
37
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
38
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
39
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO U.S. Quality Equity Fund returned +5.3% for the fiscal year ended February 28, 2006, as compared to +8.4% for the S&P 500 Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period.
The portfolio's underformance for the fiscal year is primarily due to the fact that high quality stocks lagged their low quality stock brethren by a substantial margin. For example, the return of GMO's 200-stock High Quality Universe, from which we make selections for this fund, gained 3.6%, while the universe of very low quality, or 'junk' stocks, returned over 18% for the twelve month period.
At the broad sector level, performance was hindered for the fiscal year. While there were some modest gains made from GMO's underweighting in oil & gas and manufacturing, these gains were negated by the overweighting in retail and autos, along with underweighting financials.
Versus the S&P 500, stock selection was disappointing for the period as well. While selections in health care and retail were very strong, selections in technology wiped out these gains.
The Fund uses one investment tool – price to intrinsic value – to make selections from the quality-only large cap universe.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class IV shares may vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.2 | % | |||||
Short-Term Investment(s) | 5.0 | ||||||
Futures | 0.0 | ||||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Health Care | 32.6 | % | |||||
Retail Stores | 24.7 | ||||||
Utility | 15.1 | ||||||
Food & Beverage | 10.1 | ||||||
Technology | 4.2 | ||||||
Consumer Goods | 4.1 | ||||||
Oil & Gas | 4.1 | ||||||
Automotive | 2.1 | ||||||
Financial | 1.8 | ||||||
Services | 1.2 | ||||||
100.0 | % |
1
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.2% |
Automotive — 1.9% | |||||||||||
28,200 | Genuine Parts Co. | 1,255,464 | |||||||||
1,129,600 | Harley-Davidson, Inc. | 59,315,296 | |||||||||
60,570,760 | |||||||||||
Consumer Goods — 3.9% | |||||||||||
573,100 | Colgate-Palmolive Co. | 31,222,488 | |||||||||
193,400 | Kimberly Clark Corp. | 11,445,412 | |||||||||
258,700 | Liz Claiborne, Inc. | 9,320,961 | |||||||||
1,006,800 | Procter & Gamble Co. | 60,337,524 | |||||||||
160,100 | VF Corp. | 8,773,480 | |||||||||
121,099,865 | |||||||||||
Financial — 1.7% | |||||||||||
346,100 | Brown & Brown, Inc. | 10,822,547 | |||||||||
69,500 | Chubb Corp. | 6,654,625 | |||||||||
189,800 | First American Corp. | 8,001,968 | |||||||||
34,000 | Jefferson Pilot Corp. | 2,048,500 | |||||||||
245,900 | Progressive Corp. (The) | 26,421,955 | |||||||||
53,949,595 | |||||||||||
Food & Beverage — 9.6% | |||||||||||
184,100 | Anheuser Busch Cos., Inc. | 7,647,514 | |||||||||
43,700 | Brown-Forman Corp.-Class B | 3,074,732 | |||||||||
4,638,500 | Coca-Cola Co. (The) | 194,677,845 | |||||||||
153,900 | HJ Heinz Co. | 5,828,193 | |||||||||
1,081,000 | PepsiCo, Inc. | 63,897,910 | |||||||||
1,258,000 | Sara Lee Corp. | 22,228,860 | |||||||||
297,355,054 | |||||||||||
Health Care — 30.7% | |||||||||||
13,100 | Cigna Corp. | 1,608,025 | |||||||||
908,800 | Forest Laboratories, Inc. * | 41,713,920 |
See accompanying notes to the financial statements.
2
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
2,632,300 | Johnson & Johnson | 151,752,095 | |||||||||
6,000 | Lincare Holdings, Inc. * | 245,400 | |||||||||
222,000 | McKesson Corp. | 12,016,860 | |||||||||
5,550,100 | Merck & Co., Inc. | 193,476,486 | |||||||||
7,773,100 | Pfizer, Inc. | 203,577,489 | |||||||||
3,435,000 | UnitedHealth Group, Inc. | 200,020,050 | |||||||||
3,022,400 | Wyeth | 150,515,520 | |||||||||
954,925,845 | |||||||||||
Oil & Gas — 3.8% | |||||||||||
2,016,900 | Exxon Mobil Corp. | 119,743,353 | |||||||||
Retail Stores — 23.3% | |||||||||||
9,100 | Abercrombie & Fitch Co.-Class A | 612,612 | |||||||||
203,300 | Bed Bath & Beyond, Inc. * | 7,326,932 | |||||||||
525,000 | Best Buy, Inc. | 28,276,500 | |||||||||
5,040,900 | Home Depot, Inc. | 212,473,935 | |||||||||
1,481,000 | Kroger Co. * | 29,679,240 | |||||||||
3,125,400 | Lowe's Cos., Inc. | 213,089,772 | |||||||||
634,000 | Supervalu, Inc. | 20,034,400 | |||||||||
3,354,500 | Walgreen Co. | 150,482,870 | |||||||||
1,399,700 | Wal-Mart Stores, Inc. | 63,490,392 | |||||||||
725,466,653 | |||||||||||
Services — 1.1% | |||||||||||
131,000 | Darden Restaurants, Inc. | 5,494,140 | |||||||||
580,400 | McDonald's Corp. | 20,261,764 | |||||||||
88,700 | Moody's Corp. | 5,942,900 | |||||||||
106,100 | Starbucks Corp. * | 3,853,552 | |||||||||
35,552,356 | |||||||||||
Technology — 4.0% | |||||||||||
308,800 | Affiliated Computer Services, Inc.-Class A * | 19,429,696 | |||||||||
424,400 | Dell, Inc. * | 12,307,600 |
See accompanying notes to the financial statements.
3
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
190,600 | First Data Corp. | 8,601,778 | |||||||||
201,100 | Fiserv, Inc. * | 8,345,650 | |||||||||
20,300 | Intuit, Inc. * | 986,174 | |||||||||
1,609,200 | Microsoft Corp. | 43,287,480 | |||||||||
708,300 | Pitney Bowes, Inc. | 30,272,742 | |||||||||
123,231,120 | |||||||||||
Utility — 14.2% | |||||||||||
1,224,400 | Alltel Corp. | 77,320,860 | |||||||||
6,602,700 | AT&T Inc. | 182,168,493 | |||||||||
1,451,000 | BellSouth Corp. | 45,822,580 | |||||||||
4,079,800 | Verizon Communications, Inc. | 137,489,260 | |||||||||
442,801,193 | |||||||||||
TOTAL COMMON STOCKS (COST $2,800,225,653) | 2,934,695,794 | ||||||||||
SHORT-TERM INVESTMENT(S) — 5.0% | |||||||||||
148,513,341 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $148,525,758 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $151,483,608. | 148,513,341 | |||||||||
6,300,000 | U.S. Treasury Bill, 3.81%, due 03/23/06 (a) (b) | 6,285,658 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $154,798,999) | 154,798,999 | ||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $2,955,024,652) | 3,089,494,793 | ||||||||||
Other Assets and Liabilities (net) — 0.8% | 24,010,094 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,113,504,887 |
See accompanying notes to the financial statements.
4
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
65 | S&P 500 | March 2006 | $ | 20,839,000 | $ | 239,401 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
(b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
See accompanying notes to the financial statements.
5
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $2,955,024,652) (Note 2) | $ | 3,089,494,793 | |||||
Receivable for investments sold | 11,186,589 | ||||||
Receivable for Fund shares sold | 9,000,000 | ||||||
Dividends and interest receivable | 5,736,255 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 113,722 | ||||||
Total assets | 3,115,531,359 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 495,902 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 775,057 | ||||||
Shareholder service fee | 285,951 | ||||||
Trustees and Chief Compliance Officer fees | 6,955 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 188,500 | ||||||
Accrued expenses | 274,107 | ||||||
Total liabilities | 2,026,472 | ||||||
Net assets | $ | 3,113,504,887 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,967,837,222 | |||||
Accumulated undistributed net investment income | 11,716,758 | ||||||
Distributions in excess of net realized gain | (758,635 | ) | |||||
Net unrealized appreciation | 134,709,542 | ||||||
$ | 3,113,504,887 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,108,087,674 | |||||
Class IV shares | $ | 2,005,417,213 | |||||
Shares outstanding: | |||||||
Class III | 53,245,835 | ||||||
Class IV | 96,312,160 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.81 | |||||
Class IV | $ | 20.82 |
See accompanying notes to the financial statements.
6
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends | $ | 40,539,090 | |||||
Interest | 3,368,517 | ||||||
Total investment income | 43,907,607 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 7,026,992 | ||||||
Shareholder service fee – Class III (Note 3) | 1,160,240 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,423,693 | ||||||
Custodian, fund accounting agent and transfer agent fees | 253,325 | ||||||
Audit and tax fees | 29,962 | ||||||
Legal fees | 35,365 | ||||||
Trustees fees and related expenses (Note 3) | 36,147 | ||||||
Registration fees | 169,968 | ||||||
Miscellaneous | 37,874 | ||||||
Total expenses | 10,173,566 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (504,337 | ) | |||||
Net expenses | 9,669,229 | ||||||
Net investment income (loss) | 34,238,378 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (1,009,468 | ) | |||||
Closed futures contracts | 3,221,891 | ||||||
Net realized gain (loss) | 2,212,423 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 119,913,386 | ||||||
Open futures contracts | 182,468 | ||||||
Net unrealized gain (loss) | 120,095,854 | ||||||
Net realized and unrealized gain (loss) | 122,308,277 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 156,546,655 |
See accompanying notes to the financial statements.
7
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 34,238,378 | $ | 14,725,475 | |||||||
Net realized gain (loss) | 2,212,423 | 762,866 | |||||||||
Change in net unrealized appreciation (depreciation) | 120,095,854 | 15,109,205 | |||||||||
Net increase (decrease) in net assets from operations | 156,546,655 | 30,597,546 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (8,981,477 | ) | (3,766,730 | ) | |||||||
Class IV | (15,500,649 | ) | (9,021,810 | ) | |||||||
Total distributions from net investment income | (24,482,126 | ) | (12,788,540 | ) | |||||||
Net realized gains | |||||||||||
Class III | (1,546,552 | ) | — | ||||||||
Class IV | (2,159,897 | ) | — | ||||||||
Total distributions from net realized gains | (3,706,449 | ) | — | ||||||||
(28,188,575 | ) | (12,788,540 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 593,814,070 | 437,911,989 | |||||||||
Class IV | 988,898,698 | 789,912,468 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 1,582,712,768 | 1,227,824,457 | |||||||||
Total increase (decrease) in net assets | 1,711,070,848 | 1,245,633,463 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,402,434,039 | 156,800,576 | |||||||||
End of period (including accumulated undistributed net investment income of $11,716,758 and $1,960,506, respectively) | $ | 3,113,504,887 | $ | 1,402,434,039 |
See accompanying notes to the financial statements.
8
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||
2006 | 2005 | 2004(a) | |||||||||||||
Net asset value, beginning of period | $ | 20.03 | $ | 19.93 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.32 | 0.39 | 0.01 | ||||||||||||
Net realized and unrealized gain (loss) | 0.72 | (0.05 | ) | (0.08 | ) | ||||||||||
Total from investment operations | 1.04 | 0.34 | (0.07 | ) | |||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (0.22 | ) | (0.24 | ) | — | ||||||||||
From net realized gains | (0.04 | ) | — | — | |||||||||||
Total distributions | (0.26 | ) | (0.24 | ) | — | ||||||||||
Net asset value, end of period | $ | 20.81 | $ | 20.03 | $ | 19.93 | |||||||||
Total Return(b) | 5.28 | % | 1.72 | % | (0.35 | )%** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 1,108,088 | $ | 463,848 | $ | 18,966 | |||||||||
Net expenses to average daily net assets | 0.48 | % | 0.48 | % | 0.47 | %* | |||||||||
Net investment income to average daily net assets | 1.58 | % | 1.98 | % | 1.22 | %* | |||||||||
Portfolio turnover rate | 52 | % | 66 | % | 2 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | % | 0.04 | % | 1.59 | %* |
(a) Period from February 6, 2004 (commencement of operations) through February 29, 2004.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||
2006 | 2005 | 2004(a) | |||||||||||||
Net asset value, beginning of period | $ | 20.03 | $ | 19.93 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.32 | 0.38 | 0.01 | ||||||||||||
Net realized and unrealized gain (loss) | 0.74 | (0.03 | ) | (0.08 | ) | ||||||||||
Total from investment operations | 1.06 | 0.35 | (0.07 | ) | |||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (0.23 | ) | (0.25 | ) | — | ||||||||||
From net realized gains | (0.04 | ) | — | — | |||||||||||
Total distributions | (0.27 | ) | (0.25 | ) | — | ||||||||||
Net asset value, end of period | $ | 20.82 | $ | 20.03 | $ | 19.93 | |||||||||
Total Return(b) | 5.37 | % | 1.75 | % | (0.35 | )%** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 2,005,417 | $ | 938,586 | $ | 137,835 | |||||||||
Net expenses to average daily net assets | 0.44 | % | 0.44 | % | 0.44 | %* | |||||||||
Net investment income to average daily net assets | 1.62 | % | 1.92 | % | 0.99 | %* | |||||||||
Portfolio turnover rate | 52 | % | 66 | % | 2 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | % | 0.04 | % | 1.59 | %* |
(a) Period from February 6, 2004 (commencement of operations) through February 29, 2004.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO U.S. Quality Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return primarily through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index.
Throughout the year ended February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the classes of shares is generally based on the total amount of assets invested in the Fund or with GMO, as more fully outlined in the Fund's prospectus.
2. Significant Accounting Policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument
11
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabil ities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements
12
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
of credit, legal, market and documentation risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in
13
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $27,076,640 and $12,788,540, respectively and long-term capital gains – $1,111,935 and $0, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $14,340,831 and $848,051 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,959,016,011 | $ | 160,662,594 | $ | (30,183,812 | ) | $ | 130,478,782 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
14
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.105% for Class IV shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.33% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $22,759 and $16,542, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $2,494,902,630 and $1,042,253,328, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related parties
As of February 28, 2006, 22.4% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
15
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, 0.2% of the Fund's shares were held by nine related parties, comprised of certain GMO employee accounts, and 56.2% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 43,846,709 | $ | 874,138,746 | 23,897,887 | $ | 471,705,564 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 457,932 | 9,093,758 | 140,086 | 2,814,184 | |||||||||||||||
Shares repurchased | (14,220,768 | ) | (289,418,434 | ) | (1,827,592 | ) | (36,607,759 | ) | |||||||||||
Net increase (decrease) | 30,083,873 | $ | 593,814,070 | 22,210,381 | $ | 437,911,989 | |||||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 49,970,954 | $ | 999,519,390 | 39,507,112 | $ | 781,349,114 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 843,645 | 16,747,719 | 449,463 | 9,021,810 | |||||||||||||||
Shares repurchased | (1,350,936 | ) | (27,368,411 | ) | (23,078 | ) | (458,456 | ) | |||||||||||
Net increase (decrease) | 49,463,663 | $ | 988,898,698 | 39,933,497 | $ | 789,912,468 |
16
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Quality Equity Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Quality Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accountin g Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
17
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 1,053.00 | $ | 2.44 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.41 | $ | 2.41 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,053.20 | $ | 2.24 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.61 | $ | 2.21 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
18
GMO U.S. Quality Equity Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $1,111,935 from long-term capital gains.
For taxable, non-corporate shareholders, 94.27% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 99.69% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $1,512,156 or if determined to be different, the qualified interest income of such year.
19
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
20
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
21
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
22
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
23
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Tobacco-Free Core Fund returned +5.4% for the fiscal year ended February 28, 2006, as compared to +8.4% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period.
Sector selection detracted from the portfolio's relative performance for the fiscal year. Underweight positions in manufacturing and services, and an overweight position in utility provided the bulk of positive performance. Meanwhile, an overweight position in automotive proved costly.
The portfolio's underperformance for the period is primarily attributed to stock selection, and, more specifically, picks made among technology issues. Some positive performance came from selections made in health care and retail store securities.
For the year, the portfolio's valuation stock selection strategies detracted from overall performance, while price momentum provided a positive impact for the period.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class IV shares will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.0 | % | |||||
Short-Term Investment(s) | 11.6 | ||||||
Futures | 0.0 | ||||||
Other | (8.6 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Health Care | 23.0 | % | |||||
Financial | 16.7 | ||||||
Technology | 15.4 | ||||||
Retail Stores | 14.0 | ||||||
Utility | 9.6 | ||||||
Oil & Gas | 5.7 | ||||||
Services | 3.1 | ||||||
Food & Beverage | 2.7 | ||||||
Construction | 2.5 | ||||||
Consumer Goods | 2.3 | ||||||
Automotive | 2.0 | ||||||
Machinery | 1.3 | ||||||
Transportation | 1.1 | ||||||
Manufacturing | 0.4 | ||||||
Primary Process Industry | 0.2 | ||||||
100.0 | % |
1
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 97.0% | |||||||||||
Automotive — 2.0% | |||||||||||
225,093 | Ford Motor Co. (a) | 1,793,991 | |||||||||
10,313 | General Motors Corp. (a) | 209,457 | |||||||||
3,500 | Genuine Parts Co. | 155,820 | |||||||||
50,400 | Harley-Davidson, Inc. (a) | 2,646,504 | |||||||||
22,800 | Johnson Controls, Inc. | 1,624,956 | |||||||||
12,800 | Paccar, Inc. | 894,336 | |||||||||
7,325,064 | |||||||||||
Construction — 2.4% | |||||||||||
26,000 | Centex Corp. | 1,757,860 | |||||||||
45,000 | D.R. Horton, Inc. | 1,534,950 | |||||||||
5,200 | Fluor Corp. | 448,760 | |||||||||
24,400 | KB Home | 1,635,532 | |||||||||
23,200 | Lennar Corp.-Class A | 1,388,752 | |||||||||
300 | NVR, Inc. * (a) | 225,900 | |||||||||
39,200 | Pulte Homes, Inc. | 1,505,672 | |||||||||
3,300 | Ryland Group, Inc. | 230,175 | |||||||||
2,100 | Vulcan Materials Co. | 165,900 | |||||||||
8,893,501 | |||||||||||
Consumer Goods — 2.3% | |||||||||||
3,000 | Black & Decker Corp. | 256,740 | |||||||||
12,900 | Colgate-Palmolive Co. | 702,792 | |||||||||
70,300 | Eastman Kodak Co. (a) | 1,971,915 | |||||||||
25,700 | Jones Apparel Group, Inc. | 743,244 | |||||||||
30,000 | Liz Claiborne, Inc. (a) | 1,080,900 | |||||||||
15,700 | Mattel Co. | 264,545 | |||||||||
19,500 | Mohawk Industries, Inc. * | 1,686,945 | |||||||||
6,200 | Newell Rubbermaid, Inc. | 154,194 | |||||||||
17,400 | Whirlpool Corp. | 1,562,346 | |||||||||
8,423,621 |
See accompanying notes to the financial statements.
2
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Financial — 16.2% | |||||||||||
89,100 | Aflac, Inc. | 4,120,875 | |||||||||
10,000 | Allstate Corp. (The) | 547,800 | |||||||||
25,100 | AMBAC Financial Group, Inc. | 1,886,265 | |||||||||
66,800 | American International Group, Inc. | 4,432,848 | |||||||||
18,800 | AON Corp. | 744,668 | |||||||||
70,188 | Bank of America Corp. | 3,218,120 | |||||||||
4,500 | BB&T Corp. | 177,885 | |||||||||
138,600 | Charles Schwab Corp. (The) | 2,246,706 | |||||||||
9,600 | Chubb Corp. | 919,200 | |||||||||
58,700 | Citigroup, Inc. | 2,721,919 | |||||||||
11,900 | Comerica, Inc. (a) | 682,108 | |||||||||
8,000 | E*Trade Financial Corp. * | 204,640 | |||||||||
10,800 | Equifax, Inc. | 395,712 | |||||||||
131,000 | Fannie Mae | 7,163,080 | |||||||||
45,655 | Fidelity National Financial, Inc. | 1,723,933 | |||||||||
3,100 | First American Corp. | 130,696 | |||||||||
4,800 | First Horizon National Corp. | 187,728 | |||||||||
19,200 | Franklin Resources, Inc. | 1,971,456 | |||||||||
25,700 | Freddie Mac | 1,731,923 | |||||||||
6,700 | Goldman Sachs Group, Inc. | 946,643 | |||||||||
9,200 | Hartford Financial Services Group, Inc. | 757,896 | |||||||||
8,700 | Legg Mason, Inc. | 1,136,133 | |||||||||
15,300 | Lehman Brothers Holdings, Inc. | 2,233,035 | |||||||||
22,400 | Lincoln National Corp. | 1,271,648 | |||||||||
24,100 | Marsh & McLennan Cos., Inc. | 744,931 | |||||||||
2,400 | MBIA, Inc. (a) | 140,976 | |||||||||
17,700 | Metlife, Inc. (a) | 887,124 | |||||||||
25,100 | MGIC Investment Corp. | 1,600,125 | |||||||||
38,600 | National City Corp. (a) | 1,343,280 | |||||||||
37,125 | Old Republic International Corp. | 790,391 | |||||||||
8,500 | PMI Group (The), Inc. (a) | 368,050 | |||||||||
6,200 | PNC Financial Services Group, Inc. | 436,170 | |||||||||
4,300 | Principal Financial Group | 209,496 | |||||||||
14,200 | Progressive Corp. (The) | 1,525,790 |
See accompanying notes to the financial statements.
3
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Financial — continued | |||||||||||
14,500 | Prudential Financial, Inc. | 1,117,080 | |||||||||
10,100 | Radian Group, Inc. | 573,175 | |||||||||
31,100 | St. Paul Travelers Cos. (The), Inc. (a) | 1,336,678 | |||||||||
13,000 | State Street Corp. | 812,240 | |||||||||
22,600 | TD Ameritrade Holding Corp. | 491,776 | |||||||||
19,800 | Torchmark Corp. | 1,082,466 | |||||||||
62,600 | UnumProvident Corp. (a) | 1,295,194 | |||||||||
4,100 | Wachovia Corp. | 229,887 | |||||||||
97,166 | Washington Mutual, Inc. | 4,148,988 | |||||||||
60,686,734 | |||||||||||
Food & Beverage — 2.6% | |||||||||||
22,700 | Archer-Daniels-Midland Co. | 720,044 | |||||||||
116,400 | Coca-Cola Co. (The) | 4,885,308 | |||||||||
12,100 | Dean Foods Co. * | 453,387 | |||||||||
2,900 | General Mills Co. | 142,825 | |||||||||
23,500 | PepsiCo, Inc. | 1,389,085 | |||||||||
88,100 | Sara Lee Corp. | 1,556,727 | |||||||||
56,300 | Tyson Foods, Inc.-Class A | 761,739 | |||||||||
9,909,115 | |||||||||||
Health Care — 22.3% | |||||||||||
63,000 | Abbott Laboratories | 2,783,340 | |||||||||
53,000 | Aetna, Inc. | 2,703,000 | |||||||||
3,600 | Allergan, Inc. | 389,736 | |||||||||
44,800 | AmerisourceBergen Corp. | 2,060,352 | |||||||||
2,000 | Amgen, Inc. * | 150,980 | |||||||||
4,800 | Barr Pharmaceuticals, Inc. * | 322,464 | |||||||||
67,200 | Bristol-Myers Squibb Co. | 1,552,320 | |||||||||
24,600 | Cardinal Health, Inc. (a) | 1,785,960 | |||||||||
25,400 | Cigna Corp. | 3,117,850 | |||||||||
600 | DENTSPLY International, Inc. | 34,194 | |||||||||
23,000 | Express Scripts, Inc. * | 2,007,210 | |||||||||
40,600 | Forest Laboratories, Inc. * (a) | 1,863,540 |
See accompanying notes to the financial statements.
4
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
24,800 | Genentech, Inc. * | 2,125,112 | |||||||||
30,100 | HCA, Inc. | 1,441,790 | |||||||||
8,800 | Health Net, Inc. * | 421,960 | |||||||||
12,900 | Humana, Inc. * | 666,543 | |||||||||
180,420 | Johnson & Johnson | 10,401,213 | |||||||||
32,200 | Lincare Holdings, Inc. * | 1,316,980 | |||||||||
88,000 | McKesson Corp. | 4,763,440 | |||||||||
17,400 | Medco Health Solutions, Inc. * | 969,528 | |||||||||
25,000 | Medtronic, Inc. | 1,348,750 | |||||||||
239,600 | Merck & Co., Inc. | 8,352,456 | |||||||||
577,390 | Pfizer, Inc. | 15,121,844 | |||||||||
13,100 | Stryker Corp. | 605,482 | |||||||||
8,800 | Tenet Healthcare Corp. * | 69,432 | |||||||||
216,224 | UnitedHealth Group, Inc. | 12,590,724 | |||||||||
22,362 | WellPoint, Inc. * | 1,717,178 | |||||||||
53,300 | Wyeth | 2,654,340 | |||||||||
83,337,718 | |||||||||||
Machinery — 1.2% | |||||||||||
7,200 | Baker Hughes, Inc. | 489,384 | |||||||||
3,500 | BJ Services Co. | 109,585 | |||||||||
50,300 | Caterpillar, Inc. | 3,675,924 | |||||||||
3,600 | Halliburton Co. | 244,800 | |||||||||
4,519,693 | |||||||||||
Manufacturing — 0.3% | |||||||||||
6,000 | ITT Industries, Inc. | 315,000 | |||||||||
3,500 | Textron, Inc. | 308,385 | |||||||||
11,900 | United Technologies Corp. | 696,150 | |||||||||
1,319,535 | |||||||||||
Oil & Gas — 5.5% | |||||||||||
1,400 | Amerada Hess Corp. (a) | 193,634 | |||||||||
13,300 | Anadarko Petroleum Corp. | 1,318,828 |
See accompanying notes to the financial statements.
5
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Oil & Gas — continued | |||||||||||
7,000 | Apache Corp. | 468,440 | |||||||||
24,100 | Burlington Resources, Inc. | 2,173,338 | |||||||||
74,266 | ConocoPhillips | 4,527,255 | |||||||||
22,900 | Devon Energy Corp. | 1,342,627 | |||||||||
87,200 | Exxon Mobil Corp. | 5,177,064 | |||||||||
14,000 | Marathon Oil Corp. | 988,400 | |||||||||
35,600 | Occidental Petroleum Corp. | 3,258,824 | |||||||||
12,700 | Patterson-UTI Energy, Inc. | 349,885 | |||||||||
10,200 | Sunoco, Inc. (a) | 755,820 | |||||||||
20,554,115 | |||||||||||
Primary Process Industry — 0.2% | |||||||||||
12,600 | Air Products & Chemicals, Inc. | 808,416 | |||||||||
Retail Stores — 13.6% | |||||||||||
5,000 | Abercrombie & Fitch Co.-Class A | 336,600 | |||||||||
10,800 | Advance Auto Parts * | 446,580 | |||||||||
36,076 | Albertson's, Inc. | 917,774 | |||||||||
35,900 | Autonation, Inc. * (a) | 750,669 | |||||||||
4,600 | Autozone, Inc. * | 444,728 | |||||||||
56,100 | Bed Bath & Beyond, Inc. * | 2,021,844 | |||||||||
2,900 | Best Buy, Inc. | 156,194 | |||||||||
20,400 | Chico's FAS, Inc. * | 959,820 | |||||||||
13,100 | CVS Corp. | 371,123 | |||||||||
10,600 | Dollar General Corp. | 184,652 | |||||||||
19,500 | Federated Department Stores, Inc. | 1,385,280 | |||||||||
324,600 | Home Depot, Inc. | 13,681,890 | |||||||||
111,500 | Kroger Co. * | 2,234,460 | |||||||||
137,900 | Lowe's Cos., Inc. (a) | 9,402,022 | |||||||||
20,700 | Nordstrom, Inc. | 786,600 | |||||||||
28,400 | Office Depot, Inc. * | 1,013,312 | |||||||||
13,200 | Ross Stores, Inc. | 373,824 | |||||||||
102,000 | Safeway, Inc. (a) | 2,479,620 | |||||||||
27,700 | Supervalu, Inc. | 875,320 |
See accompanying notes to the financial statements.
6
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Retail Stores — continued | |||||||||||
6,600 | Target Corp. | 359,040 | |||||||||
8,800 | Tiffany & Co. | 326,744 | |||||||||
40,700 | TJX Cos., Inc. | 996,743 | |||||||||
113,000 | Walgreen Co. | 5,069,180 | |||||||||
114,100 | Wal-Mart Stores, Inc. | 5,175,576 | |||||||||
2,000 | Whole Foods Market, Inc. | 127,760 | |||||||||
50,877,355 | |||||||||||
Services — 3.0% | |||||||||||
33,000 | Darden Restaurants, Inc. | 1,384,020 | |||||||||
9,000 | Gannett Co., Inc. (a) | 559,440 | |||||||||
33,500 | Marriott International, Inc.-Class A | 2,291,400 | |||||||||
16,500 | McDonald's Corp. | 576,015 | |||||||||
24,100 | MGM Mirage * | 890,977 | |||||||||
6,300 | Moody's Corp. | 422,100 | |||||||||
19,000 | Omnicom Group | 1,516,580 | |||||||||
1,900 | Outback Steakhouse, Inc. | 79,439 | |||||||||
25,100 | Sysco Corp. | 755,259 | |||||||||
2,900 | Weight Watchers International, Inc. * (a) | 152,163 | |||||||||
20,900 | Wendy's International, Inc. | 1,210,110 | |||||||||
25,800 | Yum! Brands, Inc. (a) | 1,230,660 | |||||||||
11,068,163 | |||||||||||
Technology — 15.0% | |||||||||||
62,500 | Adobe Systems, Inc. | 2,413,750 | |||||||||
5,400 | Affiliated Computer Services, Inc.-Class A * (a) | 339,768 | |||||||||
10,500 | Agilent Technologies, Inc. * | 378,000 | |||||||||
24,900 | American Power Conversion Corp. | 508,707 | |||||||||
7,000 | Applera Corp.-Applied Biosystems Group | 197,890 | |||||||||
7,100 | Autodesk, Inc. | 267,315 | |||||||||
6,400 | BMC Software, Inc. * | 139,968 | |||||||||
11,500 | Boeing Co. | 835,935 | |||||||||
8,700 | Broadcom Corp.-Class A * | 392,283 | |||||||||
73,300 | Corning, Inc. * | 1,789,253 |
See accompanying notes to the financial statements.
7
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Technology — continued | |||||||||||
226,200 | Dell, Inc. * | 6,559,800 | |||||||||
4,300 | Diebold, Inc. | 172,000 | |||||||||
2,600 | DST Systems, Inc. * | 146,198 | |||||||||
72,200 | EMC Corp. * | 1,012,244 | |||||||||
4,600 | Emerson Electric Co. | 376,326 | |||||||||
66,400 | First Data Corp. | 2,996,632 | |||||||||
3,400 | General Dynamics Corp. | 419,118 | |||||||||
11,200 | Goodrich Corp. | 468,608 | |||||||||
3,800 | Google, Inc.-Class A * | 1,377,956 | |||||||||
309,300 | Hewlett-Packard Co. | 10,148,133 | |||||||||
440,000 | Intel Corp. | 9,064,000 | |||||||||
12,100 | Intuit, Inc. * | 587,818 | |||||||||
4,900 | Jabil Circuit, Inc. * | 185,465 | |||||||||
16,600 | Lexmark International, Inc. * | 781,694 | |||||||||
35,100 | Lockheed Martin Corp. | 2,557,737 | |||||||||
3,900 | Microchip Technology, Inc. | 137,280 | |||||||||
83,700 | Motorola, Inc. | 1,791,180 | |||||||||
5,300 | National Semiconductor Corp. | 148,665 | |||||||||
2,300 | Northrop Grumman Corp. | 147,430 | |||||||||
12,400 | Nvidia Corp. * (a) | 584,412 | |||||||||
123,500 | Oracle Corp. * | 1,533,870 | |||||||||
3,900 | Paychex, Inc. | 156,195 | |||||||||
20,100 | Qualcomm, Inc. | 948,921 | |||||||||
22,200 | Rockwell Automation, Inc. | 1,513,374 | |||||||||
7,700 | Rockwell Collins, Inc. | 409,255 | |||||||||
134,800 | Texas Instruments, Inc. | 4,023,780 | |||||||||
5,900 | W.W. Grainger, Inc. | 436,836 | |||||||||
55,947,796 | |||||||||||
Transportation — 1.1% | |||||||||||
31,400 | Burlington Northern Santa Fe Corp. | 2,469,296 | |||||||||
6,200 | C.H. Robinson Worldwide, Inc. | 277,884 | |||||||||
13,600 | JB Hunt Transport Services, Inc. (a) | 321,776 | |||||||||
10,400 | Union Pacific Corp. | 920,920 | |||||||||
3,989,876 |
See accompanying notes to the financial statements.
8
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares/ Par Value ($) | Description | Value ($) | |||||||||
Utility — 9.3% | |||||||||||
28,800 | AES Corp. (The) * | 498,240 | |||||||||
14,500 | Alltel Corp. | 915,675 | |||||||||
21,200 | American Electric Power Co., Inc. | 773,800 | |||||||||
361,187 | AT&T, Inc. | 9,965,149 | |||||||||
107,300 | BellSouth Corp. | 3,388,534 | |||||||||
19,500 | Centerpoint Energy, Inc. | 252,915 | |||||||||
13,800 | Constellation Energy Group, Inc. | 810,612 | |||||||||
12,600 | Duke Energy Corp. | 357,840 | |||||||||
19,000 | Edison International | 842,840 | |||||||||
36,600 | El Paso Corp. | 478,728 | |||||||||
4,700 | Entergy Corp. | 340,797 | |||||||||
39,400 | Exelon Corp. | 2,250,134 | |||||||||
11,700 | FirstEnergy Corp. | 597,636 | |||||||||
7,800 | FPL Group, Inc. | 327,054 | |||||||||
16,400 | Kinder Morgan, Inc. | 1,521,592 | |||||||||
18,100 | Nextel Partners, Inc.-Class A * | 507,886 | |||||||||
7,900 | Public Service Enterprise Group, Inc. | 548,181 | |||||||||
6,800 | Questar Corp. | 498,100 | |||||||||
11,400 | TXU Corp. | 597,246 | |||||||||
275,284 | Verizon Communications, Inc. | 9,277,071 | |||||||||
34,750,030 | |||||||||||
TOTAL COMMON STOCKS (COST $335,683,565) | 362,410,732 | ||||||||||
SHORT-TERM INVESTMENT(S) — 11.6% | |||||||||||
1,103,345 | American Beacon Money Market Select Fund (b) | 1,103,345 | |||||||||
3,585,870 | BGI Institutional Money Market Fund (b) | 3,585,870 | |||||||||
9,393,827 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $9,394,613 and an effective yield of 3.01%, collateralized by U.S. Treasury Bonds with a rate of 4.50%, maturity date of 02/15/36 and a market value, with accrued interest, of $9,581,704. | 9,393,827 |
See accompanying notes to the financial statements.
9
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares/ Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENT(S) — continued | |||||||||||
1,655,017 | Fortis Bank Eurodollar Term Fixed Rate Yankee Certificate of Deposit, 4.53%, due 03/23/06 (b) | 1,655,017 | |||||||||
5,516,724 | Goldman Sachs Group Inc. Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $5,517,429 and an effective yield of 4.60%, collateralized by various corporate debt obligations with an aggregate market value of $5,627,058. (b) | 5,516,724 | |||||||||
4,965,051 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $4,965,679 and an effective yield of 4.55%, collateralized by various U.S. government obligations with an aggregate market value of $5,093,460. (b) | 4,965,051 | |||||||||
1,103,345 | Merrimac Cash Series - Premium Class (b) | 1,103,345 | |||||||||
4,023,028 | Morgan Stanley & Co. Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $4,023,537 and an effective yield of 4.55%, collateralized by various U.S. government obligations with an aggregate market value of $4,103,513. (b) | 4,023,028 | |||||||||
3,310,034 | National Australia Bank Eurodollar Overnight Time Deposit, 4.56%, due 03/01/06 (b) | 3,310,034 | |||||||||
2,206,689 | Rabobank Nederland Eurodollar Overnight Time Deposit, 4.52%, due 03/01/06 (b) | 2,206,689 | |||||||||
1,655,017 | Royal Bank of Scotland Eurodollar Term Fixed Rate Yankee Certificate of Deposit, 4.55%, due 03/31/06 (b) | 1,655,017 | |||||||||
3,391,617 | Svenska Handlesbanken Eurodollar Overnight Time Deposit, 4.57%, due 03/01/06 (b) | 3,391,617 | |||||||||
1,500,000 | U.S. Treasury Bill, 3.81%, due 03/23/06 (c) (d) | 1,496,622 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $43,406,186) | 43,406,186 | ||||||||||
TOTAL INVESTMENTS — 108.6% (Cost $379,089,751) | 405,816,918 | ||||||||||
Other Assets and Liabilities (net) — (8.6%) | (32,095,458 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 373,721,460 |
See accompanying notes to the financial statements.
10
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
17 | S&P 500 | March 2006 | $ | 5,450,200 | $ | 38,215 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) All or a portion of this security represents investment of security lending collateral (Note 2).
(c) Rate shown represents yield-to-maturity.
(d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
See accompanying notes to the financial statements.
11
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $31,027,326 (cost $379,089,751) (Note 2) | $ | 405,816,918 | |||||
Cash | 125,515 | ||||||
Dividends and interest receivable | 527,180 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 11,142 | ||||||
Total assets | 406,480,755 | ||||||
Liabilities: | |||||||
Collateral on securities loaned (Note 2) | 32,515,737 | ||||||
Payable for Fund shares repurchased | 11,630 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 94,494 | ||||||
Shareholder service fee | 37,814 | ||||||
Trustees and Chief Compliance Officer fees | 456 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 49,300 | ||||||
Accrued expenses | 49,864 | ||||||
Total liabilities | 32,759,295 | ||||||
Net assets | $ | 373,721,460 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 359,826,006 | |||||
Accumulated undistributed net investment income | 2,430,916 | ||||||
Accumulated net realized loss | (15,300,844 | ) | |||||
Net unrealized appreciation | 26,765,382 | ||||||
$ | 373,721,460 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 224,097,066 | |||||
Class IV shares | $ | 149,624,394 | |||||
Shares outstanding: | |||||||
Class III | 18,001,266 | ||||||
Class IV | 12,012,033 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.45 | |||||
Class IV | $ | 12.46 |
See accompanying notes to the financial statements.
12
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends | $ | 7,541,438 | |||||
Interest (including securities lending income of $44,585) | 289,428 | ||||||
Total investment income | 7,830,866 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,193,570 | ||||||
Shareholder service fee – Class III (Note 3) | 328,535 | ||||||
Shareholder service fee – Class IV (Note 3) | 149,797 | ||||||
Custodian, fund accounting agent and transfer agent fees | 83,836 | ||||||
Audit and tax fees | 47,801 | ||||||
Legal fees | 7,826 | ||||||
Trustees fees and related expenses (Note 3) | 7,413 | ||||||
Registration fees | 3,896 | ||||||
Miscellaneous | 9,306 | ||||||
Total expenses | 1,831,980 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (149,075 | ) | |||||
Net expenses | 1,682,905 | ||||||
Net investment income (loss) | 6,147,961 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 20,095,010 | ||||||
Closed futures contracts | 109,830 | ||||||
Net realized gain (loss) | 20,204,840 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (7,011,960 | ) | |||||
Open futures contracts | (26,757 | ) | |||||
Net unrealized gain (loss) | (7,038,717 | ) | |||||
Net realized and unrealized gain (loss) | 13,166,123 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 19,314,084 |
See accompanying notes to the financial statements.
13
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 6,147,961 | $ | 5,723,625 | |||||||
Net realized gain (loss) | 20,204,840 | 37,458,622 | |||||||||
Change in net unrealized appreciation (depreciation) | (7,038,717 | ) | (26,591,641 | ) | |||||||
Net increase (decrease) in net assets from operations | 19,314,084 | 16,590,606 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,769,665 | ) | (3,121,454 | ) | |||||||
Class IV | (1,840,585 | ) | (2,764,012 | ) | |||||||
Total distributions from net investment income | (4,610,250 | ) | (5,885,466 | ) | |||||||
Net realized gains | |||||||||||
Class III | (4,972,971 | ) | (961,765 | ) | |||||||
Class IV | (3,238,317 | ) | (620,323 | ) | |||||||
Total distributions from net realized gains | (8,211,288 | ) | (1,582,088 | ) | |||||||
(12,821,538 | ) | (7,467,554 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (1,410,664 | ) | 24,518,394 | ||||||||
Class IV | 5,078,901 | (252,904,685 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 3,668,237 | (228,386,291 | ) | ||||||||
Total increase (decrease) in net assets | 10,160,783 | (219,263,239 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 363,560,677 | 582,823,916 | |||||||||
End of period (including accumulated undistributed net investment income of $2,430,916 and $918,893, respectively) | $ | 373,721,460 | $ | 363,560,677 |
See accompanying notes to the financial statements.
14
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 12.24 | $ | 11.76 | $ | 8.69 | $ | 11.23 | $ | 12.29 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.17 | 0.13 | 0.12 | 0.15 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.44 | 0.54 | 3.07 | (2.55 | ) | (1.07 | ) | ||||||||||||||||
Total from investment operations | 0.64 | 0.71 | 3.20 | (2.43 | ) | (0.92 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.15 | ) | (0.18 | ) | (0.13 | ) | (0.11 | ) | (0.14 | ) | |||||||||||||
From net realized gains | (0.28 | ) | (0.05 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.43 | ) | (0.23 | ) | (0.13 | ) | (0.11 | ) | (0.14 | ) | |||||||||||||
Net asset value, end of period | $ | 12.45 | $ | 12.24 | $ | 11.76 | $ | 8.69 | $ | 11.23 | |||||||||||||
Total Return(a) | 5.40 | % | 6.16 | % | 37.06 | % | (21.69 | )% | (7.53 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 224,097 | $ | 221,661 | $ | 188,370 | $ | 163,025 | $ | 133,203 | |||||||||||||
Net expenses to average daily net assets | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||
Net investment income to average daily net assets | 1.68 | % | 1.43 | % | 1.26 | % | 1.26 | % | 1.24 | % | |||||||||||||
Portfolio turnover rate | 63 | % | 68 | % | 63 | % | 62 | % | 85 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | % | 0.04 | % | 0.04 | % | 0.04 | % | 0.03 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
15
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 12.25 | $ | 11.76 | $ | 8.69 | $ | 11.23 | $ | 12.32 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.21 | 0.16 | 0.13 | 0.13 | 0.10 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.44 | 0.56 | 3.07 | (2.55 | ) | (1.08 | ) | ||||||||||||||||
Total from investment operations | 0.65 | 0.72 | 3.20 | (2.42 | ) | (0.98 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.16 | ) | (0.18 | ) | (0.13 | ) | (0.12 | ) | (0.11 | ) | |||||||||||||
From net realized gains | (0.28 | ) | (0.05 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.44 | ) | (0.23 | ) | (0.13 | ) | (0.12 | ) | (0.11 | ) | |||||||||||||
Net asset value, end of period | $ | 12.46 | $ | 12.25 | $ | 11.76 | $ | 8.69 | $ | 11.23 | |||||||||||||
Total Return(b) | 5.44 | % | 6.25 | % | 37.12 | % | (21.65 | )% | (8.00 | )%** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 149,624 | $ | 141,900 | $ | 394,454 | $ | 308,001 | $ | 248,095 | |||||||||||||
Net expenses to average daily net assets | 0.44 | % | 0.44 | % | 0.44 | % | 0.44 | % | 0.44 | %* | |||||||||||||
Net investment income to average daily net assets | 1.72 | % | 1.37 | % | 1.31 | % | 1.35 | % | 1.37 | %* | |||||||||||||
Portfolio turnover rate | 63 | % | 68 | % | 63 | % | 62 | % | 85 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | % | 0.04 | % | 0.04 | % | 0.04 | % | 0.04 | %* |
(a) Period from July 2, 2001 (commencement of operations) through February 28, 2002.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2002.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return. The Fund seeks to achieve this objective primarily through investment in U.S. equity securities, excluding those companies that are tobacco-producing issuers (as listed within the Tobacco Producing Issuer industry classification maintained by Ford Investor Services). The Fund's benchmark is the S&P 500 Index.
Throughout the year ended February 28, 2006, the Fund offered two classes of shares: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested in the Fund and with GMO, as more fully outlined in the Fund's prospectus.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction.
17
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based
18
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $31,027,326, collateralized by cash in the amount of $32,515,737, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
19
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $11,064,022 and $5,885,466, respectively and long-term capital gains – $1,757,516 and $1,582,088, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $2,430,917 of undistributed ordinary income.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $11,651,632 expiring in 2011. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $706,692.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 381,994,056 | $ | 37,718,678 | $ | (13,895,816 | ) | $ | 23,822,862 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | (25,688 | ) | $ | 25,688 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
20
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.105% for Class IV shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.33% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $3,945 and $2,250, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $221,986,745 and $225,897,347, respectively.
21
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 53.8% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 0.9% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 777,388 | $ | 9,327,972 | 2,042,934 | $ | 23,836,926 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 583,997 | 6,995,119 | 291,187 | 3,423,015 | |||||||||||||||
Shares repurchased | (1,470,266 | ) | (17,733,755 | ) | (237,049 | ) | (2,741,547 | ) | |||||||||||
Net increase (decrease) | (108,881 | ) | $ | (1,410,664 | ) | 2,097,072 | $ | 24,518,394 |
22
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 423,945 | 5,078,901 | 288,504 | 3,384,335 | |||||||||||||||
Shares repurchased | — | — | (22,237,483 | ) | (256,289,020 | ) | |||||||||||||
Net increase (decrease) | 423,945 | $ | 5,078,901 | (21,948,979 | ) | $ | (252,904,685 | ) |
23
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Tobacco-Free Core Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tobacco-Free Core Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
24
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 1,051.60 | $ | 2.44 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.41 | $ | 2.41 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,051.60 | $ | 2.24 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.61 | $ | 2.21 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
25
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $1,757,516 from long-term capital gains.
For taxable, non-corporate shareholders, 43.88% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 73.92% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income and qualified short-term captial gains with respect to its taxable year ended February 28, 2006, $540,479 and $0, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
26
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
27
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
28
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
29
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003– present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer,October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
30
GMO Taiwan Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Taiwan Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Taiwan Fund returned +9.1% for the fiscal year ended February 28, 2006, as compared to +6.2% for the MSCI Taiwan Index. Consistent with the Fund's investment objectives and policies, throughout the period the Fund was invested substantially in emerging market equities tied economically to Taiwan.
Good stock selection in the information technology sector accounted for the outperformance. Stock selection in the financial and industrial sectors detracted from performance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .15% on the purchase and .45% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted.
GMO Taiwan Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.3 | % | |||||
Rights and Warrants | 0.0 | ||||||
Short-Term Investment(s) | 1.5 | ||||||
Other | 0.2 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments | ||||||
Information Technology | 62.7 | % | |||||
Materials | 11.5 | ||||||
Financials | 10.4 | ||||||
Telecommunication Services | 5.7 | ||||||
Industrials | 5.0 | ||||||
Consumer Discretionary | 3.1 | ||||||
Energy | 1.4 | ||||||
Consumer Staples | 0.2 | ||||||
100.0 | % |
1
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.3% | |||||||||||
Taiwan — 98.3% | |||||||||||
1,010,000 | Accton Technology Corp * | 529,867 | |||||||||
4,518,746 | Acer Inc | 9,998,668 | |||||||||
2,358,000 | Arima Computer Corp * | 539,294 | |||||||||
3,055,761 | Asia Cement Corp | 2,015,255 | |||||||||
67,385 | Asia Optical Co Inc | 300,377 | |||||||||
10,016,490 | Asustek Computer Inc | 28,229,121 | |||||||||
3,000,450 | AU Optronics Corp | 4,793,887 | |||||||||
61,000 | Catcher Technology Co | 477,579 | |||||||||
2,846,180 | Cheng Loong Corp | 887,538 | |||||||||
7,702,000 | China Bills Finance Corp | 2,510,315 | |||||||||
16,858,037 | China Development Financial Holding Corp * | 6,454,840 | |||||||||
969,000 | China Manmade Fibers * | 239,042 | |||||||||
2,246,677 | Chinatrust Financial Holding Co | 1,884,452 | |||||||||
1,850,770 | Chung Hung Steel Corp | 597,188 | |||||||||
1,389,200 | Chung HWA Pulp Corp | 515,687 | |||||||||
1,223,000 | Chunghwa Picture Tubes Ltd | 317,602 | |||||||||
4,581,000 | Chunghwa Telecom Co Ltd | 8,339,946 | |||||||||
5,300 | Chunghwa Telecom Co Ltd ADR | 100,170 | |||||||||
1,981,122 | Compal Electronics Inc | 1,842,757 | |||||||||
1,264,000 | Compeq Manufacturing Co Ltd * | 569,099 | |||||||||
890,000 | Continental Engineering Corp | 375,094 | |||||||||
378,000 | Coretronic Corp | 696,581 | |||||||||
2,965,203 | Delta Electronics Inc | 7,058,555 | |||||||||
634,000 | Elitegroup Computer Systems * | 402,055 | |||||||||
3,000,500 | Evergreen Marine Corp | 1,942,519 | |||||||||
3,570,772 | Far Eastern International Bank | 1,558,813 | |||||||||
4,108,573 | Far Eastern Textile Co Ltd | 3,023,952 | |||||||||
1,053,000 | Far Eastone Telecommunications Co Ltd | 1,288,469 | |||||||||
4,782,750 | Federal Corp | 2,031,348 | |||||||||
4,576,592 | Formosa Chemicals & Fibre Co | 7,194,926 | |||||||||
2,238,755 | Formosa Petrochemical Corp | 3,995,354 | |||||||||
6,113,917 | Formosa Plastics Corp | 9,674,687 |
See accompanying notes to the financial statements.
2
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
3,213,000 | Formosa Taffeta Co Ltd | 1,654,348 | |||||||||
147,000 | Foxconn Technology Co Ltd | 712,375 | |||||||||
2,328,000 | Fubon Financial Holding Co Ltd | 2,079,622 | |||||||||
108,000 | Giant Manufacturing Inc | 201,951 | |||||||||
1,777,862 | Gigabyte Technology Co Ltd | 1,497,693 | |||||||||
4,962,080 | Goldsun Development & Construction Co Ltd * | 1,278,377 | |||||||||
2,593,000 | Grand Pacific Petrochem * | 596,053 | |||||||||
536,760 | High Tech Computer Corp | 11,497,672 | |||||||||
4,113,396 | Hon Hai Precision Industry Co Ltd | 26,010,104 | |||||||||
123,000 | Hotai Motor Company Ltd | 298,674 | |||||||||
1,271,395 | Hua Nan Financial Holdings Co Ltd | 897,368 | |||||||||
7,092,453 | Inventec Co Ltd | 4,323,707 | |||||||||
6,553,920 | KGI Securities Co Ltd | 2,021,565 | |||||||||
2,727,702 | Kinpo Electronics | 1,046,009 | |||||||||
86,000 | Largan Precision Co Ltd | 1,600,134 | |||||||||
496,000 | Lee Chang Yung Chem Industries | 349,212 | |||||||||
165,665 | Les Enphants Co Ltd | 102,173 | |||||||||
2,462,040 | Lite-On Technology Corp | 3,317,997 | |||||||||
4,725,000 | Macronix International * | 611,343 | |||||||||
510,325 | MediaTek Inc | 5,223,281 | |||||||||
7,251,000 | Mega Financial Holdings Co Ltd | 5,500,061 | |||||||||
1,802,500 | Micro-Star International Co Ltd | 1,019,966 | |||||||||
2,322,252 | Mitac International Corp | 3,264,635 | |||||||||
297,000 | Nien Hsing Textile Co Ltd | 192,106 | |||||||||
193,000 | Nien Made Enterprise | 245,065 | |||||||||
677,587 | Novatek Microelectronics | 4,670,818 | |||||||||
1,396,690 | Oriental Union Chemical | 901,056 | |||||||||
342,000 | Phoenix Precision Technology Corp | 688,110 | |||||||||
104,000 | Powertech Technology Inc | 333,754 | |||||||||
607,520 | Premier Image Technology Corp | 755,043 | |||||||||
1,615,555 | Quanta Computer Inc | 2,460,943 | |||||||||
1,959,300 | Realtek Semiconductor Corp | 2,148,368 | |||||||||
5,562,000 | Sampo Corp * | 684,998 | |||||||||
1,078,588 | Shin Kong Financial Holdings | 932,348 | |||||||||
1,705,200 | Silicon Integrated Systems * | 877,426 |
See accompanying notes to the financial statements.
3
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
1,173,831 | Siliconware Precision Industries Co | 1,487,820 | |||||||||
3,897,473 | Sinopac Holdings Co | 2,061,798 | |||||||||
2,570,516 | Systex Corp | 705,911 | |||||||||
1,003,000 | Taichung Commercial Bank * | 206,349 | |||||||||
3,911,634 | Taishin Financial Holdings Co Ltd | 2,376,489 | |||||||||
7,200,000 | Taiwan Cellular Corp | 6,644,067 | |||||||||
8,035,205 | Taiwan Cement Corp | 6,055,356 | |||||||||
159,000 | Taiwan FU Hsing Ind Co Ltd | 172,252 | |||||||||
24,744,891 | Taiwan Semiconductor Manufacturing Co Ltd | 45,851,233 | |||||||||
235,409 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 2,290,530 | |||||||||
3,235,000 | Taiwan TEA Corp * | 484,924 | |||||||||
3,104,000 | Tatung Co * | 763,811 | |||||||||
285,720 | Tsann Kuen Enterprises Co Ltd | 498,706 | |||||||||
1,060,000 | TSRC Corp | 643,640 | |||||||||
704,000 | Tung Ho Steel Enterprise | 466,000 | |||||||||
1,313,000 | U-Ming Marine Transport Co | 1,321,606 | |||||||||
143,000 | Waffer Technology Co Ltd | 137,928 | |||||||||
9,356,578 | Walsin Lihwa Corp | 3,042,903 | |||||||||
2,447,463 | Wan Hai Lines Ltd | 1,503,707 | |||||||||
4,167,000 | Waterland Financial Holdings | 1,356,315 | |||||||||
1,364,090 | Wintek Corp | 1,918,453 | |||||||||
1,276,330 | WUS Printed Circuit Co Ltd | 523,279 | |||||||||
877,296 | Ya Hsin Industrial Co Ltd | 806,835 | |||||||||
4,118,252 | Yang Ming Marine Transport | 2,520,243 | |||||||||
3,780,000 | Yieh Phui Enterprise | 1,541,692 | |||||||||
299,475 | Yulon Motor Co Ltd | 307,655 | |||||||||
168,720 | Zyxel Communications Corp | 267,456 | |||||||||
286,336,350 | |||||||||||
TOTAL COMMON STOCKS (COST $246,788,895) | 286,336,350 |
See accompanying notes to the financial statements.
4
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Taiwan — 0.0% | |||||||||||
7,621 | Waffer Technology Corp Rights, Expires 03/22/06 * | 387 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $1,397) | 387 | ||||||||||
SHORT-TERM INVESTMENT(S) — 1.5% | |||||||||||
4,200,000 | Dresdner Bank AG Time Deposit, 4.55%, due 03/01/06 | 4,200,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $4,200,000) | 4,200,000 | ||||||||||
TOTAL INVESTMENTS — 99.8% (Cost $250,990,292) | 290,536,737 | ||||||||||
Other Assets and Liabilities (net) — 0.2% | 713,736 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 291,250,473 |
Notes to Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
As of February 28, 2006, 97.3% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
5
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $250,990,292) (Note 2) | $ | 290,536,737 | |||||
Cash | 29,896 | ||||||
Foreign currency, at value (cost $1,078,584) (Note 2) | 1,075,981 | ||||||
Interest receivable | 531 | ||||||
Total assets | 291,643,145 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 2,486 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 186,602 | ||||||
Shareholder service fee | 34,557 | ||||||
Trustees and Chief Compliance Officer fees | 665 | ||||||
Accrued expenses | 168,362 | ||||||
Total liabilities | 392,672 | ||||||
Net assets | $ | 291,250,473 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 245,933,613 | |||||
Distributions in excess of net investment income | (241,192 | ) | |||||
Accumulated net realized gain | 6,014,210 | ||||||
Net unrealized appreciation | 39,543,842 | ||||||
$ | 291,250,473 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 291,250,473 | |||||
Shares outstanding: | |||||||
Class III | 10,276,489 | ||||||
Net asset value per share: | |||||||
Class III | $ | 28.34 |
See accompanying notes to the financial statements.
6
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $2,019,057) | $ | 8,262,902 | |||||
Interest | 92,602 | ||||||
Total investment income | 8,355,504 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,098,026 | ||||||
Shareholder service fee – Class III (Note 3) | 388,523 | ||||||
Custodian and fund accounting agent fees | 719,736 | ||||||
Transfer agent fees | 27,798 | ||||||
Audit and tax fees | 56,503 | ||||||
Legal fees | 6,741 | ||||||
Trustees fees and related expenses (Note 3) | 4,845 | ||||||
Miscellaneous | 8,310 | ||||||
Total expenses | 3,310,482 | ||||||
Net investment income (loss) | 5,045,022 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 11,198,207 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (346,710 | ) | |||||
Net realized gain (loss) | 10,851,497 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 8,763,713 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (2,689 | ) | |||||
Net unrealized gain (loss) | 8,761,024 | ||||||
Net realized and unrealized gain (loss) | 19,612,521 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 24,657,543 |
See accompanying notes to the financial statements.
7
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,045,022 | $ | 828,376 | |||||||
Net realized gain (loss) | 10,851,497 | (1,500,671 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 8,761,024 | (4,257,920 | ) | ||||||||
Net increase (decrease) in net assets from operations | 24,657,543 | (4,930,215 | ) | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (5,967,696 | ) | — | ||||||||
Net realized gains | |||||||||||
Class III | (2,977,161 | ) | (9,930,750 | ) | |||||||
(8,944,857 | ) | (9,930,750 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 50,702,181 | 57,688,207 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 369,510 | 325,785 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 51,071,691 | 58,013,992 | |||||||||
Total increase (decrease) in net assets | 66,784,377 | 43,153,027 | |||||||||
Net assets: | |||||||||||
Beginning of period | 224,466,096 | 181,313,069 | |||||||||
End of period (including distributions in excess of net investment income of $241,192 and accumulated undistributed net investment income of $205,510, respectively) | $ | 291,250,473 | $ | 224,466,096 |
See accompanying notes to the financial statements.
8
GMO Taiwan Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||
2006 | 2005 | 2004 | 2003(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 26.79 | $ | 29.67 | $ | 20.28 | $ | 20.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.52 | 0.13 | (0.10 | ) | (0.12 | ) | |||||||||||||
Net realized and unrealized gain (loss) | 1.91 | (1.45 | ) | 10.03 | 0.40 | ||||||||||||||
Total from investment operations | 2.43 | (1.32 | ) | 9.93 | 0.28 | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.59 | ) | — | (0.02 | ) | — | |||||||||||||
From net realized gains | (0.29 | ) | (1.56 | ) | (0.52 | ) | — | ||||||||||||
Total distributions | (0.88 | ) | (1.56 | ) | (0.54 | ) | — | ||||||||||||
Net asset value, end of period | $ | 28.34 | $ | 26.79 | $ | 29.67 | $ | 20.28 | |||||||||||
Total Return(b) | 9.13 | % | (3.82 | )% | 49.53 | % | 1.40 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 291,250 | $ | 224,466 | $ | 181,313 | $ | 41,167 | |||||||||||
Net expenses to average daily net assets | 1.28 | % | 1.34 | % | 1.36 | % | 1.76 | %* | |||||||||||
Net investment income to average daily net assets | 1.95 | % | 0.53 | % | (0.40 | )% | (1.43 | )%* | |||||||||||
Portfolio turnover rate | 31 | % | 88 | % | 86 | % | 50 | %** | |||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.04 | $ | 0.05 | $ | 0.04 | $ | 0.01 |
(a) Period from October 4, 2002 (commencement of operations) through February 28, 2003.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholders.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Taiwan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities traded in the Taiwan securities markets. The Fund's benchmark is the MSCI Taiwan Index.
Shares of the Fund are not publicly offered and principally available to other GMO funds and certain accredited investors.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a results, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
10
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the
11
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
12
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. As of February 28, 2006, the Fund did not hold any indexed securities.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
13
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund is currently subject to Taiwan security sale transaction tax of 0.3% on equities and 0.1% on mutual fund shares of the transaction amount.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income - $5,967,696 and $6,098,201, respectively and long-term capital gains - $2,977,161 and $3,832,549, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $945,027 and $5,510,824 of undistributed ordinary income and undistributed long-term capital gains, respectively.
14
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 251,673,124 | $ | 54,173,878 | $ | (15,310,265 | ) | $ | 38,863,613 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 475,972 | $ | (475,972 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Taiwanese companies typically declare dividends in the Fund's third fiscal quarter of each year. As a result, the Fund receives substantially less dividend income in the first half of its year.
Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received.
15
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases of Fund shares were 0.15% of the amount invested. In the case of cash redemptions, the fee is currently 0.45% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $139,679 and $136,441 in purchase premiums and $229,831 and $189,344 in redemption fees, respectively. There is no prem ium for reinvested distributions or in-kind transactions.
Investment risks
Investments in emerging countries, such as Taiwan, present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The Taiwanese markets are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. The Fund may concentrate investments in the securities of a small number of issuers. As a result, the value of the Fund's shares can be expected to change in light of factors affecting those issuers and may fluctuate more widely than the value of shares of a portfolio that invests in a broader range of securities.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for class III shares.
The Fund's portion of the fees paid by the Trust to the independent Trustees and the Chief Compliance Officer ("CCO") during the year ended February 28, 2006 was $2,921 and $1,819, respectively. No remuneration was paid to any other officer of the Trust.
16
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
Cost of purchase and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $119,031,367 and $77,513,341, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 98.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 100.0% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,548,047 | $ | 94,235,742 | 4,079,726 | $ | 101,952,796 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 321,086 | 8,944,857 | 412,923 | 9,885,373 | |||||||||||||||
Shares repurchased | (1,970,363 | ) | (52,478,418 | ) | (2,226,255 | ) | (54,149,962 | ) | |||||||||||
Purchase premiums and redemption fees | — | 369,510 | — | 325,785 | |||||||||||||||
Net increase (decrease) | 1,898,770 | $ | 51,071,691 | 2,266,394 | $ | 58,013,992 |
17
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Taiwan Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Taiwan Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight B oard (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
18
GMO Taiwan Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 1.30 | % | $ | 1,000.00 | $ | 1,126.60 | $ | 6.85 | ||||||||||
2) Hypothetical | 1.30 | % | $ | 1,000.00 | $ | 1,018.35 | $ | 6.51 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
19
GMO Taiwan Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Year Ended February 28, 2006
The Fund's distributions to shareholders include $2,977,161 from long-term capital gains.
During the year ended February 28, 2006, the Fund paid foreign taxes of $2,019,057 and recognized foreign source income of $10,281,959.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $0 or if determined to be different, the qualified interest income of such year.
20
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
21
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
22
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
23
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
24
GMO Global Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Global Growth Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Global Growth Fund returned +13.6% for the fiscal year ended February 28, 2006, as compared to +11.7% for the S&P/Citigroup PMI World Growth Style Index. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested throughout the period in equity securities with higher than average expected growth drawn from the world's developed markets.
Stock selection had a positive impact on performance relative to the benchmark. Among the Fund's holdings with the largest contribution to relative returns were Apple Computer Inc., Mitsubishi Corp of Japan, and two oil companies – Canadian Natural Resources and OMV of Austria. Less successful holdings included Toyota Motor, Pfizer, and Dell.
The Fund benefited from country selection. Overweighting Canada and Norway and underweighting the U.S. made the largest contributions.
Industry weightings contributed to relative returns in most sectors, particularly overweights in energy and utility stocks and underweights in consumer staples and information technology stocks.
Currency forwards had a negative impact. The Fund's underweight position in the U.S. dollar and overweight in the Japanese yen both detracted from returns, partly mitigated by underweighting in the British pound and the euro.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .30% on the purchase and .30% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Global Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.1 | % | |||||
Preferred Stocks | 0.3 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Futures | 0.0 | ||||||
Short-Term Investment(s) | 2.1 | ||||||
Other | (0.6 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United States | 43.8 | % | |||||
Japan | 14.3 | ||||||
United Kingdom | 7.5 | ||||||
Canada | 5.9 | ||||||
Switzerland | 3.9 | ||||||
Australia | 2.8 | ||||||
France | 2.6 | ||||||
Belgium | 2.2 | ||||||
Sweden | 2.0 | ||||||
Netherlands | 2.0 | ||||||
Italy | 1.9 | ||||||
Spain | 1.8 | ||||||
Singapore | 1.5 | ||||||
Austria | 1.5 | ||||||
Norway | 1.4 | ||||||
Hong Kong | 1.3 | ||||||
Germany | 1.2 | ||||||
Ireland | 1.2 | ||||||
Finland | 1.0 | ||||||
Greece | 0.2 | ||||||
100.0 | % |
1
GMO Global Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 19.6 | % | |||||
Health Care | 17.5 | ||||||
Energy | 16.6 | ||||||
Information Technology | 10.5 | ||||||
Consumer Discretionary | 9.2 | ||||||
Industrials | 9.2 | ||||||
Consumer Staples | 5.8 | ||||||
Utilities | 5.3 | ||||||
Materials | 3.6 | ||||||
Telecommunication Services | 2.7 | ||||||
100.0 | % |
2
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) |
COMMON STOCKS — 98.1% | |||||||||||
Australia — 2.8% | |||||||||||
5,119 | Australia and New Zealand Banking Group Ltd | 97,359 | |||||||||
13,680 | BHP Billiton Ltd | 246,162 | |||||||||
3,176 | Commonwealth Bank of Australia | 105,431 | |||||||||
2,610 | CSL Ltd | 101,740 | |||||||||
2,798 | Macquarie Bank Ltd | 132,346 | |||||||||
3,586 | QBE Insurance Group Ltd | 54,854 | |||||||||
12,276 | Rinker Group Ltd | 161,277 | |||||||||
1,482 | Rio Tinto Ltd | 77,642 | |||||||||
5,845 | Suncorp-Metway Ltd | 88,493 | |||||||||
31,229 | Telstra Corp Ltd | 88,864 | |||||||||
5,372 | Westpac Banking Corp | 93,811 | |||||||||
6,749 | Woodside Petroleum Ltd | 202,594 | |||||||||
1,450,573 | |||||||||||
Austria — 1.5% | |||||||||||
888 | Erste Bank Der Oesterreichischen Sparkassen AG | 53,979 | |||||||||
254 | Oesterreichische Elektrizitaetswirtschafts AG Class A | 118,136 | |||||||||
6,688 | OMV AG | 414,785 | |||||||||
8,257 | Telekom Austria AG | 188,865 | |||||||||
775,765 | |||||||||||
Belgium — 2.2% | |||||||||||
539 | Colruyt SA | 77,648 | |||||||||
7,228 | Dexia | 179,515 | |||||||||
12,442 | Fortis | 443,200 | |||||||||
1,226 | Inbev | 56,676 | |||||||||
1,394 | KBC Groep NV | 145,529 | |||||||||
5,054 | UCB SA | 239,391 | |||||||||
1,141,959 |
See accompanying notes to the financial statements.
3
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Canada — 5.8% | |||||||||||
900 | Bank of Montreal | 54,620 | |||||||||
6,800 | Bombardier Inc * | 17,472 | |||||||||
2,200 | Cameco Corp | 81,790 | |||||||||
5,200 | Canadian National Railway Co | 243,425 | |||||||||
10,800 | Canadian Natural Resources | 590,059 | |||||||||
600 | Canadian Pacific Railway Ltd | 30,727 | |||||||||
4,200 | EnCana Corp | 173,699 | |||||||||
2,400 | Husky Energy Inc | 146,900 | |||||||||
3,800 | Imperial Oil Ltd | 366,475 | |||||||||
3,400 | Nexen Inc | 177,771 | |||||||||
6,000 | Petro - Canada | 274,856 | |||||||||
800 | Potash Corporation of Saskatchewan Inc | 76,723 | |||||||||
2,500 | Rogers Communications Inc | 100,092 | |||||||||
2,900 | Royal Bank of Canada | 242,319 | |||||||||
1,500 | Suncor Energy Inc | 112,191 | |||||||||
3,300 | Talisman Energy Inc | 173,385 | |||||||||
1,900 | Teck Corp Class B | 118,787 | |||||||||
1,800 | Telus Corp | 70,815 | |||||||||
3,052,106 | |||||||||||
Finland — 1.0% | |||||||||||
8,600 | Fortum Oyj | 208,060 | |||||||||
13,150 | Nokia Oyj | 244,695 | |||||||||
2,800 | Sampo Oyj Class A | 56,120 | |||||||||
508,875 | |||||||||||
France — 2.6% | |||||||||||
1,371 | BNP Paribas | 126,882 | |||||||||
2,692 | Peugeot SA | 156,937 | |||||||||
6,270 | Sanofi-Aventis | 533,735 | |||||||||
2,574 | Suez SA | 94,538 | |||||||||
1,531 | Total SA | 385,045 | |||||||||
566 | Vinci SA | 52,245 | |||||||||
1,349,382 |
See accompanying notes to the financial statements.
4
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — 0.9% | |||||||||||
1,563 | Altana AG | 83,944 | |||||||||
603 | RWE AG | 51,851 | |||||||||
2,419 | Schering AG | 173,502 | |||||||||
2,044 | Volkswagen AG | 143,145 | |||||||||
452,442 | |||||||||||
Greece — 0.2% | |||||||||||
1,805 | National Bank of Greece SA | 92,725 | |||||||||
Hong Kong — 1.2% | |||||||||||
29,000 | CLP Holdings Ltd | 165,802 | |||||||||
10,000 | Esprit Holdings Ltd | 76,479 | |||||||||
90,000 | Hong Kong & China Gas | 215,078 | |||||||||
34,500 | Hong Kong Electric Holdings Ltd | 158,862 | |||||||||
20,000 | Li & Fung Ltd | 40,280 | |||||||||
656,501 | |||||||||||
Ireland — 1.1% | |||||||||||
5,452 | Allied Irish Banks Plc | 130,244 | |||||||||
6,896 | Anglo Irish Bank Corp | 113,069 | |||||||||
15,676 | Bank of Ireland | 278,879 | |||||||||
1,984 | CRH Plc | 65,079 | |||||||||
587,271 | |||||||||||
Italy — 1.9% | |||||||||||
28,999 | Enel SPA | 241,283 | |||||||||
26,473 | ENI SPA | 756,813 | |||||||||
998,096 | |||||||||||
Japan — 14.1% | |||||||||||
1,900 | Aeon Co Ltd | 45,328 | |||||||||
2,100 | Astellas Pharma Inc | 81,071 | |||||||||
7,000 | Bank of Yokohama | 56,448 | |||||||||
1,100 | Benesse Corp | 37,723 |
See accompanying notes to the financial statements.
5
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
1,800 | Canon Inc | 112,385 | |||||||||
6,000 | Chiba Bank | 50,538 | |||||||||
8,800 | Chubu Electric Power Co Inc | 233,262 | |||||||||
2,400 | Daito Trust Construction Co Ltd | 112,388 | |||||||||
8,000 | Daiwa Securities Co Ltd | 94,977 | |||||||||
2,500 | Denso Corp | 91,201 | |||||||||
10 | East Japan Railway Co | 71,139 | |||||||||
4,200 | Eisai Co Ltd | 194,239 | |||||||||
17,000 | Fuji Heavy Industries Ltd | 92,118 | |||||||||
2,300 | Hitachi Chemical Co Ltd | 63,798 | |||||||||
17,000 | Hokuhoku Financial Group Inc | 73,177 | |||||||||
2,600 | Hoya Corp | 103,153 | |||||||||
22,000 | Itochu Corp | 182,853 | |||||||||
12 | Japan Tobacco Inc | 206,164 | |||||||||
2,000 | Kaneka Corp | 26,322 | |||||||||
2,000 | Kao Corp | 54,325 | |||||||||
200 | Keyence Corp | 54,635 | |||||||||
4,000 | Komatsu Ltd | 70,938 | |||||||||
39,000 | Marubeni Corp | 193,427 | |||||||||
5,000 | Matsushita Electric Industrial Co Ltd | 105,147 | |||||||||
28,000 | Mazda Motor Corp | 159,243 | |||||||||
26,100 | Mitsubishi Corp | 605,550 | |||||||||
24 | Mitsubishi Tokyo Financial Group Inc | 356,336 | |||||||||
19,000 | Mitsui & Co | 259,948 | |||||||||
3,000 | Mitsui Fudosan Co Ltd | 62,317 | |||||||||
13,000 | Mitsui OSK Lines Ltd | 94,789 | |||||||||
700 | Nidec Corp | 55,524 | |||||||||
3,000 | Nikko Cordial Corp | 47,227 | |||||||||
35,000 | Nippon Steel Corp | 139,486 | |||||||||
24 | Nippon Telegraph & Telephone Corp | 103,630 | |||||||||
3,200 | Nissin Food Products Co Ltd | 97,619 | |||||||||
3,900 | Nomura Securities Co Ltd | 74,424 | |||||||||
3,000 | Olympus Optical Co Ltd | 86,375 | |||||||||
1,000 | ORIX Corp | 263,271 |
See accompanying notes to the financial statements.
6
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
39,000 | Osaka Gas Co Ltd | 149,318 | |||||||||
51 | Rakuten Inc | 43,989 | |||||||||
2,000 | Seven & I Holdings Co Ltd | 81,810 | |||||||||
1,000 | Shimano Inc | 28,836 | |||||||||
3,200 | Shin-Etsu Chemical Co Ltd | 170,377 | |||||||||
4,700 | Softbank Corp. | 143,722 | |||||||||
19,000 | Sumitomo Corp | 256,683 | |||||||||
35,000 | Sumitomo Metal Industries Ltd | 155,381 | |||||||||
13 | Sumitomo Mitsui Financial Group Inc | 141,978 | |||||||||
3,000 | Sumitomo Realty & Development Co Ltd | 69,721 | |||||||||
10,200 | Takeda Pharmaceutical Co Ltd | 568,186 | |||||||||
10,000 | Teijin Ltd | 67,477 | |||||||||
1,400 | Terumo Corp | 42,741 | |||||||||
7,000 | Tokyu Land Corp | 61,057 | |||||||||
9,000 | TonenGeneral Sekiyu KK | 89,953 | |||||||||
6,200 | Toyota Motor Corp | 330,506 | |||||||||
4,000 | Yakult Honsha Co Ltd | 92,486 | |||||||||
400 | Yamada Denki Co Ltd | 42,854 | |||||||||
7,349,570 | |||||||||||
Netherlands — 2.0% | |||||||||||
10,074 | ABN Amro Holdings NV | 293,564 | |||||||||
2,540 | Heineken NV | 95,642 | |||||||||
16,915 | ING Groep NV | 635,766 | |||||||||
1,024,972 | |||||||||||
Norway — 1.4% | |||||||||||
5,700 | DnB NOR ASA | 69,159 | |||||||||
1,760 | Norsk Hydro ASA | 206,154 | |||||||||
1,750 | Orkla ASA | 76,279 | |||||||||
14,400 | Statoil ASA | 368,766 | |||||||||
720,358 |
See accompanying notes to the financial statements.
7
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Singapore — 1.5% | |||||||||||
3,000 | Keppel Corp Ltd | 25,782 | |||||||||
129,000 | Singapore Technologies Engineering Ltd | 241,081 | |||||||||
320,860 | Singapore Telecommunications | 514,365 | |||||||||
781,228 | |||||||||||
Spain — 1.7% | |||||||||||
726 | Acciona SA | 101,208 | |||||||||
3,716 | Acesa Infraestructuras SA | 96,218 | |||||||||
2,406 | ACS Actividades de Construccion y Servicios SA | 89,728 | |||||||||
1,608 | Antena 3 de Television | 42,654 | |||||||||
1,310 | Grupo Ferrovial SA | 98,072 | |||||||||
8,238 | Iberdrola SA | 259,827 | |||||||||
3,270 | Indra Sistemas SA | 65,072 | |||||||||
3,013 | Sacyr Vallehermoso SA | 84,713 | |||||||||
2,017 | Union Fenosa SA | 75,690 | |||||||||
913,182 | |||||||||||
Sweden — 2.0% | |||||||||||
3,400 | Atlas Copco AB Class A | 83,739 | |||||||||
8,150 | Hennes & Mauritz AB Class B | 296,963 | |||||||||
16,500 | Nordea AB | 186,509 | |||||||||
2,200 | Sandvik AB | 118,434 | |||||||||
10,100 | Swedish Match AB | 135,247 | |||||||||
9,700 | Tele2 AB Class B | 104,693 | |||||||||
30,000 | Telefonaktiebolaget LM Ericsson | 102,225 | |||||||||
1,027,810 | |||||||||||
Switzerland — 3.8% | |||||||||||
19,776 | ABB Ltd * | 236,949 | |||||||||
2,400 | Alcon Inc | 276,384 | |||||||||
2,871 | Compagnie Financiere Richemont AG | 125,021 | |||||||||
1,196 | Credit Suisse Group | 66,241 | |||||||||
3,458 | Roche Holding AG (Non Voting) | 510,909 | |||||||||
247 | Serono SA | 175,260 |
See accompanying notes to the financial statements.
8
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
32 | Societe Generale de Surveillance Holding SA (Registered) | 29,536 | |||||||||
365 | Swisscom AG (Registered) | 109,614 | |||||||||
813 | UBS AG (Registered) | 86,377 | |||||||||
1,659 | Zurich Financial Services AG * | 391,762 | |||||||||
2,008,053 | |||||||||||
United Kingdom — 7.4% | |||||||||||
3,197 | AstraZeneca Plc | 147,646 | |||||||||
13,356 | Barclays Plc | 156,439 | |||||||||
7,722 | BG Group Plc | 90,446 | |||||||||
9,879 | BHP Billiton Plc | 166,023 | |||||||||
12,019 | British American Tobacco Plc | 286,353 | |||||||||
14,187 | Cadbury Schweppes Plc | 144,119 | |||||||||
40,966 | Centrica Plc | 208,677 | |||||||||
19,909 | DSG International Plc | 60,035 | |||||||||
13,344 | GlaxoSmithKline Plc | 338,924 | |||||||||
8,232 | HBOS Plc | 153,305 | |||||||||
8,548 | Imperial Tobacco Group Plc | 257,080 | |||||||||
13,889 | National Grid Plc | 146,032 | |||||||||
4,003 | Next Plc | 115,780 | |||||||||
3,467 | Rio Tinto Plc | 163,164 | |||||||||
20,855 | Royal Bank of Scotland Group | 697,577 | |||||||||
19,567 | Royal Dutch Shell Group Class A | 589,896 | |||||||||
6,111 | Scottish & Southern Energy Plc | 123,082 | |||||||||
3,844,578 | |||||||||||
United States — 43.0% | |||||||||||
2,200 | Adobe Systems, Inc | 84,964 | |||||||||
5,000 | Aetna, Inc | 255,000 | |||||||||
3,700 | Allstate Corp (The) | 202,686 | |||||||||
1,300 | AMBAC Financial Group, Inc | 97,695 | |||||||||
2,000 | American International Group, Inc | 132,720 | |||||||||
2,000 | American Tower Corp-Class A * | 63,660 | |||||||||
5,100 | AmerisourceBergen Corp | 234,549 |
See accompanying notes to the financial statements.
9
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
1,300 | Amgen, Inc * | 98,137 | |||||||||
3,600 | Apple Computer, Inc * | 246,744 | |||||||||
4,500 | Archer-Daniels-Midland Co | 142,740 | |||||||||
1,700 | Autodesk, Inc | 64,005 | |||||||||
1,200 | Baker Hughes, Inc | 81,564 | |||||||||
600 | Bear Stearns Cos (The), Inc | 80,664 | |||||||||
4,200 | Bed Bath & Beyond, Inc * | 151,368 | |||||||||
2,250 | Broadcom Corp-Class A * | 101,452 | |||||||||
3,800 | Burlington Northern Santa Fe Corp | 298,832 | |||||||||
2,000 | Burlington Resources, Inc | 180,360 | |||||||||
3,700 | Capital One Financial Corp | 324,120 | |||||||||
2,300 | Cardinal Health, Inc | 166,980 | |||||||||
3,900 | Caremark Rx, Inc * | 194,025 | |||||||||
3,600 | Caterpillar, Inc | 263,088 | |||||||||
800 | Centex Corp | 54,088 | |||||||||
3,100 | Chevron Corp | 175,088 | |||||||||
12,400 | Cisco Systems, Inc * | 250,976 | |||||||||
3,100 | Coach, Inc * | 110,732 | |||||||||
12,200 | ConocoPhillips | 743,712 | |||||||||
12,700 | Corning, Inc * | 310,007 | |||||||||
5,600 | CVS Corp | 158,648 | |||||||||
3,000 | D.R. Horton, Inc | 102,330 | |||||||||
19,400 | Dell, Inc * | 562,600 | |||||||||
2,000 | Devon Energy Corp | 117,260 | |||||||||
1,600 | EOG Resources, Inc | 107,840 | |||||||||
800 | Everest RE Group Ltd | 79,232 | |||||||||
2,300 | Exelon Corp | 131,353 | |||||||||
1,400 | Express Scripts, Inc * | 122,178 | |||||||||
10,700 | Exxon Mobil Corp | 635,259 | |||||||||
8,700 | Fannie Mae | 475,716 | |||||||||
1,200 | FedEx Corp | 128,688 | |||||||||
3,900 | Fidelity National Financial, Inc | 147,264 | |||||||||
2,500 | Franklin Resources, Inc | 256,700 | |||||||||
6,300 | Freddie Mac | 424,557 | |||||||||
5,900 | Genentech, Inc * | 505,571 |
See accompanying notes to the financial statements.
10
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
1,000 | General Dynamics Corp | 123,270 | |||||||||
700 | Genzyme Corp | 48,538 | |||||||||
2,100 | Gilead Sciences, Inc * | 130,767 | |||||||||
900 | Goldman Sachs Group, Inc | 127,161 | |||||||||
800 | Google, Inc-Class A * | 290,096 | |||||||||
1,900 | Halliburton Co | 129,200 | |||||||||
4,600 | Harley-Davidson, Inc | 241,546 | |||||||||
600 | Hartford Financial Services Group, Inc | 49,428 | |||||||||
1,100 | HCA, Inc | 52,690 | |||||||||
700 | Hershey Co (The) | 35,805 | |||||||||
17,600 | Hewlett-Packard Co | 577,456 | |||||||||
22,200 | Home Depot, Inc | 935,730 | |||||||||
18,800 | Intel Corp | 387,280 | |||||||||
3,800 | International Business Machines Corp | 304,912 | |||||||||
3,000 | JC Penney Corp | 175,920 | |||||||||
11,200 | Johnson & Johnson | 645,680 | |||||||||
1,300 | Johnson Controls, Inc | 92,651 | |||||||||
2,700 | Juniper Networks, Inc * | 49,653 | |||||||||
5,300 | King Pharmaceuticals, Inc * | 86,125 | |||||||||
1,500 | Lehman Brothers Holdings, Inc | 218,925 | |||||||||
2,600 | Lockheed Martin Corp | 189,462 | |||||||||
3,600 | Lowe's Cos, Inc | 245,448 | |||||||||
1,300 | Marathon Oil Corp | 91,780 | |||||||||
1,700 | McGraw-Hill, Inc | 90,253 | |||||||||
2,200 | McKesson Corp | 119,086 | |||||||||
1,200 | Medco Health Solutions, Inc * | 66,864 | |||||||||
2,300 | Medtronic, Inc | 124,085 | |||||||||
1,500 | Merrill Lynch & Co, Inc | 115,815 | |||||||||
3,400 | Metlife, Inc | 170,408 | |||||||||
1,600 | MGIC Investment Corp | 102,000 | |||||||||
700 | Monsanto Co | 58,716 | |||||||||
1,800 | Moody's Corp | 120,600 | |||||||||
19,200 | Motorola, Inc | 410,880 | |||||||||
1,900 | National Semiconductor Corp | 53,295 |
See accompanying notes to the financial statements.
11
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
1,200 | Newmont Mining Corp | 63,504 | |||||||||
1,200 | NII Holdings, Inc-Class B * | 61,464 | |||||||||
500 | Nike, Inc. Class B | 43,390 | |||||||||
2,500 | Nordstrom, Inc | 95,000 | |||||||||
1,000 | Norfolk Southern Corp | 51,180 | |||||||||
2,600 | Occidental Petroleum Corp | 238,004 | |||||||||
5,400 | Oracle Corp * | 67,068 | |||||||||
1,400 | Peabody Energy Corp | 67,578 | |||||||||
4,300 | PepsiCo, Inc | 254,173 | |||||||||
62,900 | Pfizer, Inc | 1,647,351 | |||||||||
6,465 | Procter & Gamble Co | 387,447 | |||||||||
3,100 | Prudential Financial, Inc | 238,824 | |||||||||
3,600 | Qualcomm, Inc | 169,956 | |||||||||
1,700 | Radian Group, Inc | 96,475 | |||||||||
800 | Rockwell Automation, Inc. | 54,536 | |||||||||
1,000 | SanDisk Corp * | 60,340 | |||||||||
3,700 | Schlumberger Ltd | 425,500 | |||||||||
1,600 | SPX Corp | 78,800 | |||||||||
2,600 | Target Corp | 141,440 | |||||||||
13,000 | Texas Instuments, Inc | 388,050 | |||||||||
900 | Transocean, Inc * | 66,762 | |||||||||
2,800 | TXU Corp | 146,692 | |||||||||
2,600 | United Technologies Corp | 152,100 | |||||||||
8,300 | UnitedHealth Group, Inc | 483,309 | |||||||||
1,500 | United Parcel Service-Class B | 112,065 | |||||||||
4,200 | Valero Energy Corp | 225,918 | |||||||||
3,800 | Walgreen Co | 170,468 | |||||||||
1,168 | Weatherford International Ltd * | 50,364 | |||||||||
3,500 | WellPoint, Inc * | 268,765 | |||||||||
2,200 | Whole Foods Market, Inc | 140,536 | |||||||||
3,700 | Wyeth | 184,260 | |||||||||
3,600 | Yahoo! Inc * | 115,416 | |||||||||
22,473,412 | |||||||||||
TOTAL COMMON STOCKS (COST $42,924,987) | 51,208,858 |
See accompanying notes to the financial statements.
12
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) |
PREFERRED STOCKS — 0.3% | |||||||||||
Germany — 0.3% | |||||||||||
3,215 | Volkswagen AG 2.82% | 165,668 | |||||||||
TOTAL PREFERRED STOCKS (COST $89,428) | 165,668 | ||||||||||
SHORT-TERM INVESTMENT(S) — 2.1% | |||||||||||
1,100,000 | Dresdner Bank AG - Time Deposit 4.55% due 3/01/06 | 1,100,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $1,100,000) | 1,100,000 | ||||||||||
TOTAL INVESTMENTS — 100.5% (Cost $44,114,415) | 52,474,526 | ||||||||||
Other Assets and Liabilities (net) — (0.5%) | (279,103 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 52,195,423 |
See accompanying notes to the financial statements.
13
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
5/26/06 | CAD | 315,296 | $ | 278,080 | $ | 3,670 | |||||||||||||
5/26/06 | CHF | 1,176,080 | 904,335 | (5,337 | ) | ||||||||||||||
5/26/06 | HKD | 1,241,488 | 160,242 | (72 | ) | ||||||||||||||
5/26/06 | JPY | 351,061,200 | 3,067,294 | 59,779 | |||||||||||||||
5/26/06 | NOK | 8,057,928 | 1,200,640 | 6,831 | |||||||||||||||
5/26/06 | NZD | 493,006 | 324,470 | (1,592 | ) | ||||||||||||||
5/26/06 | SEK | 9,227,259 | 1,173,695 | (2,896 | ) | ||||||||||||||
5/26/06 | SGD | 2,305,560 | 1,425,392 | 9,201 | |||||||||||||||
$ | 69,584 | ||||||||||||||||||
Sales | |||||||||||||||||||
5/26/06 | AUD | 1,662,141 | $ | 1,231,987 | $ | (9,316 | ) | ||||||||||||
5/26/06 | EUR | 1,967,683 | 2,357,740 | (8,043 | ) | ||||||||||||||
5/26/06 | GBP | 872,301 | 1,531,299 | (15,516 | ) | ||||||||||||||
5/26/06 | HKD | 5,307,592 | 685,064 | (46 | ) | ||||||||||||||
5/26/06 | JPY | 99,178,440 | 866,543 | (11,888 | ) | ||||||||||||||
$ | (44,809 | ) |
See accompanying notes to the financial statements.
14
GMO Global Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1 | S&P 500 | March 2006 | $ | 320,600 | $ | 2,896 | |||||||||||||
2 | TOPIX | March 2006 | 286,467 | 6,503 | |||||||||||||||
$ | 9,399 | ||||||||||||||||||
Sales | |||||||||||||||||||
1 | DAX | March 2006 | $ | 172,974 | $ | (14,339 | ) | ||||||||||||
5 | FTSE | March 2006 | 505,575 | (779 | ) | ||||||||||||||
$ | (15,118 | ) |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
As February 28, 2006, 49.0% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
See accompanying notes to the financial statements.
15
GMO Global Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $44,114,415) (Note 2) | $ | 52,474,526 | |||||
Foreign currency, at value (cost $31,127) (Note 2) | 31,302 | ||||||
Dividends and interest receivable | 74,766 | ||||||
Foreign taxes receivable | 8,398 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 79,481 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 9,939 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 14,598 | ||||||
Total assets | 52,693,010 | ||||||
Liabilities: | |||||||
Due to custodian | 345,131 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 18,688 | ||||||
Shareholder service fee | 5,964 | ||||||
Trustees and Chief Compliance Officer fees | 77 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 54,706 | ||||||
Accrued expenses | 73,021 | ||||||
Total liabilities | 497,587 | ||||||
Net assets | $ | 52,195,423 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 38,514,753 | |||||
Distributions in excess of net investment income | (106,243 | ) | |||||
Accumulated net realized gain | 5,407,808 | ||||||
Net unrealized appreciation | 8,379,105 | ||||||
$ | 52,195,423 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 52,195,423 | |||||
Shares outstanding: | |||||||
Class III | 2,076,927 | ||||||
Net asset value per share: | |||||||
Class III | $ | 25.13 |
See accompanying notes to the financial statements.
16
GMO Global Growth Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $94,067) | $ | 1,255,996 | |||||
Interest (including securities lending income of $18,043) | 63,518 | ||||||
Total investment income | 1,319,514 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 306,328 | ||||||
Shareholder service fee – Class III (Note 3) | 97,764 | ||||||
Custodian and fund accounting agent fees | 123,716 | ||||||
Transfer agent fees | 27,550 | ||||||
Audit and tax fees | 53,655 | ||||||
Legal fees | 1,056 | ||||||
Trustees fees and related expenses (Note 3) | 1,571 | ||||||
Registration fees | 7,426 | ||||||
Miscellaneous | 7,071 | ||||||
Total expenses | 626,137 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (219,840 | ) | |||||
Net expenses | 406,297 | ||||||
Net investment income (loss) | 913,217 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 6,819,150 | ||||||
Closed futures contracts | (134,576 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (688,883 | ) | |||||
Net realized gain (loss) | 5,995,691 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 1,796,355 | ||||||
Open futures contracts | (25,993 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (53,872 | ) | |||||
Net unrealized gain (loss) | 1,716,490 | ||||||
Net realized and unrealized gain (loss) | 7,712,181 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 8,625,398 |
See accompanying notes to the financial statements.
17
GMO Global Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Period from July 20, 2004 (commencement of operations) through February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 913,217 | $ | 379,276 | |||||||
Net realized gain (loss) | 5,995,691 | 398,821 | |||||||||
Change in net unrealized appreciation (depreciation) | 1,716,490 | 6,662,615 | |||||||||
Net increase (decrease) in net assets from operations | 8,625,398 | 7,440,712 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (295,069 | ) | (678,209 | ) | |||||||
Net realized gains | |||||||||||
Class III | (1,412,162 | ) | — | ||||||||
(1,707,231 | ) | (678,209 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (12,748,277 | ) | 51,197,188 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 65,842 | — | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (12,682,435 | ) | 51,197,188 | ||||||||
Total increase (decrease) in net assets | (5,764,268 | ) | 57,959,691 | ||||||||
Net assets: | |||||||||||
Beginning of period | 57,959,691 | — | |||||||||
End of period (including distributions in excess of net investment income of $106,243 and $62,457, respectively) | $ | 52,195,423 | $ | 57,959,691 |
See accompanying notes to the financial statements.
18
GMO Global Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28, | |||||||||||
2006 | 2005(a) | ||||||||||
Net asset value, beginning of period | $ | 22.67 | $ | 20.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.33 | 0.15 | |||||||||
Net realized and unrealized gain (loss) | 2.72 | 2.79 | |||||||||
Total from investment operations | 3.05 | 2.94 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.10 | ) | (0.27 | ) | |||||||
From net realized gains | (0.49 | ) | — | ||||||||
Total distributions | (0.59 | ) | (0.27 | ) | |||||||
Net asset value, end of period | $ | 25.13 | $ | 22.67 | |||||||
Total Return(b) | 13.61 | % | 14.72 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 52,195 | $ | 57,960 | |||||||
Net expenses to average daily net assets | 0.62 | % | 0.62 | %* | |||||||
Net investment income to average daily net assets | 1.40 | % | 1.17 | %* | |||||||
Portfolio turnover rate | 53 | % | 40 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.34 | % | 0.51 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | — | (c) |
(a) Period from July 20, 2004 (commencement of operations) through February 28, 2005.
(b) The total return would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) For the period ended February 28, 2005, the Fund received no purchase premiums or redemption fees.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
19
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Global Growth Fund (the "Fund"), which commenced operations on July 20, 2004, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks a high total return through investing primarily in equity securities of both U.S. and non-U.S. issuers. The Fund's benchmark is the S&P/Citigroup (f/k/a Salomon Smith Barney) Primary Market Index ("PMI") World Growth Style Index.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
20
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures Contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the
21
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
22
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
23
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding tax rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders. As of February 28, 2006, 99.9% of the Fund was held by a non-U.S. shareholder.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $1,128,306 and $678,209, respectively and long-term capital gains – $578,925 and $0, respectively.
24
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $682,710 and $4,787,628 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 44,264,278 | $ | 9,474,506 | $ | (1,264,258 | ) | $ | 8,210,248 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Distributions In Excess Of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (661,934 | ) | $ | 661,934 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
25
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Purchase and redemption of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.30% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transactions costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the periods ended February 28, 2006 and February 28, 2005, the Fund received $280 and $0 in purchase premiums and $65,562 and $0 in redemption fees, respectively.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.47% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.47% of average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $1,167 and $431, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $33,149,136 and $47,414,234, respectively.
26
GMO Global Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related party
As of February 28, 2006, 99.9% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 99.9% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Period from July 20, 2004 (commencement of operations) through February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 332,529 | $ | 7,529,187 | 2,530,994 | $ | 50,620,710 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 69,037 | 1,642,031 | 26,085 | 576,478 | |||||||||||||||
Shares repurchased | (881,718 | ) | (21,919,495 | ) | — | — | |||||||||||||
Purchase premiums and redemption fees | — | 65,842 | — | — | |||||||||||||||
Net increase (decrease) | (480,152 | ) | $ | (12,682,435 | ) | 2,557,079 | $ | 51,197,188 |
27
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Global Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Growth Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Over sight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
28
GMO Global Growth Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred * | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.62 | % | $ | 1,000.00 | $ | 1,089.20 | $ | 3.21 | ||||||||||
2) Hypothetical | 0.62 | % | $ | 1,000.00 | $ | 1,021.72 | $ | 3.11 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
29
GMO Global Growth Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $94,067 and recognized foreign source income of $959,398.
The Fund's distributions to shareholders include $578,925 from long-term capital gains.
For taxable, non-corporate shareholders, 75.98% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 37.85% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $16,169 and $677,407, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
30
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
31
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005) , Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present) ; Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
32
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
33
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
34
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Inflation Indexed Bond Fund returned +2.6% for the fiscal year ended February 28, 2006, as compared to +3.2% for the Lehman Brothers U.S. Treasury TIPS Index.
The Fund underperformed the benchmark by 0.6% during the fiscal year. Curve positioning was attributable for much of the underperformance during the time period.
Real (inflation-adjusted) yields on Treasury Inflation-Protected Securities (TIPS) as of February 28, 2006 are around 2%. In addition to inflation-indexed bonds issued by the U.S. Treasury Department, the Fund holds inflation-indexed bonds issued by various U.S. Government agencies. While the Fund is permitted to own securities of foreign countries that are not in the benchmark, as of February 28, 2006, the portfolio is entirely invested in the United States. In addition, the Fund maintained an interest rate exposure quite similar to that of its benchmark. At fiscal year end, approximately 98% of the debt obligations held are AAA-rated and the remaining 2% are A-rated.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 113.0 | % | |||||
Short-Term Investment(s) | 0.5 | ||||||
Mutual Fund | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | 0.0 | ||||||
Futures | 0.0 | ||||||
Reverse Repurchase Agreements | (14.0 | ) | |||||
Other | 0.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 96.5% | |||||||||||
United States — 96.5% | |||||||||||
Corporate Debt — 1.9% | |||||||||||
13,850,000 | JP Morgan & Co. Series MTN, Variable Rate, CPI + 4.00%, 6.80%, due 02/15/12 | 14,424,775 | |||||||||
U.S. Government — 94.6% | |||||||||||
21,433,400 | U.S. Treasury Inflation Indexed Bond, 1.88%, due 07/15/13 (a) | 21,282,696 | |||||||||
41,155,135 | U.S. Treasury Inflation Indexed Bond, 2.00%, due 01/15/16 (a) | 41,148,705 | |||||||||
31,734,080 | U.S. Treasury Inflation Indexed Bond, 2.00%, due 01/15/26 (a) | 31,922,501 | |||||||||
34,682,790 | U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 (a) | 45,309,814 | |||||||||
19,755,450 | U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 (a) | 26,978,536 | |||||||||
17,178,594 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (a) | 17,785,213 | |||||||||
11,401,615 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) | 12,062,552 | |||||||||
1,754,835 | U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (a) | 1,910,302 | |||||||||
113,247,730 | U.S. Treasury Inflation Indexed Note, 0.88%, due 04/15/10 (a) | 108,558,566 | |||||||||
237,362,103 | U.S. Treasury Inflation Indexed Note, 2.00%, due 01/15/14 (a) (b) | 237,399,191 | |||||||||
21,406,100 | U.S. Treasury Inflation Indexed Note, 2.00%, due 07/15/14 (a) | 21,422,824 | |||||||||
63,910,220 | U.S. Treasury Inflation Indexed Note, 1.63%, due 01/15/15 (a) | 61,972,942 | |||||||||
28,333,760 | U.S. Treasury Inflation Indexed Note, 1.88%, due 07/15/15 (a) | 28,059,277 | |||||||||
63,591,780 | U.S. Treasury Inflation Indexed Note, 2.38%, due 01/15/25 (a) | 67,566,266 | |||||||||
723,379,385 | |||||||||||
Total United States | 737,804,160 | ||||||||||
TOTAL DEBT OBLIGATION(S) (COST $744,872,329) | 737,804,160 |
See accompanying notes to the financial statements.
2
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 17.1% | |||||||||||
Affiliated Issuer(s) — 17.1% | |||||||||||
5,104,995 | GMO Short-Duration Collateral Fund | 130,687,876 | |||||||||
28,918 | GMO Special Purpose Holding Fund | 237,997 | |||||||||
TOTAL MUTUAL FUNDS (COST $130,675,192) | 130,925,873 | ||||||||||
TOTAL INVESTMENTS — 113.6% (Cost $875,547,521) | 868,730,033 | ||||||||||
Other Assets and Liabilities (net) — (13.6%) | (104,249,732 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 764,480,301 |
See accompanying notes to the financial statements.
3
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Reverse Repurchase Agreement
Face Value | Description | Market Value | |||||||||
$ | 106,687,670 | Barclays Bank, 4.44%*, dated 2/3/06, to be repurchased on demand by Barclays Bank, at face value, plus accrued interest. | $ | 107,029,781 | |||||||
Average balance outstanding | $ | 102,260,979 | |||||||||
Average interest rate | 3.37 | % | |||||||||
Maximum balance outstanding | $ | 174,978,515 | |||||||||
Average shares outstanding | 45,820,319 | ||||||||||
Average balance per share outstanding | 2.23 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements.
* Represents the current interest rate for a variable rate security.
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
8,000,000 | USD | 8/31/2006 | JP Morgan Chase Bank | 1 month LIBOR– | Lehman TIPS | ||||||||||||||||||
0.08 | % | 1 | Y-10Y | $ | 0 |
Notes to Schedule of Investments:
CPI - Consumer Price Index
LIBOR - London Interbank Offered Rate
MTN - Medium Term Note
TIPS - Treasury Inflation Protected Securities
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 2).
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
See accompanying notes to the financial statements.
4
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $744,872,329) (Note 2) | $ | 737,804,160 | |||||
Investments in affiliated issuers, at value (cost $130,675,192) (Notes 2 and 8) | 130,925,873 | ||||||
Cash | 188,032 | ||||||
Receivable for Fund shares sold | 12,220,500 | ||||||
Interest receivable | 2,557,771 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 26,290 | ||||||
Total assets | 883,722,626 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 12,000,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 53,146 | ||||||
Shareholder service fee | 79,719 | ||||||
Trustees and Chief Compliance Officer fees | 1,410 | ||||||
Payable for reverse repurchase agreements (Note 2) | 107,029,781 | ||||||
Accrued expenses | 78,269 | ||||||
Total liabilities | 119,242,325 | ||||||
Net assets | $ | 764,480,301 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 773,062,508 | |||||
Distributions in excess of net investment income | (6,635,659 | ) | |||||
Accumulated net realized gain | 4,870,940 | ||||||
Net unrealized depreciation | (6,817,488 | ) | |||||
$ | 764,480,301 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 764,480,301 | |||||
Shares outstanding: | |||||||
Class III | 68,849,501 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.10 |
See accompanying notes to the financial statements.
5
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Interest | $ | 24,411,624 | |||||
Dividends from affiliated issuers (Note 8) | 2,237,995 | ||||||
Total investment income | 26,649,619 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 524,634 | ||||||
Shareholder service fee – Class III (Note 3) | 786,951 | ||||||
Custodian, fund accounting agent and transfer agent fees | 189,688 | ||||||
Audit and tax fees | 37,279 | ||||||
Legal fees | 7,492 | ||||||
Trustees fees and related expenses (Note 3) | 9,848 | ||||||
Registration fees | 4,202 | ||||||
Interest expense (Note 2) | 3,613,441 | ||||||
Miscellaneous | 10,182 | ||||||
Total expenses | 5,183,717 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (242,709 | ) | |||||
Net expenses | 4,941,008 | ||||||
Net investment income (loss) | 21,708,611 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 7,544,550 | ||||||
Investments in affiliated issuers | 453,690 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 256,478 | ||||||
Closed futures contracts | 878,777 | ||||||
Closed swap contracts | (239,500 | ) | |||||
Net realized gain (loss) | 8,893,995 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (12,504,947 | ) | |||||
Open futures contracts | (376,470 | ) | |||||
Net unrealized gain (loss) | (12,881,417 | ) | |||||
Net realized and unrealized gain (loss) | (3,987,422 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 17,721,189 |
See accompanying notes to the financial statements.
6
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 21,708,611 | $ | 25,845,054 | |||||||
Net realized gain (loss) | 8,893,995 | 26,250,795 | |||||||||
Change in net unrealized appreciation (depreciation) | (12,881,417 | ) | (21,893,210 | ) | |||||||
Net increase (decrease) in net assets from operations | 17,721,189 | 30,202,639 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (28,441,726 | ) | (26,930,343 | ) | |||||||
Net realized gains | |||||||||||
Class III | (8,798,710 | ) | (27,466,011 | ) | |||||||
Return of capital | |||||||||||
Class III | (685,212 | ) | — | ||||||||
(37,925,648 | ) | (54,396,354 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 76,459,831 | 316,804,831 | |||||||||
Total increase (decrease) in net assets | 56,255,372 | 292,611,116 | |||||||||
Net assets: | |||||||||||
Beginning of period | 708,224,929 | 415,613,813 | |||||||||
End of period (including distributions in excess of net investment income of $6,635,659 and $11,331, respectively) | $ | 764,480,301 | $ | 708,224,929 |
See accompanying notes to the financial statements.
7
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Cash Flows For the Year Ended February 28, 2006
Cash flows from operating activities: | |||||||
Net investment income | $ | 21,708,611 | |||||
Net accretion of investments | (11,058,255 | ) | |||||
10,650,356 | |||||||
Investments purchased | (765,649,885 | ) | |||||
Investments sold | 781,966,208 | ||||||
Short-term investments, net | 2,380,535 | ||||||
18,696,858 | |||||||
Realized gain distributions from affiliated issuers | 256,478 | ||||||
Changes in assets and liabilities: | |||||||
(Increase) decrease in interest receivable | 199,650 | ||||||
(Increase) decrease in receivable for fund shares sold | (11,935,500 | ) | |||||
(Increase) decrease in receivable for variation margin on open futures contracts | 187,875 | ||||||
(Increase) decrease in receivable for expenses reimbursed by Manager | 9,942 | ||||||
Increase (decrease) in payable for Fund shares repurchased | (330,000 | ) | |||||
Increase (decrease) in payable for securities purchased | 12,000,000 | ||||||
Increase (decrease) in payable to affiliate for: | |||||||
Management Fee | (1,603 | ) | |||||
Trustees and Chief Compliance Officer fees | 128 | ||||||
Shareholder service fee | (2,405 | ) | |||||
Increase (decrease) in accrued expenses | (48,546 | ) | |||||
Net realized and unrealized gain on swaps and futures contracts | 262,807 | ||||||
Net cash provided (used in) operating activities | 29,946,040 | ||||||
Cash flows from financing activities* | |||||||
Proceeds from shares sold | 432,094,002 | ||||||
Shares redeemed | (391,388,123 | ) | |||||
Cash distributions paid | (2,171,696 | ) | |||||
Increase (decrease) in payable for reverse repurchase agreements | (68,292,191 | ) | |||||
Net cash provided (used in) financing activities | (29,758,008 | ) | |||||
Net increase in cash | 188,032 | ||||||
Cash and cash equivalents, beginning of period | — | ||||||
Cash and cash equivalents, end of period | $ | 188,032 | |||||
*Supplemental disclosure of cash flow information: | |||||||
Reinvestment of dividends and distributions | $ | 35,753,952 |
See accompanying notes to the financial statements.
8
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.53 | $ | 12.02 | $ | 11.72 | $ | 10.81 | $ | 10.64 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.47 | † | 0.50 | † | 0.30 | 0.51 | 0.30 | ||||||||||||||||
Net realized and unrealized gain (loss) | (0.16 | ) | (0.05 | ) | 0.56 | 1.25 | 0.29 | ||||||||||||||||
Total from investment operations | 0.31 | 0.45 | 0.86 | 1.76 | 0.59 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.56 | ) | (0.45 | ) | (0.33 | ) | (0.56 | ) | (0.37 | ) | |||||||||||||
From net realized gains | (0.17 | ) | (0.49 | ) | (0.23 | ) | (0.29 | ) | (0.05 | ) | |||||||||||||
From return of capital | (0.01 | ) | — | — | — | — | |||||||||||||||||
Total distributions | (0.74 | ) | (0.94 | ) | (0.56 | ) | (0.85 | ) | (0.42 | ) | |||||||||||||
Net asset value, end of period | $ | 11.10 | $ | 11.53 | $ | 12.02 | $ | 11.72 | $ | 10.81 | |||||||||||||
Total Return(a) | 2.64 | % | 3.83 | % | 7.54 | % | 16.67 | % | 5.66 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 764,480 | $ | 708,225 | $ | 415,614 | $ | 278,088 | $ | 149,274 | |||||||||||||
Net operating expenses to average daily net assets | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | |||||||||||||
Interest expense to average daily net assets(b) | 0.69 | % | 0.26 | % | 0.13 | % | 0.15 | % | 0.17 | % | |||||||||||||
Total net expenses to average daily net assets(c) | 0.94 | % | 0.51 | % | 0.38 | % | 0.40 | % | 0.42 | % | |||||||||||||
Net investment income to average daily net assets | 4.14 | % | 4.17 | % | 3.49 | % | 4.55 | % | 4.15 | % | |||||||||||||
Portfolio turnover rate | 118 | % | 161 | % | 57 | % | 75 | % | 40 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | % | 0.05 | % | 0.06 | % | 0.06 | % | 0.09 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(b) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
9
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Inflation Indexed Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investments in securities that are indexed or otherwise "linked" to general measures of inflation in the country of issue ("inflation indexed bonds") and other funds of the Trust ("underlying fund(s)") primarily GMO Short-Duration Collateral Fund. The Fund's benchmark is the Lehman Brothers U.S. Treasury TIPS Index.
Inflation indexed bonds issued by the U.S. Treasury are fixed income securities whose principal value is periodically adjusted according to the rate of U.S. inflation. Inflation indexed bonds issued by a foreign government are generally adjusted to reflect a comparable local inflation index.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). Shares of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued
10
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 7.1% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $180,361 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $1,004,016 in conjunction with that settlement. Those settlement proceeds received in April 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of th e Fund.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future
11
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in curre ncy values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
12
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and forward swap spread lock swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap sp read lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
13
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expense. As of February 28, 2006, the Fund had entered into reverse repurchase agreements having a market value plus accrued interest of $107,029,781, collateralized by securities with a market value of $108,935,590. See the Schedule of Investments for open reverse repurchase agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Statement of cash flows
The cash amounts shown in the Statement of Cash Flows are the amounts reported as cash in the Fund's Statement of Assets and Liabilities and represent cash on hand at its custodian as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund is seeking consent from the Internal Revenue Service to change its tax year-end from February 28/29, to December 31, effective December 31, 2005. The Fund is making this request, in consideration of both the nature of its investments and its above-noted intentions with regard to distributions,
14
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
as well as coordinating its distributions for excise and income tax purposes. Accordingly the financial statements and related disclosures consider an expected change to the Fund's tax year-end.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended December 31, 2005 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $28,441,726 and $30,834,668, respectively, long-term capital gains – $0 and $23,561,686, respectively, and return of capital – $685,212 and $0, respectively.
The Fund's net investment income distributed to shareholders exceeded net investment income (loss), as disclosed in the Statement of Operations. The Fund made such distributions based on its estimated undistributed taxable ordinary income through December 31, 2005 (of which certain amounts were reversed, due to an absolute decline in the related inflation index), in accordance with the excise tax rules.
As of December 31, 2005, the Fund elected to defer to January 1, 2006 post-October capital losses of $410,720.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 870,124,238 | $ | 7,292,087 | $ | (8,686,292 | ) | $ | (1,394,205 | ) |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of December 31, 2005. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 108,787 | $ | (4,924,406 | ) | $ | 4,815,619 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
15
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.10% of the average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.001 | % | 0.000 | % | 0.002 | % | 0.003 | % |
16
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $5,219 and $3,556, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 610,786,890 | $ | 649,566,208 | |||||||
Investments (non-U.S. Government securities) | 154,862,995 | 132,400,000 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related parties
As of February 28, 2006, 49.2% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
As of February 28, 2006, 0.1% of the Fund's shares were held by nineteen related parties comprised of certain GMO employee accounts, and 88.8% of the Fund's shares were held by accounts for which the Manager has investment discretion.
17
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 38,161,008 | $ | 432,094,002 | 29,549,567 | $ | 349,328,487 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,172,282 | 35,753,952 | 4,444,888 | 51,765,262 | |||||||||||||||
Shares repurchased | (33,933,240 | ) | (391,388,123 | ) | (7,123,847 | ) | (84,288,918 | ) | |||||||||||
Net increase (decrease) | 7,400,050 | $ | 76,459,831 | 26,870,608 | $ | 316,804,831 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gain Distributions | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 107,322,039 | $ | 154,862,995 | $ | 132,400,000 | $ | 2,237,995 | $ | — | $ | 130,687,876 | |||||||||||||||
GMO Special Purpose Holding Fund | 448,523 | — | — | — | 256,478 | 237,997 | * | ||||||||||||||||||||
Totals | $ | 107,770,562 | $ | 154,862,995 | $ | 132,400,000 | $ | 2,237,995 | $ | 256,478 | $ | 130,925,873 |
* After the effect of return of capital distributions of $159,419 on April 5, 2005 and $40,293 on February 21, 2006, respectively.
18
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Inflation Indexed Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations, of changes in net assets and of cash flows and the financial highlights present fairly, in all material respects, the financial position of GMO Inflation Indexed Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and cash flows and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standard s of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
19
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.01 | % | $ | 1,000.00 | $ | 993.60 | $ | 4.99 | |||||||||||
2) Hypothetical | 1.01 | % | $ | 1,000.00 | $ | 1,019.79 | $ | 5.06 |
* Expenses are calculated using the Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
20
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended December 31, 2005
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended December 31, 2005, $23,445,461 and $3,254,781, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
Note Concerning Prior Distribution:
Because adjustments on inflation indexed securities affect, for accounting purposes, the amount of income generated by such securities, subsequent changes in relevant inflation indices may result in adjustments of the Fund's income calculated for a given period. This occurred for the Fund when various inflation indices decreased subsequent to when distributions were made for the calendar year 2005. Of the $.434 net dividend income per share distributed on December 27, 2005, subsequent absolute declines in inflation indices now suggest that for accounting purposes $685,212, of such distribution (3.10%) was not derived from net investment income or net profits.
21
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
22
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
23
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
24
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer,October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
25
GMO Foreign Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Foreign Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Foreign Fund returned +19.1% for the fiscal year ended February 28, 2006, as compared to +17.4% for the MSCI EAFE Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in international equity securities throughout the fiscal year.
Fair value pricing of the Fund subtracted 0.1% from returns versus the benchmark, which utilizes local close prices. Using the local close, which we do for attribution, the Fund returned +19.2% for the fiscal year.
Stock selection added 1.6% to returns for the fiscal year. Stock selection was positive in Japan and the United Kingdom.
Country selection outperformed the MSCI EAFE Index by 0.1%. The largest positive contribution to country selection came from an overweight position in Japan, which added 0.2%.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The Fund commenced operations on June 28, 1996 subsequent to a transaction involving, in essence, the reorganization of the GMO International Equities Pool of the Common Fund for Non-Profit Organizations (the "GMO Pool") as the Foreign Fund. All information relating to the time periods prior to June 28, 1996 relates to the GMO Pool. Performance for Classes II, IV and M will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or hig her than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.1 | % | |||||
Preferred Stocks | 0.8 | ||||||
Rights and Warrants | 0.0 | ||||||
Short-Term Investment(s) | 4.1 | ||||||
Other | 1.0 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 28.9 | % | |||||
United Kingdom | 23.8 | ||||||
Germany | 10.5 | ||||||
France | 5.4 | ||||||
Netherlands | 4.4 | ||||||
Italy | 3.7 | ||||||
Switzerland | 3.4 | ||||||
Spain | 3.2 | ||||||
Hong Kong | 1.9 | ||||||
Australia | 1.9 | ||||||
Ireland | 1.4 | ||||||
Norway | 1.3 | ||||||
Taiwan | 1.3 | ||||||
Belgium | 1.2 | ||||||
Finland | 1.1 | ||||||
Singapore | 1.1 | ||||||
South Korea | 1.1 | ||||||
Sweden | 0.8 | ||||||
Brazil | 0.8 | ||||||
Austria | 0.7 | ||||||
Denmark | 0.5 | ||||||
New Zealand | 0.3 | ||||||
India | 0.3 | ||||||
Chile | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Thailand | 0.2 | ||||||
Indonesia | 0.2 | ||||||
Canada | 0.1 | ||||||
Philippines | 0.1 | ||||||
Mexico | 0.0 | ||||||
100.0 | % |
1
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 29.4 | % | |||||
Consumer Discretionary | 15.9 | ||||||
Industrials | 15.8 | ||||||
Consumer Staples | 6.9 | ||||||
Energy | 6.7 | ||||||
Telecommunication Services | 6.5 | ||||||
Materials | 5.5 | ||||||
Utilities | 5.3 | ||||||
Health Care | 4.4 | ||||||
Information Technology | 3.6 | ||||||
100.0 | % |
2
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.1% | |||||||||||
Australia — 1.8% | |||||||||||
1,080,000 | Amcor Ltd | 5,930,050 | |||||||||
287,000 | Commonwealth Bank of Australia | 9,527,312 | |||||||||
5,236,600 | Foster's Group Ltd | 21,079,355 | |||||||||
1,054,125 | Multiplex Group | 2,470,632 | |||||||||
1,186,650 | National Australia Bank Ltd | 32,207,894 | |||||||||
16,477,000 | SP AusNet * | 16,210,279 | |||||||||
656,551 | TABCORP Holdings Ltd | 7,380,926 | |||||||||
4,005,586 | Telstra Corp Ltd | 11,398,123 | |||||||||
514,027 | Westpac Banking Corp | 8,976,418 | |||||||||
945,341 | Woolworths Ltd | 12,874,818 | |||||||||
128,055,807 | |||||||||||
Austria — 0.7% | |||||||||||
183,900 | Erste Bank Der Oesterreichischen Sparkassen AG | 11,178,701 | |||||||||
29,330 | Flughafen Wien AG | 2,365,502 | |||||||||
344,400 | OMV AG | 21,359,427 | |||||||||
385,500 | Telekom Austria AG | 8,817,657 | |||||||||
131,530 | Wienerberger AG | 6,098,271 | |||||||||
49,819,558 | |||||||||||
Belgium — 1.1% | |||||||||||
192,990 | Belgacom SA | 5,801,140 | |||||||||
24,087 | CIE Francois d' Enterprises | 22,965,519 | |||||||||
281,495 | Fortis | 10,027,206 | |||||||||
52,985 | Groupe Bruxelles Lambert SA | 5,816,107 | |||||||||
214,565 | KBC Groep NV | 22,399,833 | |||||||||
72,092 | Solvay SA | 7,976,078 | |||||||||
103,459 | UCB SA | 4,900,495 | |||||||||
79,886,378 |
See accompanying notes to the financial statements.
3
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Brazil — 0.7% | |||||||||||
90,800 | All America Latina Logistica | 4,981,493 | |||||||||
1,709,500 | Companhia de Concessoes Rodoviarias | 16,141,029 | |||||||||
47,700 | Gafisa SA GDR 144A * | 1,105,209 | |||||||||
482,300 | Tam SA | 10,890,645 | |||||||||
349,500 | Tractebel Energia SA | 2,872,039 | |||||||||
116,900 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 10,281,355 | |||||||||
71,600 | Universo Online SA * | 529,371 | |||||||||
46,801,141 | |||||||||||
Canada — 0.1% | |||||||||||
220,100 | KAP Resources Ltd * (a) | 1,937 | |||||||||
1,209,500 | QLT Inc * (b) | 8,620,661 | |||||||||
8,622,598 | |||||||||||
Chile — 0.2% | |||||||||||
728,000 | Inversiones Aguas Metropolitanas SA ADR 144A * | 14,123,200 | |||||||||
Denmark — 0.5% | |||||||||||
999,200 | Danske Bank A/S | 35,628,502 | |||||||||
Finland — 1.1% | |||||||||||
330,800 | Jaakko Poyry Group Oyj | 13,784,585 | |||||||||
1,141,250 | Nokian Renkaat Oyj (b) | 18,161,103 | |||||||||
327,900 | Ramirent Oyj | 10,018,657 | |||||||||
491,900 | UPM-Kymmene Oyj | 10,436,112 | |||||||||
844,300 | Uponor Oyj | 22,094,972 | |||||||||
74,495,429 | |||||||||||
France — 5.1% | |||||||||||
48,260 | Accor SA | 2,900,367 | |||||||||
163,400 | Arcelor | 5,970,852 | |||||||||
113,340 | Assurances Generales de France | 11,773,632 | |||||||||
467,440 | Axa | 16,527,875 | |||||||||
107,905 | BIC SA | 6,582,037 | |||||||||
382,371 | BNP Paribas | 35,387,249 |
See accompanying notes to the financial statements.
4
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
142,996 | Cie de Saint-Gobain | 9,539,831 | |||||||||
189,717 | Credit Agricole SA | 6,929,570 | |||||||||
29,410 | Etablissements Economiques du Casino Guichard-Perrachon SA (b) | 1,833,214 | |||||||||
596,192 | France Telecom SA | 13,024,806 | |||||||||
107,676 | Groupe Danone | 12,384,227 | |||||||||
17,475 | Guyenne et Gascogne SA (b) | 1,779,773 | |||||||||
94,492 | Imerys SA (b) | 8,071,038 | |||||||||
76,278 | Lafarge SA | 7,979,841 | |||||||||
128,166 | Lagardere S.C.A. | 9,907,896 | |||||||||
118,800 | L'Oreal SA | 10,503,952 | |||||||||
83,100 | M6-Metropole Television | 2,499,204 | |||||||||
163,104 | Michelin SA Class B | 9,949,693 | |||||||||
30,083 | Pernod-Ricard | 5,148,291 | |||||||||
265,272 | Peugeot SA | 15,464,664 | |||||||||
80,300 | Publicis Groupe | 3,063,708 | |||||||||
216,733 | Sanofi-Aventis | 18,449,448 | |||||||||
101,964 | Schneider Electric SA | 10,418,975 | |||||||||
24,831 | Sequana Capital | 698,280 | |||||||||
55,400 | Societe Generale | 7,845,407 | |||||||||
137,852 | Suez Lyon des Eaux VVPR Strip * | 1,643 | |||||||||
1,355,072 | Suez SA | 49,768,930 | |||||||||
102,440 | Technip SA | 6,155,687 | |||||||||
108,114 | Thales SA | 4,925,832 | |||||||||
197,500 | Total SA | 49,671,007 | |||||||||
115,031 | Wendel Investissement | 13,165,607 | |||||||||
358,322,536 | |||||||||||
Germany — 9.3% | |||||||||||
284,895 | Adidas-Salomon AG | 55,676,422 | |||||||||
485,791 | Allianz AG (Registered) | 78,457,730 | |||||||||
212,900 | Bayerische Motoren Werke AG | 10,235,068 | |||||||||
605,510 | Commerzbank AG | 22,124,331 | |||||||||
110,820 | Continental AG | 11,392,748 | |||||||||
1,254,481 | DaimlerChrysler AG (Registered) | 69,708,493 | |||||||||
758,600 | Depfa Bank Plc | 12,648,551 |
See accompanying notes to the financial statements.
5
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
151,100 | Deutsche Bank AG (Registered) | 16,716,460 | |||||||||
2,353,923 | Deutsche Lufthansa AG (Registered) | 38,784,391 | |||||||||
915,900 | Deutsche Post AG (Registered) | 23,831,906 | |||||||||
3,851,838 | Deutsche Telekom (Registered) | 60,866,747 | |||||||||
170,170 | Fraport AG (b) | 13,002,939 | |||||||||
311,818 | Heidelberger Druckmaschinen (b) | 13,388,027 | |||||||||
525,900 | Metro AG | 28,013,095 | |||||||||
476,474 | Muenchener Rueckversicherungs AG (Registered) | 64,683,632 | |||||||||
1,024,837 | Siemens AG (Registered) | 94,252,588 | |||||||||
594,300 | TUI AG (b) | 11,737,494 | |||||||||
348,350 | Volkswagen AG (b) | 24,395,544 | |||||||||
649,916,166 | |||||||||||
Hong Kong — 1.8% | |||||||||||
2,296,600 | Bank of East Asia Ltd | 7,853,597 | |||||||||
5,200,500 | China Netcom Group | 9,233,721 | |||||||||
7,750,000 | China Resources Power Holdings Co | 5,164,635 | |||||||||
7,991,000 | Hang Lung Properties Ltd | 14,301,788 | |||||||||
2,585,000 | Henderson Land Development Co Ltd | 13,765,819 | |||||||||
6,746,000 | Hopewell Highway Infrastructure Ltd | 5,341,826 | |||||||||
2,702,500 | Jardine Strategic Holdings Ltd | 31,038,483 | |||||||||
2,385,507 | Kerry Properties Ltd | 7,596,914 | |||||||||
812,000 | Swire Pacific Ltd Class A | 7,752,921 | |||||||||
7,737,500 | Swire Pacific Ltd Class B | 14,068,010 | |||||||||
553,500 | Wing Hang Bank Ltd | 4,262,718 | |||||||||
2,488,000 | Yue Yuen Industrial Holdings | 7,682,048 | |||||||||
128,062,480 | |||||||||||
India — 0.3% | |||||||||||
3,066,205 | Arvind Mills Ltd | 6,825,313 | |||||||||
2,690,400 | India Cements Ltd * | 8,524,281 | |||||||||
1,428,000 | Jain Irrigation Systems Ltd * | 7,221,197 | |||||||||
1,897,489 | Mirc Electronics Ltd | 834,351 | |||||||||
23,405,142 |
See accompanying notes to the financial statements.
6
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Indonesia — 0.1% | |||||||||||
15,605,000 | Telekomunikasi Indonesia Tbk PT | 10,325,307 | |||||||||
Ireland — 1.4% | |||||||||||
1,849,840 | Allied Irish Banks Plc | 44,191,211 | |||||||||
1,892,770 | Bank of Ireland | 33,672,729 | |||||||||
266,927 | CRH Plc | 8,755,661 | |||||||||
425,300 | Grafton Group Plc * | 5,223,470 | |||||||||
224,000 | Irish Life & Permanent Plc | 4,936,377 | |||||||||
96,779,448 | |||||||||||
Italy — 3.4% | |||||||||||
675,200 | Alleanza Assicurazioni SPA (b) | 8,357,580 | |||||||||
264,531 | Assicurazioni Generali SPA | 9,489,371 | |||||||||
1,500,528 | Banca Intesa SPA | 8,865,727 | |||||||||
969,623 | Banca Intesa SPA - Di RISP | 5,331,300 | |||||||||
941,124 | Banca Monte dei Paschi di Siena SPA (b) | 4,867,872 | |||||||||
267,554 | Buzzi Unicem SPA | 5,535,779 | |||||||||
3,380,935 | Enel SPA | 28,130,668 | |||||||||
2,260,121 | ENI SPA | 64,612,583 | |||||||||
833,510 | Fiat SPA * (b) | 9,023,030 | |||||||||
460,020 | Finmeccanica SPA | 10,066,025 | |||||||||
221,146 | Grouppo Editoriale L'Espresso (b) | 1,134,893 | |||||||||
512,470 | Italcementi SPA - Di RISP | 7,304,167 | |||||||||
58,000 | Pagnossin SPA * (b) | 60,160 | |||||||||
829,300 | Snam Rete Gas SPA | 3,641,540 | |||||||||
9,299,276 | Telecom Italia Di RISP | 21,366,514 | |||||||||
11,311,498 | Telecom Italia SPA | 30,383,133 | |||||||||
3,116,382 | UniCredito Italiano SPA | 22,666,567 | |||||||||
240,836,909 | |||||||||||
Japan — 27.4% | |||||||||||
313,700 | Aisin Seiki Co Ltd | 11,132,866 | |||||||||
850,000 | Asahi Breweries | 11,488,903 | |||||||||
1,009,600 | Astellas Pharma Inc | 38,975,895 |
See accompanying notes to the financial statements.
7
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
956,000 | Bridgestone Corp | 18,642,916 | |||||||||
928,000 | Canon Inc | 57,940,659 | |||||||||
891 | Central Japan Railway Co | 8,725,535 | |||||||||
1,283,700 | Chubu Electric Power Co Inc | 34,027,105 | |||||||||
1,079,000 | Daikin Industries Ltd | 35,903,727 | |||||||||
1,678,000 | Daimaru Inc | 22,565,568 | |||||||||
815,000 | Daiwa House Industry Co Ltd | 13,043,859 | |||||||||
3,676,000 | Daiwa Securities Co Ltd | 43,642,045 | |||||||||
1,550,600 | Denso Corp | 56,566,510 | |||||||||
5,928 | East Japan Railway Co | 42,171,217 | |||||||||
719,100 | Eisai Co Ltd | 33,256,471 | |||||||||
254,700 | Fanuc Ltd | 21,477,572 | |||||||||
3,179,000 | Fujitsu Ltd | 25,330,532 | |||||||||
803,900 | Honda Motor Co Ltd | 46,956,032 | |||||||||
505,800 | Hoya Corp | 20,067,189 | |||||||||
807,700 | Isetan Co Ltd (b) | 14,616,017 | |||||||||
2,928,000 | Isuzu Motors Ltd (b) | 10,082,423 | |||||||||
5,548,000 | Itochu Corp | 46,112,308 | |||||||||
488,200 | Japan Synthetic Rubber Co Ltd | 14,377,395 | |||||||||
512 | Japan Tobacco Inc | 8,796,311 | |||||||||
1,055,200 | JFE Holdings Inc | 38,893,564 | |||||||||
1,037,020 | JTEKT Corp | 19,643,699 | |||||||||
616,000 | Kaneka Corp | 8,107,195 | |||||||||
1,038,000 | Kao Corp | 28,194,633 | |||||||||
7,527 | KDDI Corp | 38,660,962 | |||||||||
1,726,000 | Komatsu Ltd | 30,609,883 | |||||||||
103,718 | Kose Corp | 4,251,069 | |||||||||
3,653,000 | Kubota Corp | 35,725,731 | |||||||||
227,200 | Lawson Inc | 8,483,154 | |||||||||
4,077,000 | Matsushita Electric Industrial Co Ltd | 85,736,931 | |||||||||
2,112,200 | Mitsubishi Corp | 49,005,454 | |||||||||
7,980,000 | Mitsubishi Electric Corp | 63,545,901 | |||||||||
2,690,000 | Mitsubishi Rayon Co Ltd | 21,615,188 | |||||||||
3,712 | Mitsubishi Tokyo Financial Group Inc | 55,113,365 |
See accompanying notes to the financial statements.
8
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
1,375,000 | Mitsui Fudosan Co Ltd | 28,562,167 | |||||||||
2,881,000 | Mitsui Mining & Smelting Co Ltd | 19,469,358 | |||||||||
1,234,000 | Mitsui OSK Lines Ltd | 8,997,659 | |||||||||
8,641 | Mizuho Financial Group Inc | 68,879,294 | |||||||||
299,000 | Mori Seiki Co (b) | 5,503,261 | |||||||||
312,000 | Nikko Cordial Corp | 4,911,581 | |||||||||
3,121,500 | Nippon Mining Holdings Inc | 23,310,830 | |||||||||
995,000 | Nishi Nippon City Bank Ltd | 5,099,735 | |||||||||
4,099,200 | Nissan Motor Co | 47,057,739 | |||||||||
331 | Nomura Real Estate Office Fund (REIT) | 2,686,348 | |||||||||
1,367,000 | NTN Corp | 10,134,790 | |||||||||
245,200 | Omron Corp | 6,804,642 | |||||||||
167,100 | ORIX Corp | 43,992,524 | |||||||||
506 | Sapporo Hokuyo Holdings Inc | 5,459,125 | |||||||||
416,500 | Sega Sammy Holdings Inc | 16,987,046 | |||||||||
492,800 | Seven & I Holdings Co Ltd | 20,158,071 | |||||||||
675,000 | Sharp Corp | 11,907,298 | |||||||||
567,000 | Shionogi and Co Ltd | 7,818,511 | |||||||||
2,598,000 | Sumitomo Electric Industries Ltd | 39,040,202 | |||||||||
3,604,000 | Sumitomo Heavy Industries Ltd | 32,231,286 | |||||||||
11,911 | Sumitomo Mitsui Financial Group Inc | 130,084,723 | |||||||||
438,000 | Sumitomo Realty & Development Co Ltd | 10,179,290 | |||||||||
534,300 | Takeda Pharmaceutical Co Ltd | 29,762,895 | |||||||||
290,000 | TDK Corp | 20,088,791 | |||||||||
1,721 | The Tokyo Star Bank Ltd * (b) | 5,902,440 | |||||||||
74,900 | Tokyo Electron Ltd | 4,988,167 | |||||||||
3,699,000 | Tokyo Gas Co Ltd | 16,841,598 | |||||||||
100,600 | Tokyo Seimitsu Co Ltd | 5,861,275 | |||||||||
1,230,000 | Tokyo Tatemono Co Ltd | 11,896,739 | |||||||||
2,315,000 | Toray Industries Inc | 17,836,969 | |||||||||
2,600,000 | Tosoh Corp | 13,658,471 | |||||||||
2,224,000 | Toyota Motor Corp | 118,555,767 | |||||||||
282,500 | Ushio Inc | 6,903,563 | |||||||||
1,925,057,939 |
See accompanying notes to the financial statements.
9
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Malaysia — 0.2% | |||||||||||
1,282,000 | IOI Corp Berhad | 4,764,140 | |||||||||
3,000,000 | MISC Berhad | 7,826,003 | |||||||||
12,590,143 | |||||||||||
Mexico — 0.0% | |||||||||||
65,400 | Ternium SA ADR * (b) | 1,540,170 | |||||||||
Netherlands — 4.2% | |||||||||||
969,285 | ABN Amro Holdings NV | 28,245,707 | |||||||||
1,089,409 | Aegon NV | 17,964,832 | |||||||||
481,202 | Akzo Nobel NV | 24,428,498 | |||||||||
626,650 | Fortis NV | 22,403,339 | |||||||||
134,832 | Fugro NV | 5,042,426 | |||||||||
1,244,454 | Hagemeyer NV * (b) | 5,008,342 | |||||||||
139,274 | Hal Trust (Participating Units) (b) | 9,635,948 | |||||||||
1,504,367 | ING Groep NV | 56,543,077 | |||||||||
333,213 | Koninklijke Ahold NV * | 2,719,668 | |||||||||
1,100,500 | Koninklijke KPN NV | 11,393,117 | |||||||||
253,397 | Koninklijke Wessanen NV | 3,986,146 | |||||||||
1,318,532 | Philips Electronics NV | 42,909,483 | |||||||||
92,391 | Philips Electronics NV ADR | 3,004,555 | |||||||||
359,307 | TNT NV | 11,687,752 | |||||||||
102,523 | Unilever NV | 7,116,918 | |||||||||
42,734 | Univar NV | 2,244,104 | |||||||||
143,310 | Van Ommeren Vopak NV | 4,559,955 | |||||||||
388,714 | VNU NV | 12,595,108 | |||||||||
72,087 | Wereldhave NV | 7,684,979 | |||||||||
648,219 | Wolters Kluwer NV | 14,221,078 | |||||||||
293,395,032 | |||||||||||
New Zealand — 0.3% | |||||||||||
394,477 | Air New Zealand | 336,454 | |||||||||
1,073,119 | Asian Growth Properties Ltd * | 724,708 | |||||||||
5,540,643 | Telecom Corp of New Zealand | 19,484,668 | |||||||||
20,545,830 |
See accompanying notes to the financial statements.
10
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Norway — 1.3% | |||||||||||
978,398 | Ekornes ASA | 19,154,530 | |||||||||
1,531,000 | Norske Skogindustrier AS Class A | 22,908,268 | |||||||||
303,700 | Orkla ASA | 13,237,633 | |||||||||
521,720 | Prosafe ASA | 25,883,101 | |||||||||
252,700 | Statoil ASA | 6,471,336 | |||||||||
87,654,868 | |||||||||||
Philippines — 0.1% | |||||||||||
6,797,100 | First General Corp * | 5,916,238 | |||||||||
Singapore — 1.1% | |||||||||||
4,390,000 | ComfortDelgro Corp Ltd | 4,447,361 | |||||||||
2,248,880 | DBS Group Holdings Ltd | 22,619,089 | |||||||||
1,106,000 | Keppel Corp Ltd | 9,505,056 | |||||||||
15,664,000 | People's Food Holdings Ltd | 11,068,583 | |||||||||
907,000 | Singapore Airlines Ltd | 8,231,982 | |||||||||
4,756,220 | Singapore Telecommunications | 7,624,609 | |||||||||
6,923,000 | Unisteel Technology Ltd | 10,680,408 | |||||||||
74,177,088 | |||||||||||
South Korea — 1.0% | |||||||||||
19,865 | Hansol Paper Co | 274,136 | |||||||||
1,459,100 | KT Corp ADR | 29,794,822 | |||||||||
297,000 | Samsung Electro Mechanics Co Ltd * | 12,213,931 | |||||||||
221,510 | Samsung SDI Co Ltd | 19,572,661 | |||||||||
30,620 | SK Telecom Co Ltd | 6,363,062 | |||||||||
147,700 | SK Telecom Co Ltd ADR | 3,566,955 | |||||||||
71,785,567 | |||||||||||
Spain — 3.0% | |||||||||||
446,340 | ACS Actividades de Construccion y Servicios SA | 16,645,491 | |||||||||
220,603 | Altadis SA | 9,250,193 | |||||||||
1,756,392 | Banco Bilbao Vizcaya Argentaria SA | 35,719,094 | |||||||||
684,315 | Banco Popular Espanol SA | 9,178,413 |
See accompanying notes to the financial statements.
11
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Spain — continued | |||||||||||
1,552,932 | Banco Santander Central Hispano SA | 22,687,627 | |||||||||
727,527 | Endesa SA | 24,361,427 | |||||||||
154,600 | Gas Natural SDG SA | 4,702,730 | |||||||||
516,593 | Iberdrola SA | 16,293,397 | |||||||||
132,100 | Inditex SA | 4,741,914 | |||||||||
124,750 | Red Electrica de Espana | 4,172,155 | |||||||||
940,929 | Repsol YPF SA | 26,300,402 | |||||||||
2,410,161 | Telefonica SA | 37,162,509 | |||||||||
211,215,352 | |||||||||||
Sweden — 0.7% | |||||||||||
606,090 | Autoliv Inc SDR (b) | 32,489,794 | |||||||||
1,044,450 | Lundin Mining Corp SDR * | 19,199,612 | |||||||||
51,689,406 | |||||||||||
Switzerland — 3.2% | |||||||||||
66,900 | Adecco SA | 3,670,716 | |||||||||
43,170 | Baloise Holding Ltd | 2,734,920 | |||||||||
1,620 | Bank Sarasin & Cie AG Class B (Registered) | 3,765,472 | |||||||||
2,822 | Banque Cantonale Vaudoise | 903,444 | |||||||||
2,666 | Belimo Holding AG (Registered) | 1,787,382 | |||||||||
20,560 | Bobst Group AG (Registered) | 877,869 | |||||||||
90,460 | Converium Holding AG * | 996,636 | |||||||||
441,250 | Credit Suisse Group | 24,438,715 | |||||||||
9,335 | Energiedienst Holding AG (Registered) | 3,477,433 | |||||||||
6,697 | Forbo Holdings AG (Registered) * | 1,692,276 | |||||||||
8,262 | Geberit AG (Registered) | 7,495,952 | |||||||||
141,905 | Holcim Ltd | 11,175,618 | |||||||||
880 | Jelmoli Holding AG (Bearer) | 1,421,952 | |||||||||
4,836 | Jelmoli Holding AG (Registered) | 1,569,144 | |||||||||
102,120 | Nestle SA (Registered) | 30,023,654 | |||||||||
408,284 | Novartis AG (Registered) | 21,970,998 | |||||||||
93,700 | Swatch Group AG | 15,202,012 | |||||||||
19,900 | Swiss Life Holding | 3,689,237 |
See accompanying notes to the financial statements.
12
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
504 | Swiss National Insurance Co (Registered) | 261,701 | |||||||||
427,926 | Swiss Reinsurance Co (Registered) | 30,483,453 | |||||||||
31,330 | Swisscom AG (Registered) (b) | 9,408,743 | |||||||||
344,440 | UBS AG (Registered) | 36,595,126 | |||||||||
18,941 | Valora Holding AG * | 3,848,922 | |||||||||
42,841 | Zurich Financial Services AG * | 10,116,635 | |||||||||
227,608,010 | |||||||||||
Taiwan — 1.2% | |||||||||||
3,528,000 | Benq Corp | 3,461,127 | |||||||||
13,272,000 | Chinatrust Financial Holding Co | 11,132,194 | |||||||||
675,000 | Chunghwa Telecom Co Ltd ADR | 12,757,500 | |||||||||
689,860 | Compal Electronics GDR 144A | 3,318,227 | |||||||||
4,223,465 | Compal Electronics Inc | 3,928,491 | |||||||||
7,770,000 | E.Sun Financial Holdings Co Ltd | 5,206,275 | |||||||||
3,127,000 | Fubon Financial Holding Co Ltd | 2,793,375 | |||||||||
147,300 | Fubon Financial Holding Co Ltd GDR (Registered) | 1,318,335 | |||||||||
21,079,000 | Sinopac Holdings Co | 11,150,976 | |||||||||
646,070 | Standard Foods Corp | 267,961 | |||||||||
645,300 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 6,278,769 | |||||||||
41,380,091 | United Microelectronics Corp | 24,131,936 | |||||||||
85,745,166 | |||||||||||
Thailand — 0.2% | |||||||||||
32,380,000 | Charoen Pokphand Foods Pcl (Foreign Registered) (a) | 4,470,775 | |||||||||
16,559,000 | Sino Thai Engineering & Construction Pcl (Foreign Registered) (a) | 4,569,920 | |||||||||
3,117,000 | Thai Airways International Pcl (Foreign Registered) (a) | 3,380,554 | |||||||||
12,421,249 | |||||||||||
United Kingdom — 22.6% | |||||||||||
860,900 | Amvescap Plc | 8,132,216 | |||||||||
513,200 | Anglo American Plc | 19,118,085 | |||||||||
767,408 | Associated British Foods Plc | 11,772,408 | |||||||||
764,800 | AstraZeneca Plc | 35,320,622 |
See accompanying notes to the financial statements.
13
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
2,216,616 | Aviva Plc | 30,669,077 | |||||||||
209,372 | AWG Plc | 4,063,689 | |||||||||
1,421,628 | BAA Plc | 19,945,432 | |||||||||
7,388,910 | BAE Systems Plc | 54,390,362 | |||||||||
5,772,417 | Barclays Plc | 67,612,336 | |||||||||
896,942 | BBA Group Plc | 4,211,479 | |||||||||
2,436,846 | BG Group Plc | 28,542,356 | |||||||||
579,847 | BHP Billiton Plc | 9,744,724 | |||||||||
253,500 | BOC Group | 6,704,916 | |||||||||
437,062 | Boots Group Plc | 5,435,015 | |||||||||
8,445,151 | BP Plc | 93,420,735 | |||||||||
224,100 | Brambles Industries Plc | 1,619,311 | |||||||||
501,600 | British Energy Plc (Deferred Shares) * (a) (c) | — | |||||||||
804,676 | British Sky Broadcasting Plc | 7,132,361 | |||||||||
8,501,501 | BT Group Plc | 30,663,047 | |||||||||
414,370 | Bunzl Plc | 4,643,386 | |||||||||
229,783 | Burberry Group Plc | 1,845,139 | |||||||||
2,765,801 | Cable & Wireless Plc | 5,166,838 | |||||||||
718,800 | Cadbury Schweppes Plc | 7,301,944 | |||||||||
976,047 | Cattle's Plc | 5,937,336 | |||||||||
5,022,457 | Centrica Plc | 25,583,926 | |||||||||
3,297,000 | Cobham Group Plc | 9,820,567 | |||||||||
2,245,100 | Compass Group Plc | 8,546,136 | |||||||||
2,036,297 | Diageo Plc | 31,250,992 | |||||||||
1,981,282 | DSG International Plc | 5,974,503 | |||||||||
55,095 | DX Services Plc | 293,676 | |||||||||
260,981 | Filtrona Plc | 1,373,040 | |||||||||
526,698 | FKI Plc | 1,121,776 | |||||||||
1,857,345 | Gallaher Group Plc | 28,780,245 | |||||||||
3,214,499 | GlaxoSmithKline Plc | 81,645,115 | |||||||||
647,914 | GUS Plc | 11,923,084 | |||||||||
741,658 | Hanson Plc | 9,054,038 | |||||||||
1,132,961 | Hays Plc | 2,938,064 | |||||||||
3,510,547 | HBOS Plc | 65,377,283 |
See accompanying notes to the financial statements.
14
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
4,292,773 | HSBC Holdings Plc | 73,463,729 | |||||||||
1,005,670 | ICAP Plc | 7,835,362 | |||||||||
755,120 | Imperial Chemical Industries Plc | 4,453,422 | |||||||||
1,104,418 | Imperial Tobacco Group Plc | 33,215,285 | |||||||||
177,057 | Intercontinental Hotels Group Plc | 2,721,419 | |||||||||
1,577,300 | International Power Plc * | 7,903,198 | |||||||||
3,918,000 | ITV Plc | 7,451,921 | |||||||||
1,483,269 | J Sainsbury Plc | 8,328,369 | |||||||||
343,370 | Johnson Matthey Plc | 8,606,883 | |||||||||
283,803 | Kesa Electricals Plc | 1,321,759 | |||||||||
1,698,210 | Kingfisher Plc | 6,792,329 | |||||||||
1,717,091 | Ladbrokes Group | 11,083,974 | |||||||||
8,637,744 | Legal & General Group Plc | 19,724,179 | |||||||||
4,319,420 | Lloyds TSB Group Plc | 41,959,735 | |||||||||
49,738 | Lonmin Plc | 1,978,508 | |||||||||
1,255,000 | Matalan Plc | 4,029,434 | |||||||||
1,936,500 | Misys Plc | 7,967,908 | |||||||||
402,128 | Mitchells & Butlers Plc | 2,791,724 | |||||||||
1,781,554 | National Grid Plc | 18,731,706 | |||||||||
180,132 | Next Plc | 5,210,022 | |||||||||
633,700 | Northern Rock Plc | 12,519,426 | |||||||||
1,133,000 | Old Mutual Plc | 3,730,142 | |||||||||
1,205,500 | Pearson Plc | 14,972,618 | |||||||||
617,017 | Peninsular & Oriental Steam Navigation Co | 5,583,960 | |||||||||
1,471,606 | Photo-Me International Plc | 2,535,138 | |||||||||
2,440,417 | Prudential Plc | 25,818,400 | |||||||||
446,590 | Reed Elsevier Plc | 4,031,659 | |||||||||
2,581,620 | Rentokil Initial Plc | 7,109,619 | |||||||||
66,311 | Resolution Plc | 774,433 | |||||||||
621,169 | Reuters Group Plc | 4,136,965 | |||||||||
625,836 | Rexam Plc | 5,565,080 | |||||||||
2,239,511 | Royal & Sun Alliance Insurance Group | 5,106,431 | |||||||||
3,229,884 | Royal Bank of Scotland Group | 108,036,173 | |||||||||
525,440 | Royal Dutch Shell Group Class A | 15,840,699 |
See accompanying notes to the financial statements.
15
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
489,000 | Royal Dutch Shell Plc A Shares | 14,701,747 | |||||||||
1,812,597 | Royal Dutch Shell Plc B Shares | 56,988,935 | |||||||||
1,283,000 | Sage Group Plc | 6,235,714 | |||||||||
1,534,421 | Scottish & Newcastle Plc | 13,778,739 | |||||||||
912,260 | Scottish & Southern Energy Plc | 18,373,922 | |||||||||
1,549,700 | Scottish Power Plc | 15,852,206 | |||||||||
773,363 | Severn Trent Plc | 15,637,971 | |||||||||
665,100 | Shire Pharmaceuticals Plc | 10,389,035 | |||||||||
635,595 | Slough Estates Plc | 6,786,714 | |||||||||
597,432 | Smith (David S.) Holdings Plc | 1,862,426 | |||||||||
1,097,400 | South African Breweries Plc | 21,812,178 | |||||||||
100,000 | SSL International Plc | 572,749 | |||||||||
282,734 | Standard Chartered Plc | 7,383,511 | |||||||||
431,000 | Stolt-Nielsen SA | 13,367,346 | |||||||||
1,154,549 | Tesco Plc | 6,841,917 | |||||||||
226,228 | TI Automotive Ltd Class A * (a) | — | |||||||||
948,246 | Tomkins Plc | 5,535,856 | |||||||||
216,525 | Travis Perkins Plc | 5,634,391 | |||||||||
340,847 | Trinity Mirror Plc | 3,448,809 | |||||||||
1,182,332 | Unilever Plc | 12,164,835 | |||||||||
901,112 | United Utilities Plc | 10,789,769 | |||||||||
377,082 | Viridian Group Plc | 6,665,194 | |||||||||
27,125,890 | Vodafone Group Plc | 51,973,298 | |||||||||
280,066 | Whitbread Plc | 5,200,027 | |||||||||
1,201,036 | William Morrison Supermarkets | 4,490,510 | |||||||||
652,021 | Wolseley Plc | 16,175,034 | |||||||||
2,291,250 | Wood Group (John) Plc | 9,537,683 | |||||||||
746,400 | WPP Group Plc | 8,668,219 | |||||||||
1,589,275,603 | |||||||||||
TOTAL COMMON STOCKS (COST $4,583,105,289) | 6,615,698,262 |
See accompanying notes to the financial statements.
16
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
PREFERRED STOCKS — 0.8% | |||||||||||
Brazil — 0.1% | |||||||||||
602,400 | Suzano Bahia Sul Papel e Celulose SA 0.64% | 4,102,050 | |||||||||
France — 0.0% | |||||||||||
21,058 | Casino Guichard Perrachon SA 4.55% | 1,134,059 | |||||||||
Germany — 0.7% | |||||||||||
166,290 | Henkel KGaA 1.46% | 18,347,002 | |||||||||
579,099 | Volkswagen AG 2.82% | 29,840,875 | |||||||||
48,187,877 | |||||||||||
Italy — 0.0% | |||||||||||
165,933 | Fiat SPA * | 1,432,432 | |||||||||
76,871 | IFI Istituto Finanziario Industries * | 1,442,711 | |||||||||
2,875,143 | |||||||||||
TOTAL PREFERRED STOCKS (COST $37,377,645) | 56,299,129 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Thailand — 0.0% | |||||||||||
2,759,833 | Sino Thai Engineering & Construction Pcl Warrants, Expires 04/18/08 * (a) | 92,914 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $215,949) | 92,914 |
See accompanying notes to the financial statements.
17
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENT(S) — 4.1% | |||||||||||
155,184,995 | Boston Global Investment Trust (d) | 155,184,995 | |||||||||
131,400,000 | Dresdner Bank AG Time Deposit, 4.55%, due 03/01/06 | 131,400,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $286,584,995) | 286,584,995 | ||||||||||
TOTAL INVESTMENTS — 99.0% (Cost $4,907,283,878) | 6,958,675,300 | ||||||||||
Other Assets and Liabilities (net) — 1.0% | 67,808,419 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 7,026,483,719 |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
GDR - Global Depository Receipt
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) All or a portion of this security is out on loan (Note 2).
(c) Bankrupt issuer.
(d) All or a portion of this security represents investment of security lending collateral (Note 2).
As of February 28, 2006, 92.2% of the Net Assets of the Fund was valued using fair valued prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
18
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $131,918,988 (cost $4,907,283,878) (Note 2) | $ | 6,958,675,300 | |||||
Foreign currency, at value (cost $186,443,890) (Note 2) | 185,843,992 | ||||||
Receivable for investments sold | 64,590,267 | ||||||
Receivable for Fund shares sold | 172,759 | ||||||
Dividends and interest receivable | 8,824,036 | ||||||
Foreign taxes receivable | 1,079,567 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 286,025 | ||||||
Total assets | 7,219,471,946 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 25,631,174 | ||||||
Collateral on securities loaned (Note 2) | 155,184,995 | ||||||
Payable for Fund shares repurchased | 6,951,204 | ||||||
Due to custodian | 227,563 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 363,771 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 3,200,716 | ||||||
Shareholder service fee | 788,902 | ||||||
Administration fee – Class M | 849 | ||||||
Trustees and Chief Compliance Officer fees | 9,465 | ||||||
Payable for 12b-1 fee – Class M | 2,184 | ||||||
Accrued expenses | 627,404 | ||||||
Total liabilities | 192,988,227 | ||||||
Net assets | $ | 7,026,483,719 |
See accompanying notes to the financial statements.
19
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006 — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 4,816,531,795 | |||||
Distributions in excess of net investment income | (32,007,207 | ) | |||||
Accumulated net realized gain | 191,804,969 | ||||||
Net unrealized appreciation | 2,050,154,162 | ||||||
$ | 7,026,483,719 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 1,213,447,282 | |||||
Class III shares | $ | 3,800,326,348 | |||||
Class IV shares | $ | 2,007,037,250 | |||||
Class M shares | $ | 5,672,839 | |||||
Shares outstanding: | |||||||
Class II | 72,668,355 | ||||||
Class III | 226,736,663 | ||||||
Class IV | 119,704,047 | ||||||
Class M | 338,579 | ||||||
Net asset value per share: | |||||||
Class II | $ | 16.70 | |||||
Class III | $ | 16.76 | |||||
Class IV | $ | 16.77 | |||||
Class M | $ | 16.75 |
See accompanying notes to the financial statements.
20
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $12,350,000) | $ | 154,756,056 | |||||
Interest (including securities lending income of $4,471,442) | 9,875,723 | ||||||
Total investment income | 164,631,779 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 36,583,320 | ||||||
Shareholder service fee – Class II (Note 3) | 2,141,583 | ||||||
Shareholder service fee – Class III (Note 3) | 5,887,748 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,074,908 | ||||||
12b-1 fee – Class M (Note 3) | 10,662 | ||||||
Administration fee – Class M (Note 3) | 8,530 | ||||||
Custodian and fund accounting agent fees | 2,705,594 | ||||||
Transfer agent fees | 77,115 | ||||||
Audit and tax fees | 75,389 | ||||||
Legal fees | 101,830 | ||||||
Trustees fees and related expenses (Note 3) | 114,983 | ||||||
Registration fees | 99,815 | ||||||
Miscellaneous | 170,352 | ||||||
Total expenses | 49,051,829 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (3,158,864 | ) | |||||
Net expenses | 45,892,965 | ||||||
Net investment income (loss) | 118,738,814 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $655,984 and $63,864, respectively) (Note 2) | 406,930,496 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (12,335,748 | ) | |||||
Net realized gain (loss) | 394,594,748 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $363,771) (Note 2) | 628,142,477 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (3,093,818 | ) | |||||
Net unrealized gain (loss) | 625,048,659 | ||||||
Net realized and unrealized gain (loss) | 1,019,643,407 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,138,382,221 |
See accompanying notes to the financial statements.
21
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 118,738,814 | $ | 90,861,700 | |||||||
Net realized gain (loss) | 394,594,748 | 273,901,994 | |||||||||
Change in net unrealized appreciation (depreciation) | 625,048,659 | 548,944,432 | |||||||||
Net increase (decrease) in net assets from operations | 1,138,382,221 | 913,708,126 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (21,424,856 | ) | (20,351,355 | ) | |||||||
Class III | (83,505,010 | ) | (77,653,151 | ) | |||||||
Class IV | (28,114,634 | ) | (27,096,262 | ) | |||||||
Class M | (87,274 | ) | (91,041 | ) | |||||||
Total distributions from net investment income | (133,131,774 | ) | (125,191,809 | ) | |||||||
Net realized gains | |||||||||||
Class II | (54,410,141 | ) | (21,380,268 | ) | |||||||
Class III | (212,547,994 | ) | (80,817,446 | ) | |||||||
Class IV | (65,893,966 | ) | (27,299,080 | ) | |||||||
Class M | (237,365 | ) | (75,925 | ) | |||||||
Total distributions from net realized gains | (333,089,466 | ) | (129,572,719 | ) | |||||||
(466,221,240 | ) | (254,764,528 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | 293,352,728 | (79,831,540 | ) | ||||||||
Class III | (282,786,170 | ) | 993,325,125 | ||||||||
Class IV | 697,266,022 | 104,840,700 | |||||||||
Class M | 1,658,096 | (10,038,565 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 709,490,676 | 1,008,295,720 | |||||||||
Total increase (decrease) in net assets | 1,381,651,657 | 1,667,239,318 | |||||||||
Net assets: | |||||||||||
Beginning of period | 5,644,832,062 | 3,977,592,744 | |||||||||
End of period (including distributions in excess of net investment income of $32,007,207 and $5,020,274, respectively) | $ | 7,026,483,719 | $ | 5,644,832,062 |
See accompanying notes to the financial statements.
22
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.13 | $ | 13.29 | $ | 8.88 | $ | 9.94 | $ | 11.21 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a) | 0.28 | 0.26 | 0.17 | 0.15 | 0.16 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 2.46 | 2.28 | 4.46 | (1.03 | ) | (1.20 | ) | ||||||||||||||||
Total from investment operations | 2.74 | 2.54 | 4.63 | (0.88 | ) | (1.04 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.33 | ) | (0.34 | ) | (0.22 | ) | (0.18 | ) | (0.11 | ) | |||||||||||||
From net realized gains | (0.84 | ) | (0.36 | ) | — | — | (0.12 | ) | |||||||||||||||
Total distributions | (1.17 | ) | (0.70 | ) | (0.22 | ) | (0.18 | ) | (0.23 | ) | |||||||||||||
Net asset value, end of period | $ | 16.70 | $ | 15.13 | $ | 13.29 | $ | 8.88 | $ | 9.94 | |||||||||||||
Total Return(b) | 19.01 | % | 19.40 | % | 52.49 | % | (9.00 | )% | (9.37 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,213,447 | $ | 808,149 | $ | 781,448 | $ | 305,423 | $ | 100,127 | |||||||||||||
Net expenses to average daily net assets | 0.82 | % | 0.82 | % | 0.82 | % | 0.82 | % | 0.82 | % | |||||||||||||
Net investment income to average daily net assets | 1.82 | % | 1.92 | % | 1.47 | % | 1.54 | % | 1.56 | % | |||||||||||||
Portfolio turnover rate | 25 | % | 23 | % | 25 | % | 22 | % | 22 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | % | 0.06 | % | 0.08 | % | 0.09 | % | 0.09 | % |
(a) Calculated using average shares outstanding throughout the period.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
See accompanying notes to the financial statements.
23
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.95 | $ | 11.22 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a) | 0.30 | 0.26 | 0.19 | 0.17 | 0.19 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 2.45 | 2.30 | 4.47 | (1.04 | ) | (1.23 | ) | ||||||||||||||||
Total from investment operations | 2.75 | 2.56 | 4.66 | (0.87 | ) | (1.04 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.33 | ) | (0.36 | ) | (0.22 | ) | (0.18 | ) | (0.11 | ) | |||||||||||||
From net realized gains | (0.84 | ) | (0.36 | ) | — | — | (0.12 | ) | |||||||||||||||
Total distributions | (1.17 | ) | (0.72 | ) | (0.22 | ) | (0.18 | ) | (0.23 | ) | |||||||||||||
Net asset value, end of period | $ | 16.76 | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.95 | |||||||||||||
Total Return(b) | 19.07 | % | 19.41 | % | 52.76 | % | (8.89 | )% | (9.33 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,800,326 | $ | 3,663,370 | $ | 2,260,046 | $ | 1,241,562 | $ | 1,049,456 | |||||||||||||
Net expenses to average daily net assets | 0.75 | % | 0.75 | % | 0.75 | % | 0.75 | % | 0.75 | % | |||||||||||||
Net investment income to average daily net assets | 1.97 | % | 1.87 | % | 1.67 | % | 1.77 | % | 1.88 | % | |||||||||||||
Portfolio turnover rate | 25 | % | 23 | % | 25 | % | 22 | % | 22 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | % | 0.06 | % | 0.08 | % | 0.09 | % | 0.09 | % |
(a) Calculated using average shares outstanding throughout the period.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
See accompanying notes to the financial statements.
24
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.96 | $ | 11.22 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a) | 0.31 | 0.28 | 0.19 | 0.18 | 0.20 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 2.47 | 2.28 | 4.48 | (1.05 | ) | (1.22 | ) | ||||||||||||||||
Total from investment operations | 2.78 | 2.56 | 4.67 | (0.87 | ) | (1.02 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.35 | ) | (0.36 | ) | (0.23 | ) | (0.19 | ) | (0.12 | ) | |||||||||||||
From net realized gains | (0.84 | ) | (0.36 | ) | — | — | (0.12 | ) | |||||||||||||||
Total distributions | (1.19 | ) | (0.72 | ) | (0.23 | ) | �� | (0.19 | ) | (0.24 | ) | ||||||||||||
Net asset value, end of period | $ | 16.77 | $ | 15.18 | $ | 13.34 | $ | 8.90 | $ | 9.96 | |||||||||||||
Total Return(b) | 19.22 | % | 19.47 | % | 52.84 | % | (8.92 | )% | (9.19 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,007,037 | $ | 1,169,805 | $ | 923,221 | $ | 207,858 | $ | 134,357 | |||||||||||||
Net expenses to average daily net assets | 0.69 | % | 0.69 | % | 0.70 | % | 0.69 | % | 0.69 | % | |||||||||||||
Net investment income to average daily net assets | 1.98 | % | 2.00 | % | 1.65 | % | 1.79 | % | 1.97 | % | |||||||||||||
Portfolio turnover rate | 25 | % | 23 | % | 25 | % | 22 | % | 22 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | % | 0.06 | % | 0.09 | % | 0.09 | % | 0.09 | % |
(a) Calculated using average shares outstanding throughout the period.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
See accompanying notes to the financial statements.
25
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class M share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002† | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.19 | $ | 13.25 | $ | 8.86 | $ | 9.93 | $ | 9.85 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a) | 0.24 | 0.30 | 0.14 | 0.05 | 0.00 | (b) | |||||||||||||||||
Net realized and unrealized gain (loss) | 2.46 | 2.21 | 4.45 | (0.93 | ) | 0.08 | |||||||||||||||||
Total from investment operations | 2.70 | 2.51 | 4.59 | (0.88 | ) | 0.08 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.30 | ) | (0.21 | ) | (0.20 | ) | (0.19 | ) | — | ||||||||||||||
From net realized gains | (0.84 | ) | (0.36 | ) | — | — | — | ||||||||||||||||
Total distributions | (1.14 | ) | (0.57 | ) | (0.20 | ) | (0.19 | ) | — | ||||||||||||||
Net asset value, end of period | $ | 16.75 | $ | 15.19 | $ | 13.25 | $ | 8.86 | $ | 9.93 | |||||||||||||
Total Return(c) | 18.66 | % | 19.18 | % | 52.10 | % | (9.09 | )% | 0.81 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 5,673 | $ | 3,508 | $ | 12,878 | $ | 4,449 | $ | 1 | |||||||||||||
Net expenses to average daily net assets | 1.05 | % | 1.05 | % | 1.05 | % | 1.06 | % | 1.05 | %* | |||||||||||||
Net investment income to average daily net assets | 1.56 | % | 2.24 | % | 1.23 | % | 0.55 | % | 0.35 | %* | |||||||||||||
Portfolio turnover rate | 25 | % | 23 | % | 25 | % | 22 | % | 22 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | % | 0.06 | % | 0.08 | % | 0.10 | % | 0.09 | %* |
(a) Calculated using average shares outstanding throughout the period.
(b) Net investment income earned was less than $.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Period from January 25, 2002 (commencement of operations) to February 28, 2002.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2002.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
26
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the MSCI EAFE Index (Europe, Australasia, and Far East).
Throughout the year ended February 28, 2006, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 3). The principal economic difference among the classes of shares is the type and level of fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares, except Class M, is generally based on the total amount of assets invested in the Fund or with GMO, as more fully outlined in the Trust's prospectus.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many
27
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after the close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or
28
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts a re generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts. Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for
29
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $131,918,988, collateralized by cash in the amount of $155,184,995, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation (depreciation) on foreign securities of $363,771 for potential capital gains and repatriation taxes as of February 28, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the year ended February 28, 2006, the Fund incurred $655,984 in capital gain taxes which is included in net realized gain (loss) in the Statement of Operations.
The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to/from the Brazilian
30
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
market. The CPMF tax has been included in the net realized gain (loss) on investments throughout the period. For the year ended February 28, 2006, the Fund incurred $63,864 in CPMF tax which is included in net realized gain in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $156,919,958 and $125,191,809, respectively and long-term capital gains – $309,301,282 and $129,572,719, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $46,993,835 and $169,059,485 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 4,963,445,145 | $ | 2,048,520,459 | $ | (53,290,304 | ) | $ | 1,995,230,155 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Distributions In Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (12,593,973 | ) | $ | 12,593,973 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities
31
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% of average daily Class M net assets for support services provided to Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, Class M shares of the Fund may pay a fee, at the annual rate of 1.00% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of certain other services incidental thereto. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net asset value attributable to its Class M shares. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class II, Class III
32
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
and Class IV only), administration fees (Class M only), 12b-1 fees (Class M only), fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.60% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $66,881 and $39,271, respectively. No remuneration is paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $1,659,162,169 and $1,470,822,316, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Related parties
As of February 28, 2006, less than 0.1% of the Fund's shares were held by fourteen related parties comprised of certain GMO employee accounts, and 0.6% of the Fund's shares were held by accounts for which the Manager has investment discretion.
33
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 20,435,753 | $ | 315,944,888 | 9,864,921 | $ | 135,159,548 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,621,131 | 70,186,396 | 2,677,947 | 39,124,025 | |||||||||||||||
Shares repurchased | (5,804,846 | ) | (92,778,556 | ) | (17,908,586 | ) | (254,115,113 | ) | |||||||||||
Net increase (decrease) | 19,252,038 | $ | 293,352,728 | (5,365,718 | ) | $ | (79,831,540 | ) | |||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 54,877,217 | $ | 816,011,668 | 73,613,892 | $ | 1,012,049,726 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 16,054,197 | 244,024,637 | 8,609,335 | 126,389,249 | |||||||||||||||
Shares repurchased | (85,541,651 | ) | (1,342,822,475 | ) | (10,356,779 | ) | (145,113,850 | ) | |||||||||||
Net increase (decrease) | (14,610,237 | ) | $ | (282,786,170 | ) | 71,866,448 | $ | 993,325,125 | |||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 49,623,322 | $ | 800,078,517 | 6,486,623 | $ | 85,105,954 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 5,715,726 | 87,337,578 | 3,345,917 | 49,084,746 | |||||||||||||||
Shares repurchased | (12,672,320 | ) | (190,150,073 | ) | (2,003,741 | ) | (29,350,000 | ) | |||||||||||
Net increase (decrease) | 42,666,728 | $ | 697,266,022 | 7,828,799 | $ | 104,840,700 | |||||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 129,243 | $ | 1,984,452 | 304,303 | $ | 4,053,057 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 21,242 | 324,639 | 11,731 | 166,966 | |||||||||||||||
Shares repurchased | (42,894 | ) | (650,995 | ) | (1,056,646 | ) | (14,258,588 | ) | |||||||||||
Net increase (decrease) | 107,591 | $ | 1,658,096 | (740,612 | ) | $ | (10,038,565 | ) |
34
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Foreign Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Foreign Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
35
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution and/or service (12b-1) fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
36
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
February 28, 2006 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class II | |||||||||||||||||||
1) Actual | 0.82 | % | $ | 1,000.00 | $ | 1,151.60 | $ | 4.37 | |||||||||||
2) Hypothetical | 0.82 | % | $ | 1,000.00 | $ | 1,020.73 | $ | 4.11 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.75 | % | $ | 1,000.00 | $ | 1,152.20 | $ | 4.00 | |||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.08 | $ | 3.76 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.69 | % | $ | 1,000.00 | $ | 1,152.80 | $ | 3.68 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.46 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.05 | % | $ | 1,000.00 | $ | 1,150.10 | $ | 5.60 | |||||||||||
2) Hypothetical | 1.05 | % | $ | 1,000.00 | $ | 1,019.59 | $ | 5.26 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
37
GMO Foreign Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $309,301,282 from long-term capital gains.
During the year ended February 28, 2006, the Fund paid foreign taxes of $13,005,984 and recognized foreign source income of $167,104,702.
For taxable, non-corporate shareholders, 75.57% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $4,268,861 and $17,541,463, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
38
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
39
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
40
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
41
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
42
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Currency Hedged International Bond Fund returned +6.0% for the fiscal year ended February 28, 2006, as compared to +6.0% for the JPMorgan Non-U.S. Government Ex-Japan Bond Index (Hedged). The Fund's exposure to various issues is achieved directly and indirectly through its investment in certain underlying GMO mutual funds, including the GMO Emerging Country Debt Fund, the GMO World Opportunity Overlay Fund, and the GMO Short-Duration Collateral Fund.
The Fund was even with the benchmark during the fiscal year. Interest rate strategy underperformance offset value added from currency selection, emerging debt exposure, and cash management.
Global bond yields fell across the board during the first half of 2005, although they began heading higher in the third quarter of 2005 and carrying into the New Year. Major, sustained bond market positions included overweights in Sweden and Canada and underweights in the U.K. and Switzerland. The Fund had been overweight Australia early in 2005 and moved to an underweight position later in the year. U.S., Canada, Australia, and Euro-area positions were the largest positive contributors. Underweights in the U.K. and Switzerland and a recent overweight in Japan detracted from performance.
The U.S. dollar gained versus most currencies in 2005, began weakening in December, then stabilized in February. For much of 2005 the Fund had been overweight relatively higher yielding currencies like Australian dollars, New Zealand dollars, and British sterling and underweight lower yielding currencies such as Japanese yen and euro. In general, the underweights added value, while the overweights did not.
Emerging country debt exposure added value as did cash management strategies.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* JPMorgan Non-U.S. ex-Japan Government Bond Index (Hedged) + represents the JPMorgan Non-U.S. Government Bond Index (Hedged) prior to 12/31/03 and the JPMorgan Non-U.S. ex-Japan Government Bond Index (Hedged) thereafter.
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 95.7 | % | |||||
Short-Term Investment(s) | 2.5 | ||||||
Mutual Funds | 0.9 | ||||||
Put Options Purchased | 0.2 | ||||||
Forward Currency Contracts | 0.2 | ||||||
Call Options Purchased | 0.2 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Swaps | 0.1 | ||||||
Forward Start Options | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Futures | (0.5 | ) | |||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Other | 0.9 | ||||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 89.5 | % | |||||
Canada | 20.7 | ||||||
Sweden | 20.1 | ||||||
Japan | 3.3 | ||||||
United Kingdom | (2.7 | ) | |||||
Switzerland | (7.7 | ) | |||||
United States | (10.4 | ) | |||||
Australia | (12.8 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate country exposure. The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes the value of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, Netherlands and Spain.
1
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value / Principal Amount | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 2.5% | |||||||||||
United States — 2.5% | |||||||||||
U.S. Government | |||||||||||
18,007,800 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) | 19,051,690 | |||||||||
5,000,000 | U.S. Treasury Note, 3.75%, due 03/31/07 (a) | 4,946,875 | |||||||||
Total United States | 23,998,565 | ||||||||||
TOTAL DEBT OBLIGATION(S) (COST $24,257,432) | 23,998,565 | ||||||||||
CALL OPTIONS PURCHASED — 0.1% | |||||||||||
Currency Options — 0.1% | |||||||||||
49,200,000 | AUD Call/USD Put, Expires 06/07/06, Strike 0.744 | 572,550 | |||||||||
TOTAL CALL OPTIONS PURCHASED (COST $909,771) | 572,550 | ||||||||||
PUT OPTIONS PURCHASED — 0.2% | |||||||||||
Currency Options — 0.2% | |||||||||||
5,500,000,000 | USD Put/JPY Call, Expires 04/04/06, Strike 116.30 | 750,695 | |||||||||
5,600,000,000 | USD Put/JPY Call, Expires 04/18/06, Strike 118.50 | 1,509,200 | |||||||||
2,259,895 | |||||||||||
TOTAL PUT OPTIONS PURCHASED (COST $1,840,797) | 2,259,895 | ||||||||||
FORWARD START OPTIONS — 0.0% | |||||||||||
Currency Options — 0.0% | |||||||||||
6,740,000,000 | JPY Put/USD Call, Expires 09/18/06, Strike TBD | 26,016 | |||||||||
TOTAL FORWARD START OPTIONS (COST $0) | 26,016 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 96.7% | |||||||||||
Affiliated Issuer(s) — 96.7% | |||||||||||
2,568,071 | GMO Emerging Country Debt Fund, Class III | 29,019,205 | |||||||||
27,410,352 | GMO Short-Duration Collateral Fund | 701,705,018 | |||||||||
5,496 | GMO Special Purpose Holding Fund | 45,229 | |||||||||
7,590,061 | GMO World Opportunity Overlay Fund | 191,497,233 | |||||||||
TOTAL MUTUAL FUNDS (COST $916,970,380) | 922,266,685 | ||||||||||
TOTAL INVESTMENTS — 99.5% (Cost $943,978,380) | 949,123,711 | ||||||||||
Other Assets and Liabilities (net) — 0.5% | 4,770,734 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 953,894,445 |
See accompanying notes to the financial statements.
3
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3/21/06 | AUD | 172,000,000 | $ | 127,650,751 | $ | (561,127 | ) | ||||||||||||
4/18/06 | CHF | 48,700,000 | 37,295,736 | (368,611 | ) | ||||||||||||||
4/11/06 | GBP | 31,900,000 | 55,967,670 | 273,344 | |||||||||||||||
3/07/06 | JPY | 11,790,000,000 | 101,917,614 | 133,414 | |||||||||||||||
5/02/06 | NZD | 79,800,000 | 52,613,736 | 176,796 | |||||||||||||||
$ | (346,184 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
3/21/06 | AUD | 137,000,000 | $ | 101,675,308 | $ | 1,121,654 | |||||||||||||
3/28/06 | CAD | 41,900,000 | 36,892,574 | (575,250 | ) | ||||||||||||||
4/18/06 | CHF | 68,500,000 | 52,459,095 | 182,576 | |||||||||||||||
4/25/06 | EUR | 95,700,000 | 114,435,260 | (75,775 | ) | ||||||||||||||
4/11/06 | GBP | 21,000,000 | 36,843,920 | 449,980 | |||||||||||||||
3/07/06 | JPY | 33,920,000,000 | 293,218,445 | 2,297,113 | |||||||||||||||
$ | 3,400,298 |
Forward Cross Currency Contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
3/14/06 | EUR | 59,900,000 | NOK | 475,324,470 | $ | (962,787 | ) | ||||||||
4/04/06 | EUR | 47,100,000 | SEK | 435,296,316 | (1,111,431 | ) | |||||||||
4/04/06 | SEK | 655,048,643 | EUR | 70,100,000 | 743,719 | ||||||||||
3/14/06 | NOK | 253,343,575 | EUR | 31,500,000 | 4,798 | ||||||||||
$ | (1,325,701 | ) |
See accompanying notes to the financial statements.
4
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
1,940 | Canadian Government Bond 10 Yr. | June 2006 | $ | 192,506,313 | $ | (270,594 | ) | ||||||||||||
1,821 | EURO BOBL | March 2006 | 243,413,384 | (1,852,556 | ) | ||||||||||||||
3,794 | EURO Bund | March 2006 | 544,503,191 | (2,890,382 | ) | ||||||||||||||
21 | Japanese Government Bond 10 Yr. (TSE) | March 2006 | 24,670,985 | (17,938 | ) | ||||||||||||||
$ | (5,031,470 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
537 | Australian Government Bond 10 Yr. | March 2006 | $ | 42,033,080 | $ | 216,769 | |||||||||||||
1,059 | Australian Government Bond 3 Yr. | March 2006 | 80,226,306 | 141,459 | |||||||||||||||
1,500 | Federal Fund 30 day | March 2006 | 596,610,225 | (36,414 | ) | ||||||||||||||
334 | U.S. Long Bond | June 2006 | 37,773,312 | 46,237 | |||||||||||||||
184 | U.S. Treasury Note 10 Yr. | June 2006 | 19,854,750 | 15,794 | |||||||||||||||
1,029 | U.S. Treasury Note 5 Yr. | June 2006 | 108,237,938 | (199,756 | ) | ||||||||||||||
146 | UK Gilt Long Bond | June 2006 | 29,044,142 | 122,489 | |||||||||||||||
$ | 306,578 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
50,000,000 | SEK | 3/17/2008 | Deutsche Bank AG | Receive | 2.90 | % | 3 Month SEK STIBOR | $ | 4,554 | ||||||||||||||||||||||
188,000,000 | SEK | 3/17/2008 | JP Morgan Chase Bank | Receive | 2.90 | % | 3 Month SEK STIBOR | 17,218 | |||||||||||||||||||||||
179,000,000 | SEK | 3/15/2011 | Citigroup | Receive | 3.40 | % | 3 Month SEK STIBOR | 4,971 | |||||||||||||||||||||||
83,000,000 | SEK | 3/15/2011 | Deutsche Bank AG | Receive | 3.40 | % | 3 Month SEK STIBOR | 2,305 | |||||||||||||||||||||||
48,000,000 | SEK | 3/15/2011 | JP Morgan Chase Bank | Receive | 3.40 | % | 3 Month SEK STIBOR | 1,333 | |||||||||||||||||||||||
54,000,000 | CHF | 3/15/2011 | Deutsche Bank AG | (Pay) | 2.25 | % | 6 Month CHF LIBOR | 32,501 | |||||||||||||||||||||||
226,000,000 | SEK | 3/15/2013 | Deutsche Bank AG | Receive | 3.50 | % | 3 Month SEK STIBOR | (63,034 | ) | ||||||||||||||||||||||
161,000,000 | SEK | 3/15/2013 | JP Morgan Chase Bank | Receive | 3.50 | % | 3 Month SEK STIBOR | (44,905 | ) | ||||||||||||||||||||||
22,500,000 | CHF | 3/15/2013 | JP Morgan Chase Bank | (Pay) | 2.40 | % | 6 Month CHF LIBOR | (945 | ) | ||||||||||||||||||||||
133,000,000 | SEK | 3/15/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 Month SEK STIBOR | 129,074 | |||||||||||||||||||||||
162,000,000 | SEK | 3/15/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 Month SEK STIBOR | 157,217 | |||||||||||||||||||||||
26,600,000 | CHF | 3/15/2016 | Deutsche Bank AG | (Pay) | 2.50 | % | 6 Month CHF LIBOR | 66,196 | |||||||||||||||||||||||
$ | 306,485 |
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
3,000,000 | USD | 7/21/2006 | JP Morgan Chase Bank | 1 month | Return on JP Morgan | ||||||||||||||||||||||
LIBOR | Non - U.S. Hedged Traded | ||||||||||||||||||||||||||
Total Return Government | |||||||||||||||||||||||||||
Bond Index | $ | (8,172 | ) |
Notes to Schedule of Investments:
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
Currency Abbreviations:
AUD - Australian Dollar | JPY - Japanese Yen | ||||||
CAD - Canadian Dollar | NOK - Norwegian Krone | ||||||
CHF - Swiss Franc | NZD - New Zealand Dollar | ||||||
EUR - Euro | SEK - Swedish Krona | ||||||
GBP - British Pound | USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $27,008,000) (Note 2) | $ | 26,857,026 | |||||
Investments in affiliated issuers, at value (cost $916,970,380) (Notes 2 and 8) | 922,266,685 | ||||||
Cash | 951,928 | ||||||
Interest receivable | 170,971 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 5,383,394 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 2,045,424 | ||||||
Receivable for open swap contracts (Note 2) | 415,369 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 43,053 | ||||||
Total assets | 958,133,850 | ||||||
Liabilities: | |||||||
Foreign cash due to custodian | 41,516 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 183,194 | ||||||
Shareholder service fee | 109,916 | ||||||
Trustees and Chief Compliance Officer fees | 1,256 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 3,654,981 | ||||||
Payable for open swap contracts (Note 2) | 117,056 | ||||||
Accrued expenses | 131,486 | ||||||
Total liabilities | 4,239,405 | ||||||
Net assets | $ | 953,894,445 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 967,417,699 | |||||
Distributions in excess of net investment income | (21,395,014 | ) | |||||
Accumulated net realized gain | 4,635,968 | ||||||
Net unrealized appreciation | 3,235,792 | ||||||
$ | 953,894,445 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 953,894,445 | |||||
Shares outstanding: | |||||||
Class III | 105,561,416 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.04 |
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 23,599,347 | |||||
Interest (including securities lending income of $5) | 1,048,196 | ||||||
Total investment income | 24,647,543 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,683,031 | ||||||
Shareholder service fee – Class III (Note 3) | 1,609,819 | ||||||
Custodian, fund accounting agent and transfer agent fees | 379,015 | ||||||
Audit and tax fees | 66,303 | ||||||
Legal fees | 19,625 | ||||||
Trustees fees and related expenses (Note 3) | 19,822 | ||||||
Registration fees | 15,511 | ||||||
Miscellaneous | 20,050 | ||||||
Total expenses | 4,813,176 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (489,312 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (132,831 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (48,507 | ) | |||||
Net expenses | 4,142,526 | ||||||
Net investment income (loss) | 20,505,017 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (9,122,372 | ) | |||||
Investments in affiliated issuers | 7,695,673 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 1,531,793 | ||||||
Closed futures contracts | 37,987,936 | ||||||
Closed swap contracts | (3,496,846 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 11,770,959 | ||||||
Net realized gain (loss) | 46,367,143 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (5,873,634 | ) | |||||
Open futures contracts | (2,386,718 | ) | |||||
Open swap contracts | (983,721 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 5,658,890 | ||||||
Net unrealized gain (loss) | (3,585,183 | ) | |||||
Net realized and unrealized gain (loss) | 42,781,960 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 63,286,977 |
See accompanying notes to the financial statements.
8
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 20,505,017 | $ | 9,829,598 | |||||||
Net realized gain (loss) | 46,367,143 | 42,243,920 | |||||||||
Change in net unrealized appreciation (depreciation) | (3,585,183 | ) | 1,697,459 | ||||||||
Net increase (decrease) in net assets from operations | 63,286,977 | 53,770,977 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (105,683,069 | ) | (14,187,423 | ) | |||||||
Net realized gains | |||||||||||
Class III | (12,456,548 | ) | — | ||||||||
(118,139,617 | ) | (14,187,423 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (6,261,661 | ) | 752,552,732 | ||||||||
Total increase (decrease) in net assets | (61,114,301 | ) | 792,136,286 | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,015,008,746 | 222,872,460 | |||||||||
End of period (including distributions in excess of net investment income of $21,395,014 and accumulated undistributed net investment income of $33,215,127, respectively) | $ | 953,894,445 | $ | 1,015,008,746 |
See accompanying notes to the financial statements.
9
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 9.59 | $ | 9.16 | $ | 8.85 | $ | 9.04 | $ | 9.72 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.18 | 0.14 | 0.06 | 0.09 | 0.50 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.39 | 0.44 | 0.76 | 0.32 | (0.13 | ) | |||||||||||||||||
Total from investment operations | 0.57 | 0.58 | 0.82 | 0.41 | 0.37 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (1.00 | )(d) | (0.15 | ) | (0.51 | ) | (0.60 | ) | (1.05 | ) | |||||||||||||
From net realized gains | (0.12 | ) | — | — | — | — | |||||||||||||||||
Total distributions | (1.12 | ) | (0.15 | ) | (0.51 | ) | (0.60 | ) | (1.05 | ) | |||||||||||||
Net asset value, end of period | $ | 9.04 | $ | 9.59 | $ | 9.16 | $ | 8.85 | $ | 9.04 | |||||||||||||
Total Return(b) | 6.01 | % | 6.35 | % | 9.53 | % | 4.81 | % | 4.21 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 953,894 | $ | 1,015,009 | $ | 222,872 | $ | 20,219 | $ | 17,932 | |||||||||||||
Net expenses to average daily net assets(c) | 0.39 | % | 0.39 | % | 0.38 | % | 0.40 | % | 0.38 | % | |||||||||||||
Net investment income to average daily net assets(a) | 1.91 | % | 1.51 | % | 0.68 | % | 0.97 | % | 5.45 | % | |||||||||||||
Portfolio turnover rate | 49 | % | 44 | % | 36 | % | 66 | % | 44 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | % | 0.09 | % | 0.24 | % | 0.51 | % | 0.54 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(d) Distributions from net investment income include amounts (approximately $0.49 per share) from foreign currency transactions which are treated as realized capital gain for book purposes.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
10
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investments in foreign bond and currency markets (excluding Japan), primarily by investing in other funds of the Trust ("underlying fund(s)", primarily GMO Short-Duration Collateral Fund, GMO World Opportunity Overlay Fund, and GMO Emerging Country Debt Fund, and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent, or another fixed income security). The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan).
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). Shares of GMO Special Purpose Holding Fund, GMO World Opportunity Overlay Fund and GMO Short-Duration Collateral Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
11
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source). Securities held by the underlying fund(s) may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund or the underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 29.6% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $34,276 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $190,801 in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of th e Fund.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market
12
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that a re unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to
13
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Loan agreements
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both t he borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. As of February 28, 2006, the Fund did not enter into any loan agreements.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease
14
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
15
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
16
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $110,053,914 and $14,187,423, respectively and long-term capital gains – $8,085,703 and $0, respectively.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $1,788,009 expiring in 2009. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital and currency losses of $3,695,106 and $7,358,833, respectively.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 945,812,615 | $ | 4,063,720 | $ | (752,624 | ) | $ | 3,311,096 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and derivative contract transactions. The financial highlights exclude these adjustments.
Distributions In Excess Of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 30,567,911 | $ | (31,526,860 | ) | $ | 958,949 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
17
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the ident ified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. The Fund may invest in GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in GMO Short-Duration Collateral Fund ("SDCF"), GMO Special Purpose Holding Fund ("SPHF") and GMO World Opportuni ty Overlay Fund ("Overlay Fund").
18
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying fund(s) exceed 0.25% of the average daily net assets, with such indirect expenses subject to a maximum total reimbursement to the Fund equal to 0.25% of the Fund's average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying fund(s) exclude investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.016 | % | 0.005 | % | 0.016 | % | 0.037 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $12,084 and $6,589, respectively. No remuneration is paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 5,000,000 | $ | — | |||||||
Investments (non-U.S. Government securities) | 511,855,019 | 576,621,810 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's
19
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related party
As of February 28, 2006, 48.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 98.7% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 28,576,178 | $ | 279,566,401 | 84,283,097 | $ | 778,377,613 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 11,745,209 | 108,299,908 | 1,290,356 | 12,276,816 | |||||||||||||||
Shares repurchased | (40,553,773 | ) | (394,127,970 | ) | (4,122,081 | ) | (38,101,697 | ) | |||||||||||
Net increase (decrease) | (232,386 | ) | $ | (6,261,661 | ) | 81,451,372 | $ | 752,552,732 |
20
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 30,230,210 | $ | 9,569,887 | $ | 12,000,000 | $ | 3,089,677 | $ | 1,480,212 | $ | 29,019,205 | |||||||||||||||
GMO Short-Duration Collateral Fund | 746,800,324 | 420,159,670 | 474,650,000 | 20,509,670 | — | 701,705,018 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 85,237 | — | — | — | 51,581 | 45,229 | * | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 201,962,112 | 69,650,000 | 80,050,000 | — | — | 191,497,233 | |||||||||||||||||||||
Totals | $ | 979,077,883 | $ | 499,379,557 | $ | 566,700,000 | $ | 23,599,347 | $ | 1,531,793 | $ | 922,266,685 |
* After the effect of return of capital distributions of $30,296 and $4,817 on April 5, 2005 and February 21, 2006, respectively.
21
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Co mpany Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
22
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetic al account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.43 | % | $ | 1,000.00 | $ | 1,012.20 | $ | 2.15 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,022.66 | $ | 2.16 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
23
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $8,085,703 from long-term capital gains.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $13,539,452 and $1,591,907, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
24
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
25
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee3. | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
26
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
27
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003– present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer,October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
28
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Foreign Small Companies Fund returned +22.3% for the fiscal year ended February 28, 2006, as compared to +23.8% for the S&P/Citigroup EMI World ex-U.S. Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in equity securities of small companies in countries outside of the U.S. throughout the fiscal year.
Fair value pricing of the Fund added 0.1% to returns versus the benchmark, which utilizes local close prices. Using the local close, which we do for attribution, the Fund returned +22.2% for the fiscal year.
Stock selection subtracted 1.2% from returns for the fiscal year. Stock selection underperformed in Canada and France.
Country selection subtracted 0.4% from performance for the fiscal year. The largest negative impacts came from an overweight position in Ireland and an underweight position in Japan, each of which subtracted 0.3% from returns. On the positive side, an overweight position in Norway added 0.5% to returns.
The GMO Foreign Small Companies Fund is currently closed to new investment.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund commenced operations on June 30, 2000 subsequent to a transaction involving, in essence, the reorganization of the GMO Small Cap Active Pool of the Common Fund for Non-Profit Organizations (the "GMO Pool") as the GMO Foreign Small Companies Fund. All information relating to the time periods prior to June 30, 2000 relates to the GMO Pool. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class IV will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or h igher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 92.3 | % | |||||
Short-Term Investment(s) | 8.0 | ||||||
Preferred Stocks | 1.3 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | (1.6 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United Kingdom | 21.0 | % | |||||
Japan | 18.6 | ||||||
Germany | 11.0 | ||||||
France | 5.6 | ||||||
Finland | 5.0 | ||||||
Switzerland | 4.7 | ||||||
Italy | 4.2 | ||||||
South Korea | 4.2 | ||||||
Brazil | 3.7 | ||||||
Hong Kong | 2.5 | ||||||
Norway | 2.3 | ||||||
Ireland | 2.3 | ||||||
Spain | 2.2 | ||||||
Sweden | 2.0 | ||||||
Taiwan | 1.9 | ||||||
Austria | 1.2 | ||||||
Canada | 1.2 | ||||||
Netherlands | 1.2 | ||||||
India | 1.1 | ||||||
Singapore | 0.9 | ||||||
Belgium | 0.8 | ||||||
Mexico | 0.6 | ||||||
Australia | 0.5 | ||||||
Thailand | 0.4 | ||||||
Chile | 0.4 | ||||||
Croatia | 0.2 | ||||||
Egypt | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Philippines | 0.1 | ||||||
New Zealand | 0.0 | ||||||
100.0 | % |
1
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Industrials | 24.0 | % | |||||
Consumer Discretionary | 22.0 | ||||||
Financials | 20.1 | ||||||
Information Technology | 8.7 | ||||||
Materials | 8.1 | ||||||
Consumer Staples | 7.6 | ||||||
Utilities | 3.1 | ||||||
Energy | 2.7 | ||||||
Health Care | 2.7 | ||||||
Telecommunication Services | 1.0 | ||||||
100.0 | % |
2
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 92.3% | |||||||||||
Australia — 0.5% | |||||||||||
491,866 | Brazin Ltd | 644,706 | |||||||||
160,827 | Colorado Group Ltd | 440,244 | |||||||||
421,897 | Consolidated Rutile Ltd | 242,180 | |||||||||
658,100 | Gunns Ltd | 1,412,558 | |||||||||
732,869 | McGuigan Simeon Wines Ltd | 1,676,053 | |||||||||
95,000 | Multiplex Group | 222,659 | |||||||||
438,800 | PMP Ltd * | 528,625 | |||||||||
5,167,025 | |||||||||||
Austria — 1.2% | |||||||||||
23,000 | Boehler Uddeholm (Bearer) | 4,314,848 | |||||||||
20,677 | Flughafen Wien AG | 1,667,627 | |||||||||
64,800 | OMV AG | 4,018,847 | |||||||||
35,000 | Wienerberger AG | 1,622,744 | |||||||||
11,624,066 | |||||||||||
Belgium — 0.8% | |||||||||||
102,000 | AGFA-Gevaert NV | 2,029,334 | |||||||||
33,278 | Bekaert NV | 3,418,131 | |||||||||
26,964 | Omega Pharma SA | 1,460,273 | |||||||||
5,006 | Unibra SA * | 643,800 | |||||||||
7,551,538 | |||||||||||
Brazil — 3.3% | |||||||||||
81,600 | All America Latina Logistica | 4,476,760 | |||||||||
420,000 | Companhia de Concessoes Rodoviarias | 3,965,623 | |||||||||
1,080,000 | Iochpe Maxion SA | 8,620,673 | |||||||||
300,000 | Localiza Rent A Car | 5,222,981 | |||||||||
300,000 | Porto Seguro SA | 4,409,230 | |||||||||
273,800 | Tam SA | 6,182,581 | |||||||||
20,000 | Universo Online SA * | 147,869 | |||||||||
33,025,717 |
See accompanying notes to the financial statements.
3
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Canada — 1.1% | |||||||||||
222,000 | Canfor Corp * | 2,637,160 | |||||||||
90,600 | KAP Resources Ltd * (a) | 797 | |||||||||
319,800 | Linamar Corp | 3,728,585 | |||||||||
681,200 | QLT Inc * | 4,855,225 | |||||||||
11,221,767 | |||||||||||
Chile — 0.4% | |||||||||||
77,300 | Compania Cervecerias Unidas ADR | 2,102,560 | |||||||||
74,000 | Inversiones Aguas Metropolitanas SA ADR 144A * | 1,435,600 | |||||||||
3,538,160 | |||||||||||
Croatia — 0.2% | |||||||||||
160,000 | Pliva D.D. | 2,264,000 | |||||||||
Egypt — 0.1% | |||||||||||
30,000 | Lecico Egypt SAE GDR | 318,900 | |||||||||
95,000 | Lecico Egypt SAE GDR 144A | 1,009,850 | |||||||||
1,328,750 | |||||||||||
Finland — 4.6% | |||||||||||
302,150 | Jaakko Poyry Group Oyj | 12,590,727 | |||||||||
430,200 | Marimekko Oyj (b) | 9,028,419 | |||||||||
331,000 | Ramirent Oyj | 10,113,374 | |||||||||
1,145,418 | Rapala VMC Oyj (b) | 8,931,154 | |||||||||
222,800 | Uponor Oyj | 5,830,581 | |||||||||
46,494,255 | |||||||||||
France — 5.2% | |||||||||||
3,700 | Casino Guichard-Perrachon SA | 230,632 | |||||||||
23,271 | Christian Dalloz | 2,532,004 | |||||||||
51,420 | Clarins (b) | 3,074,133 | |||||||||
9,407 | Credit National | 1,991,394 | |||||||||
7,250 | Damart SA | 1,725,843 | |||||||||
6,450 | Damartex SA | 246,043 |
See accompanying notes to the financial statements.
4
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
38,600 | Essilor International SA | 3,325,872 | |||||||||
39,877 | Eurazeo | 4,315,747 | |||||||||
142,100 | Fimatex * (b) | 1,543,617 | |||||||||
6,300 | Gaumont SA | 357,138 | |||||||||
48,200 | GFI Industries SA | 3,198,479 | |||||||||
31,108 | Groupe Partouche * | 556,080 | |||||||||
9,000 | Guyenne et Gascogne SA | 916,621 | |||||||||
17,700 | Klepierre | 2,042,458 | |||||||||
75,000 | M6-Metropole Television | 2,255,599 | |||||||||
53,500 | Michelin SA Class B | 3,263,615 | |||||||||
51,900 | Peugeot SA | 3,025,634 | |||||||||
1,351 | SAGA | 69,253 | |||||||||
30,400 | Schneider Electric SA | 3,106,360 | |||||||||
1,242,600 | SCOR SA (b) | 2,986,160 | |||||||||
20,350 | Seb SA | 2,192,678 | |||||||||
30,001 | Sequana Capital | 843,667 | |||||||||
21,000 | Thales SA | 956,791 | |||||||||
45,472 | Virbac SA | 2,266,001 | |||||||||
87,141 | Zodiac SA | 5,469,864 | |||||||||
52,491,683 | |||||||||||
Germany — 9.4% | |||||||||||
156,780 | Aareal Bank AG * (b) | 6,942,249 | |||||||||
35,666 | Adidas-Salomon AG | 6,970,130 | |||||||||
18,600 | Beiersdorf AG (Bearer) | 2,531,966 | |||||||||
130,900 | Commerzbank AG | 4,782,869 | |||||||||
15,900 | Continental AG | 1,634,585 | |||||||||
197,400 | Depfa Bank Plc | 3,291,358 | |||||||||
300,200 | Deutsche Lufthansa AG (Registered) | 4,946,243 | |||||||||
219,400 | Eurocastle Investment | 8,419,190 | |||||||||
19,517 | Fraport AG | 1,491,323 | |||||||||
85,747 | Hannover Rueckversicherungs AG (Registered) (b) | 3,255,062 | |||||||||
102,220 | Heidelberger Druckmaschinen | 4,388,855 | |||||||||
118,903 | Medion AG (b) | 1,738,097 |
See accompanying notes to the financial statements.
5
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
263,300 | Metallgesellschaft * | 4,308,724 | |||||||||
55,100 | Metro AG | 2,935,010 | |||||||||
83,400 | Mobilcom AG | 2,196,352 | |||||||||
289,780 | MTU Aero Engines Holding * | 9,843,470 | |||||||||
200,000 | Praktiker Bau-Und Heim * | 5,757,843 | |||||||||
197,400 | Techem AG (b) | 8,604,166 | |||||||||
193,100 | Thielert AG * | 4,339,167 | |||||||||
74,900 | TUI AG (b) | 1,479,284 | |||||||||
67,600 | Vossloh AG (b) | 3,512,734 | |||||||||
93,368,677 | |||||||||||
Hong Kong — 2.3% | |||||||||||
315,000 | ASM Pacific Technology | 1,754,314 | |||||||||
2,400,000 | Chinese Estates Holdings Ltd | 2,642,633 | |||||||||
4,200,000 | CITIC International Financial | 1,901,339 | |||||||||
1,527,000 | Hang Lung Properties Ltd | 2,732,928 | |||||||||
1,929,000 | Hopewell Highway Infrastructure Ltd | 1,527,480 | |||||||||
798,643 | Kerry Properties Ltd | 2,543,368 | |||||||||
3,020,000 | Nine Dragons Paper Holdings * | 1,323,554 | |||||||||
2,278,000 | Pacific Basin Shipping Ltd | 1,124,421 | |||||||||
6,000,000 | Samson Holding Ltd * | 3,480,323 | |||||||||
1,099,500 | Techtronic Industries Co | 1,904,294 | |||||||||
250,000 | Wing Lung Bank | 2,207,721 | |||||||||
23,142,375 | |||||||||||
India — 1.0% | |||||||||||
641,984 | Arvind Mills Ltd | 1,429,044 | |||||||||
451,600 | India Cements Ltd * | 1,430,852 | |||||||||
313,117 | Jain Irrigation Systems Ltd * | 1,583,389 | |||||||||
557,450 | Mirc Electronics Ltd | 245,118 | |||||||||
95,000 | Rajesh Exports Ltd | 406,025 | |||||||||
132,806 | Raymond Ltd | 1,308,048 | |||||||||
563,756 | Sakthi Sugars Ltd * | 2,153,362 | |||||||||
900,000 | Welspun Gujarat Stahl Ltd * | 1,858,622 | |||||||||
10,414,460 |
See accompanying notes to the financial statements.
6
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Ireland — 2.1% | |||||||||||
196,346 | Anglo Irish Bank Corp Plc | 3,220,745 | |||||||||
124,210 | CRH Plc | 4,074,300 | |||||||||
55,000 | FBD Holdings Plc | 2,667,788 | |||||||||
248,000 | Grafton Group Plc * | 3,045,898 | |||||||||
222,113 | Greencore Group | 910,396 | |||||||||
379,440 | IFG Group Plc | 850,562 | |||||||||
124,000 | Irish Continental Group Plc | 1,699,669 | |||||||||
212,000 | Irish Life & Permanent Plc | 4,671,929 | |||||||||
21,141,287 | |||||||||||
Italy — 3.9% | |||||||||||
255,000 | Arnoldo Mondadori Editore SPA (b) | 2,410,939 | |||||||||
621,425 | Banca Intesa SPA | 3,671,631 | |||||||||
187,500 | Banche Popolari Unite Scrl | 4,709,428 | |||||||||
157,000 | Brembo Filatura del Brembo SPA | 1,400,404 | |||||||||
179,200 | Buzzi Unicem SPA | 3,707,706 | |||||||||
436,100 | Campari | 3,492,779 | |||||||||
232,700 | Finmeccanica SPA | 5,091,874 | |||||||||
307,716 | Grouppo Editoriale L'Espresso (b) | 1,579,159 | |||||||||
978,700 | IFIL SPA | 5,015,912 | |||||||||
300,300 | Indesit Company SPA (b) | 3,757,259 | |||||||||
30,000 | Pagnossin SPA * (b) | 31,117 | |||||||||
600,000 | Snam Rete Gas SPA | 2,634,660 | |||||||||
909,364 | Telecom Italia Di RISP | 2,089,403 | |||||||||
39,592,271 | |||||||||||
Japan — 17.4% | |||||||||||
138,000 | Akebono Brake Industry Co (b) | 1,416,369 | |||||||||
72 | Arisawa Manufacturing Co Ltd | 1,450 | |||||||||
274,500 | Asahi Soft Drinks Co Ltd | 3,285,330 | |||||||||
80,000 | Bank of Iwate Ltd (The) | 5,218,881 | |||||||||
385,000 | Bank of Yokohama | 3,104,666 | |||||||||
255,000 | Brother Industries Ltd | 2,736,334 | |||||||||
115,000 | Daikin Industries Ltd | 3,826,625 |
See accompanying notes to the financial statements.
7
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
210,000 | Daimaru Inc | 2,824,058 | |||||||||
106,000 | Dainippon Screen Manufacturing Co Ltd (b) | 983,072 | |||||||||
335,000 | Daito Trust Construction Co Ltd | 15,687,495 | |||||||||
43,000 | Diamond Lease Co Ltd | 1,956,521 | |||||||||
180,000 | Heiwado Co Ltd | 3,574,240 | |||||||||
360,000 | Hitachi High Technologies Corp | 9,404,809 | |||||||||
130,000 | Hitachi Kokusai Electric | 1,578,369 | |||||||||
390,000 | Isuzu Motors Ltd (b) | 1,342,946 | |||||||||
600,000 | J Oil Mills Inc (b) | 3,397,059 | |||||||||
703,000 | JACCS Co Ltd | 6,945,745 | |||||||||
600 | Japan Retail Fund Investment Corp | 4,716,639 | |||||||||
1,350,000 | Kawasaki Heavy Industries Ltd (b) | 4,624,409 | |||||||||
950,000 | Kobe Steel Ltd | 3,610,264 | |||||||||
1,080,000 | Marubeni Corp | 5,356,449 | |||||||||
500,000 | NHK Spring Co Ltd | 5,931,953 | |||||||||
450,000 | Nippon Electric Glass Co Ltd | 10,832,776 | |||||||||
679,500 | Nippon Mining Holdings Inc | 5,074,390 | |||||||||
106,000 | Okasan Securities Co Ltd | 1,107,209 | |||||||||
300 | Orix JREIT Inc (b) | 1,991,335 | |||||||||
200,000 | Sanwa Shutter Corp (b) | 1,330,850 | |||||||||
95,000 | Seiren Co Ltd | 1,524,692 | |||||||||
625,000 | Shimadzu Corp | 3,862,999 | |||||||||
2,450,000 | Showa Denko | 10,483,041 | |||||||||
530,000 | Sumitomo Rubber Industries | 6,398,635 | |||||||||
162 | The Tokyo Star Bank Ltd * (b) | 555,605 | |||||||||
2,200,000 | Tokyu Land Corp (b) | 19,189,200 | |||||||||
180,000 | Tosoh Corp | 945,586 | |||||||||
365,000 | Toyo Suisan Kaisha Ltd | 5,321,865 | |||||||||
2,500,000 | Ube Industries Ltd | 7,376,772 | |||||||||
300,000 | Yamaha Motor Co Ltd | 6,841,916 | |||||||||
174,360,554 | |||||||||||
Malaysia — 0.1% | |||||||||||
7,750,000 | E & O Property Development * | 1,074,569 |
See accompanying notes to the financial statements.
8
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Mexico — 0.5% | |||||||||||
611,000 | Controladora Comercial Mexicana SA de CV | 1,102,425 | |||||||||
821,500 | Grupo Imsa SA | 2,846,821 | |||||||||
1,100,000 | Sare Holding SA de CV * | 1,352,554 | |||||||||
5,301,800 | |||||||||||
Netherlands — 1.1% | |||||||||||
136,097 | Buhrmann NV | 2,280,301 | |||||||||
96,300 | Fortis NV | 3,442,817 | |||||||||
52,365 | Hagemeyer NV * (b) | 213,860 | |||||||||
410,774 | Hagemeyer (b) (d) | 1,650,057 | |||||||||
43,700 | Imtech NV | 1,825,265 | |||||||||
49,267 | VNU NV | 1,596,349 | |||||||||
11,008,649 | |||||||||||
New Zealand — 0.0% | |||||||||||
40,400 | Air New Zealand | 34,458 | |||||||||
241,495 | Evergreen Forests Ltd * | 36,912 | |||||||||
71,370 | |||||||||||
Norway — 2.1% | |||||||||||
250,000 | Consafe Offshore AB * | 3,861,932 | |||||||||
450,490 | Ekornes ASA (b) | 8,819,442 | |||||||||
614,200 | Geo ASA * | 3,371,144 | |||||||||
106,550 | Prosafe ASA (b) | 5,286,062 | |||||||||
21,338,580 | |||||||||||
Philippines — 0.1% | |||||||||||
1,147,500 | First General Corp * | 998,791 | |||||||||
Singapore — 0.9% | |||||||||||
17,296,000 | Anwell Technologies Ltd | 1,115,046 | |||||||||
2,194,000 | GES International Ltd | 1,326,271 | |||||||||
614,000 | Gold Peak Batteries International | 669,705 | |||||||||
2,018,000 | Huan Hsin Holdings Ltd | 661,183 |
See accompanying notes to the financial statements.
9
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Singapore — continued | |||||||||||
2,962,000 | LMA International NV * | 1,398,758 | |||||||||
1,587,000 | People's Food Holdings Ltd | 1,121,415 | |||||||||
2,000,000 | Petra Foods Ltd | 1,451,710 | |||||||||
635,000 | Unisteel Technology Ltd | 979,642 | |||||||||
8,723,730 | |||||||||||
South Korea — 3.9% | |||||||||||
91,980 | Asia Cement Co Ltd | 3,689,186 | |||||||||
475,560 | Handsome Corp | 9,057,016 | |||||||||
144,000 | Kooksoondang Co Ltd | 2,292,756 | |||||||||
81,100 | Korea Electric Terminal Co | 1,443,062 | |||||||||
320,963 | Kortek Corp | 1,930,250 | |||||||||
76,810 | LG Household & Health Care | 4,940,520 | |||||||||
61,000 | Pulmuone Co Ltd | 2,487,579 | |||||||||
160,000 | Samsung Electro Mechanics Co Ltd * | 6,579,895 | |||||||||
49,800 | Samsung SDI Co Ltd | 4,400,336 | |||||||||
43,900 | Samsung SDI Co Ltd GDR 144A | 983,360 | |||||||||
96,644 | You Eal Electronics Co | 1,252,007 | |||||||||
39,055,967 | |||||||||||
Spain — 2.0% | |||||||||||
117,000 | ACS Actividades de Construccion y Servicios SA | 4,363,316 | |||||||||
118,060 | Aguas de Barcelona SA Class A | 3,265,617 | |||||||||
14,400 | Altadis SA | 603,812 | |||||||||
10,649 | Bankinter SA | 672,857 | |||||||||
38,296 | Cia de Distribucion Integral Logista SA | 2,055,173 | |||||||||
60,000 | Fomento de Construcciones y Contratas SA | 4,079,292 | |||||||||
15,597 | Gas Natural SDG SA | 474,440 | |||||||||
55,000 | Red Electrica de Espana | 1,839,427 | |||||||||
628,157 | Uralita SA | 3,181,537 | |||||||||
20,535,471 |
See accompanying notes to the financial statements.
10
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Sweden — 1.9% | |||||||||||
106,500 | Autoliv Inc SDR | 5,708,992 | |||||||||
375,670 | Lundin Mining Corp SDR * | 6,905,757 | |||||||||
202,950 | Munters AB | 6,039,660 | |||||||||
18,654,409 | |||||||||||
Switzerland — 4.4% | |||||||||||
2,131 | Bank Sarasin & Cie AG Class B (Registered) | 4,953,223 | |||||||||
2,190 | Belimo Holding AG (Registered) | 1,468,255 | |||||||||
14,450 | Bobst Group AG (Registered) | 616,985 | |||||||||
86,286 | Charles Voegele Holding AG | 7,890,287 | |||||||||
700 | Eichhof Holding AG | 852,678 | |||||||||
2,389 | Forbo Holdings AG (Registered) * | 603,681 | |||||||||
2,894 | Geberit AG (Registered) | 2,625,670 | |||||||||
17,510 | Helvetia Patria Holding (Registered) | 3,939,649 | |||||||||
1,000 | Jelmoli Holding AG (Bearer) | 1,615,854 | |||||||||
3,250 | Jelmoli Holding AG (Registered) | 1,054,532 | |||||||||
200,309 | Kardex AG * | 9,609,656 | |||||||||
29,700 | Swatch Group AG | 4,818,567 | |||||||||
17,908 | Valiant Holding - Registered * | 1,777,902 | |||||||||
9,350 | Valora Holding AG * | 1,899,975 | |||||||||
43,726,914 | |||||||||||
Taiwan — 1.8% | |||||||||||
4,319,000 | Arima Computer Corp * | 987,791 | |||||||||
2,975,500 | Benq Corp | 2,919,099 | |||||||||
3,128,000 | China Life Insurance Co Ltd * | 1,114,380 | |||||||||
2,000,000 | China Motor Corp Ltd | 2,246,240 | |||||||||
2,287,450 | Compal Electronics Inc | 2,127,690 | |||||||||
453,000 | Fubon Financial Holding Co Ltd | 404,669 | |||||||||
29,000 | Fubon Financial Holding Co Ltd GDR (Registered) | 259,550 | |||||||||
1,641,000 | Phoenixtec Power Co Ltd | 1,587,503 | |||||||||
1,995,000 | Sunplus Technology Co Ltd | 2,407,396 | |||||||||
2,394,000 | Tsann Kuen Enterprises Co Ltd | 4,178,576 | |||||||||
18,232,894 |
See accompanying notes to the financial statements.
11
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Thailand — 0.4% | |||||||||||
13,500,000 | Asian Property Development plc (Foreign Registered) (a) | 1,470,278 | |||||||||
1,798,000 | Glow Energy Pcl (Foreign Registered) (a) | 1,206,789 | |||||||||
3,787,000 | Sino Thai Engineering & Construction Pcl (Foreign Registered) (a) | 1,045,129 | |||||||||
3,722,196 | |||||||||||
United Kingdom — 19.6% | |||||||||||
145,000 | Alliance & Leicester Plc | 2,718,205 | |||||||||
140,828 | Alliance Unichem Plc | 2,163,704 | |||||||||
582,342 | Balfour Beatty Plc | 3,819,234 | |||||||||
425,000 | BBA Group Plc | 1,995,534 | |||||||||
687,250 | Bodycote International Plc | 3,137,930 | |||||||||
385,000 | Brambles Industries Plc | 2,781,948 | |||||||||
1,600,000 | Brit Insurance Holdings Plc | 3,002,458 | |||||||||
438,800 | British Airways Plc * | 2,525,152 | |||||||||
450,000 | Brown (N) Group Plc | 1,553,826 | |||||||||
725,000 | Cable & Wireless Plc | 1,354,384 | |||||||||
514,100 | Carphone Warehouse Group Plc | 2,440,044 | |||||||||
549,176 | Cattle's Plc | 3,340,661 | |||||||||
500,000 | Centrica Plc | 2,546,953 | |||||||||
239,888 | Chemring Group | 4,707,939 | |||||||||
550,000 | Cobham Group Plc | 1,638,250 | |||||||||
742,000 | Compass Group Plc | 2,824,477 | |||||||||
128,342 | Computacenter Plc | 638,409 | |||||||||
200,000 | Davis Service Group (Ordinary) | 1,727,192 | |||||||||
3,300,000 | Dimension Data Holdings Plc * | 2,785,441 | |||||||||
9,750 | DX Services Plc | 51,971 | |||||||||
696,493 | FKI Plc | 1,483,410 | |||||||||
507,600 | Fyffes Plc | 1,254,013 | |||||||||
189,952 | Gallaher Group Plc | 2,943,376 | |||||||||
50,000 | Go-Ahead Group Plc | 1,539,670 | |||||||||
615,000 | Group 4 Securicor Plc | 1,917,516 | |||||||||
315,000 | Hanson Plc | 3,845,468 | |||||||||
171,747 | Hays Plc | 445,385 |
See accompanying notes to the financial statements.
12
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
386,049 | ICAP Plc | 3,007,780 | |||||||||
102,400 | Imperial Tobacco Group Plc | 3,079,672 | |||||||||
600,000 | Inmarsat Plc | 4,163,637 | |||||||||
300,000 | ISOFT Group Plc | 977,788 | |||||||||
1,750,000 | ITV Plc | 3,328,449 | |||||||||
425,000 | JJB Sports Plc | 1,294,175 | |||||||||
115,000 | Johnson Matthey Plc | 2,882,580 | |||||||||
104,929 | Kazakhmys Plc * | 1,608,649 | |||||||||
385,000 | Kelda Group Plc | 5,376,560 | |||||||||
360,000 | Kesa Electricals Plc | 1,676,632 | |||||||||
312,344 | Kier Group Plc | 7,885,674 | |||||||||
362,200 | Matalan Plc | 1,162,917 | |||||||||
800,000 | Misys Plc | 3,291,674 | |||||||||
250,000 | Mitie Group Plc | 893,933 | |||||||||
100,000 | Next Plc | 2,892,335 | |||||||||
250,300 | Northern Rock Plc | 4,944,946 | |||||||||
260,000 | Peninsular & Oriental Steam Navigation Co | 2,352,981 | |||||||||
199,119 | Pennon Group (Ordinary) | 4,880,205 | |||||||||
1,284,614 | Photo-Me International Plc | 2,213,007 | |||||||||
425,000 | Premier Foods Plc | 2,328,248 | |||||||||
115,000 | Provident Financial Plc | 1,213,072 | |||||||||
50,000 | Punch Taverns Plc | 749,395 | |||||||||
600,000 | Qinetiq Plc * | 2,086,502 | |||||||||
148,311 | Resolution Plc | 1,732,094 | |||||||||
375,736 | Rexam Plc | 3,341,133 | |||||||||
750,000 | RM Plc | 2,451,311 | |||||||||
2,021,893 | Royal & Sun Alliance Insurance Group | 4,610,229 | |||||||||
1,000,000 | Sage Group Plc | 4,860,260 | |||||||||
275,000 | Shire Pharmaceuticals Plc | 4,295,572 | |||||||||
432,000 | Slough Estates Plc | 4,612,781 | |||||||||
755,160 | Smith (David S.) Holdings Plc | 2,354,126 | |||||||||
165,600 | Smith WH Plc | 1,184,922 | |||||||||
425,000 | SSL International Plc | 2,434,182 | |||||||||
58,600 | Tate & Lyle Plc | 614,470 |
See accompanying notes to the financial statements.
13
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
400,300 | Tomkins Plc | 2,336,950 | |||||||||
110,000 | Travis Perkins Plc | 2,862,409 | |||||||||
220,000 | Trinity Mirror Plc | 2,226,037 | |||||||||
1,080,000 | TT Group Plc | 3,345,939 | |||||||||
180,700 | Ultra Electronics Holdings | 3,195,238 | |||||||||
248,500 | Viridian Group Plc | 4,392,415 | |||||||||
265,100 | William Hill Plc | 2,700,371 | |||||||||
1,536,882 | William Morrison Supermarkets | 5,746,193 | |||||||||
137,800 | Wolseley Plc | 3,418,478 | |||||||||
850,000 | Wood Group (John) Plc | 3,538,257 | |||||||||
91,282 | Xstrata Plc | 2,664,904 | |||||||||
275,000 | Yell Group Plc | 2,676,906 | |||||||||
197,068,538 | |||||||||||
TOTAL COMMON STOCKS (COST $604,516,475) | 926,240,463 | ||||||||||
PREFERRED STOCKS — 1.3% | |||||||||||
Brazil — 0.2% | |||||||||||
280,000 | Suzano Bahia Sul Papel e Celulose SA 0.64% | 1,906,663 | |||||||||
France — 0.1% | |||||||||||
6,800 | Casino Guichard Perrachon SA 4.55% | 366,208 | |||||||||
Germany — 1.0% | |||||||||||
31,500 | Henkel KGaA 1.46% | 3,475,438 | |||||||||
128,900 | Volkswagen AG 2.82% | 6,642,196 | |||||||||
10,117,634 | |||||||||||
Italy — 0.0% | |||||||||||
10,000 | IFI Istituto Finanziario Industries * | 187,679 |
See accompanying notes to the financial statements.
14
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
South Korea — 0.0% | |||||||||||
5,600 | Samsung SDI Co Ltd 3.36% | 304,450 | |||||||||
TOTAL PREFERRED STOCKS (COST $8,420,464) | 12,882,634 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Thailand — 0.0% | |||||||||||
631,167 | Sino Thai Engineering & Construction Pcl Warrants, Expires 04/18/08 * (a) | 21,248 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $49,386) | 21,248 | ||||||||||
SHORT-TERM INVESTMENT(S) — 8.0% | |||||||||||
13,000,000 | Bank of Montreal Time Deposit, 4.64%, due 03/01/06 | 13,000,000 | |||||||||
67,561,684 | The Boston Global Investment Trust (c) | 67,561,684 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $80,561,684) | 80,561,684 | ||||||||||
TOTAL INVESTMENTS — 101.6% (Cost $693,548,009) | 1,019,706,029 | ||||||||||
Other Assets and Liabilities (net) — (1.6%) | (16,521,404 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,003,184,625 |
See accompanying notes to the financial statements.
15
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
GDR - Global Depository Receipt
SDR - Swedish Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) All or a portion of this security is out on loan (Note 2).
(c) All or a portion of this security represents investment of security lending collateral (Note 2).
(d) Direct placement securities are restricted as to resale.
As of February 28, 2006, 84.7% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
16
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $50,723,797 (cost $693,548,009) (Note 2) | $ | 1,019,706,029 | |||||
Cash | 63,105 | ||||||
Foreign currency, at value (cost $30,201,760) (Note 2) | 30,263,454 | ||||||
Receivable for investments sold | 134,912,680 | ||||||
Dividends and interest receivable | 1,633,403 | ||||||
Foreign taxes receivable | 177,129 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 80,621 | ||||||
Total assets | 1,186,836,421 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 3,566,351 | ||||||
Collateral on securities loaned (Note 2) | 67,561,684 | ||||||
Payable for Fund shares repurchased | 111,448,746 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 164,078 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 608,508 | ||||||
Shareholder service fee | 105,317 | ||||||
Trustees and Chief Compliance Officer fees | 1,774 | ||||||
Accrued expenses | 195,338 | ||||||
Total liabilities | 183,651,796 | ||||||
Net assets | $ | 1,003,184,625 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 585,190,428 | |||||
Distributions in excess of net investment income | (7,156,747 | ) | |||||
Accumulated net realized gain | 99,090,228 | ||||||
Net unrealized appreciation | 326,060,716 | ||||||
$ | 1,003,184,625 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 364,550,549 | |||||
Class IV shares | $ | 638,634,076 | |||||
Shares outstanding: | |||||||
Class III | 20,279,742 | ||||||
Class IV | 35,506,001 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.98 | |||||
Class IV | $ | 17.99 |
See accompanying notes to the financial statements.
17
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,908,887) | $ | 22,396,177 | |||||
Interest (including securities lending income of $837,991) | 1,776,068 | ||||||
Total investment income | 24,172,245 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 7,153,575 | ||||||
Shareholder service fee – Class III (Note 3) | 648,286 | ||||||
Shareholder service fee – Class IV (Note 3) | 589,749 | ||||||
Custodian and fund accounting agent fees | 748,336 | ||||||
Transfer agent fees | 42,628 | ||||||
Audit and tax fees | 64,993 | ||||||
Legal fees | 15,664 | ||||||
Trustees fees and related expenses (Note 3) | 19,652 | ||||||
Registration fees | 12,356 | ||||||
Miscellaneous | 27,234 | ||||||
Total expenses | 9,322,473 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (887,211 | ) | |||||
Net expenses | 8,435,262 | ||||||
Net investment income (loss) | 15,736,983 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $140,227 and $94,029, respectively) (Note 2) | 238,508,786 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (2,988,727 | ) | |||||
Net realized gain (loss) | 235,520,059 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $33,900) (Note 2) | (34,590,903 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (193,956 | ) | |||||
Net unrealized gain (loss) | (34,784,859 | ) | |||||
Net realized and unrealized gain (loss) | 200,735,200 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 216,472,183 |
See accompanying notes to the financial statements.
18
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 15,736,983 | $ | 14,743,431 | |||||||
Net realized gain (loss) | 235,520,059 | 98,592,316 | |||||||||
Change in net unrealized appreciation (depreciation) | (34,784,859 | ) | 113,649,493 | ||||||||
Net increase (decrease) in net assets from operations | 216,472,183 | 226,985,240 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (7,882,142 | ) | (12,236,026 | ) | |||||||
Class IV | (11,233,463 | ) | (8,819,758 | ) | |||||||
Total distributions from net investment income | (19,115,605 | ) | (21,055,784 | ) | |||||||
Net realized gains | |||||||||||
Class III | (57,805,430 | ) | (40,519,991 | ) | |||||||
Class IV | (80,047,426 | ) | (28,580,789 | ) | |||||||
Total distributions from net realized gains | (137,852,856 | ) | (69,100,780 | ) | |||||||
(156,968,461 | ) | (90,156,564 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (87,014,942 | ) | (129,870,091 | ) | |||||||
Class IV | 36,890,176 | 172,149,959 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | (50,124,766 | ) | 42,279,868 | ||||||||
Total increase (decrease) in net assets | 9,378,956 | 179,108,544 | |||||||||
Net assets: | |||||||||||
Beginning of period | 993,805,669 | 814,697,125 | |||||||||
End of period (including distributions in excess of net investment income of $7,156,747 and $3,051,291, respectively) | $ | 1,003,184,625 | $ | 993,805,669 |
See accompanying notes to the financial statements.
19
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 17.19 | $ | 14.79 | $ | 9.13 | $ | 9.59 | $ | 9.68 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.26 | † | 0.26 | † | 0.20 | † | 0.16 | † | 0.15 | ||||||||||||||
Net realized and unrealized gain (loss) | 3.19 | 3.76 | 5.77 | (0.51 | )(a) | 0.00 | (a)(b) | ||||||||||||||||
Total from investment operations | 3.45 | 4.02 | 5.97 | (0.35 | ) | 0.15 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.32 | ) | (0.38 | ) | (0.31 | ) | (0.11 | ) | (0.24 | ) | |||||||||||||
From net realized gains | (2.34 | ) | (1.24 | ) | — | — | — | ||||||||||||||||
Total distributions | (2.66 | ) | (1.62 | ) | (0.31 | ) | (0.11 | ) | (0.24 | ) | |||||||||||||
Net asset value, end of period | $ | 17.98 | $ | 17.19 | $ | 14.79 | $ | 9.13 | $ | 9.59 | |||||||||||||
Total Return(c) | 22.32 | % | 28.40 | % | 65.76 | % | (3.64 | )% | 1.59 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 364,551 | $ | 426,758 | $ | 480,966 | $ | 275,739 | $ | 149,566 | |||||||||||||
Net expenses to average daily net assets | 0.85 | % | 0.85 | % | 0.85 | % | 0.85 | % | 0.86 | %(d) | |||||||||||||
Net investment income to average daily net assets | 1.52 | % | 1.71 | % | 1.71 | % | 1.59 | % | 1.48 | % | |||||||||||||
Portfolio turnover rate | 40 | % | 25 | % | 31 | % | 24 | % | 17 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.09 | % | 0.09 | % | 0.11 | % | 0.15 | % | 0.26 | % |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) Net realized and unrealized loss was less than $0.01 per share.
(c) Total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Includes transfer taxes not reimbursed by the Manager, which approximate 0.01% of average daily net assets.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
20
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||
2006 | 2005 | 2004 | 2003(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 17.20 | $ | 14.80 | $ | 9.13 | $ | 10.60 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.26 | 0.21 | 0.08 | |||||||||||||||
Net realized and unrealized gain (loss) | 3.20 | 3.76 | 5.77 | (1.43 | ) | ||||||||||||||
Total from investment operations | 3.46 | 4.02 | 5.98 | (1.35 | ) | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.33 | ) | (0.38 | ) | (0.31 | ) | (0.12 | ) | |||||||||||
From net realized gains | (2.34 | ) | (1.24 | ) | — | — | |||||||||||||
Total distributions | (2.67 | ) | (1.62 | ) | (0.31 | ) | (0.12 | ) | |||||||||||
Net asset value, end of period | $ | 17.99 | $ | 17.20 | $ | 14.80 | $ | 9.13 | |||||||||||
Total Return(b) | 22.37 | % | 28.44 | % | 65.92 | % | (12.76 | )%** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 638,634 | $ | 567,048 | $ | 333,731 | $ | 202,319 | |||||||||||
Net expenses to average daily net assets | 0.80 | % | 0.81 | % | 0.80 | % | 0.80 | %* | |||||||||||
Net investment income to average daily net assets | 1.55 | % | 1.69 | % | 1.78 | % | 1.13 | %* | |||||||||||
Portfolio turnover rate | 40 | % | 25 | % | 31 | % | 24 | %†† | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.09 | % | 0.09 | % | 0.11 | % | 0.14 | %* |
(a) Period from June 14, 2002 (commencement of operations) through February 28, 2003.
(b) Total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2003.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Foreign Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in a diversified portfolio of equity securities of non-U.S. issuers. The Fund's benchmark is the S&P/Citigroup Extended Market Index ("EMI") World ex-U.S. Index.
Throughout the year ended February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the classes of shares is generally based on the total amount of assets invested in the Fund or with GMO, as more fully outlined in the Fund's prospectus.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange
22
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is
23
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which th ey are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
24
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing,
25
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, the Fund had loaned securities having a market value of $50,723,797, collateralized by cash in the amount of $67,561,684, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests.
The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $164,078 for potential capital gains and repatriation taxes as of February 28, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the year ended February 28, 2006, the Fund incurred $140,227 in capital gains taxes which is included in net realized gain (loss) in the Statement of Operations.
The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. For the year ended February 28, 2006, the Fund incurred $94,029 in CPMF tax which is included in the net realized gain (loss) on investments in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $33,336,181 and $25,245,856, respectively and long-term capital gains – $123,632,280 and $64,910,708, respectively.
26
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $18,661,249 and $82,200,619 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 702,433,711 | $ | 335,053,317 | $ | (17,780,999 | ) | $ | 317,272,318 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to redemption in-kind transactions. Net gains resulting from in-kind transactions were $44,137,540. The financial highlights exclude these adjustments.
Distributions In Excess Of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (726,834 | ) | $ | (42,237,291 | ) | $ | 42,964,125 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature
27
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.70% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.70% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $11,341 and $6,590, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $384,376,491 and $611,954,804, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's
28
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 54.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares were held by nine related parties comprised of certain GMO employee accounts, and less than 0.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,105,870 | $ | 36,900,000 | 2,003,413 | $ | 31,586,841 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,919,744 | 63,826,169 | 3,225,981 | 50,882,694 | |||||||||||||||
Shares repurchased | (10,575,215 | ) | (187,741,111 | ) | (12,913,661 | ) | (212,339,626 | ) | |||||||||||
Net increase (decrease) | (4,549,601 | ) | $ | (87,014,942 | ) | (7,684,267 | ) | $ | (129,870,091 | ) | |||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 8,179,317 | $ | 136,758,180 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 5,485,547 | 89,390,176 | 2,242,284 | 35,391,779 | |||||||||||||||
Shares repurchased | (2,953,972 | ) | (52,500,000 | ) | — | — | |||||||||||||
Net increase (decrease) | 2,531,575 | $ | 36,890,176 | 10,421,601 | $ | 172,149,959 |
29
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Foreign Small Companies Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Foreign Small Companies Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accou nting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
30
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.85 | % | $ | 1,000.00 | $ | 1,174.30 | $ | 4.58 | |||||||||||
2) Hypothetical | 0.85 | % | $ | 1,000.00 | $ | 1,020.58 | $ | 4.26 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.81 | % | $ | 1,000.00 | $ | 1,174.00 | $ | 4.37 | |||||||||||
2) Hypothetical | 0.81 | % | $ | 1,000.00 | $ | 1,020.78 | $ | 4.06 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
31
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $2,049,114 and recognized foreign source income of $24,304,996.
The Fund's distributions to shareholders include $123,632,280 from long-term capital gains.
For taxable, non-corporate shareholders, 47.78% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $759,533 and $11,997,045, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
32
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
33
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
34
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
35
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
36
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Emerging Markets Quality Fund returned +36.9% for the fiscal year ended February 28, 2006, as compared to +37.9% for the S&P/IFC Investable Composite Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in emerging market equities.
Country selection detracted 1.4% from performance during the period. The Fund underweighted Hungary and Turkey due to their expensive and vulnerable currencies. Hungary underperformed and Turkey outperformed the benchmark during the period. The Fund also does not invest in the smallest countries like Czech Republic, Egypt, Morocco, and Peru. Consequently, the Fund slightly overweighted the largest countries in the index. Egypt was among the best performing countries during the period. Overweights in Brazil, Russia, and Korea helped performance, while an overweight in Taiwan detracted from performance.
Stock selection added 0.4% to performance. Quality is the only driver of stock selection. Stock selection added to performance in Argentina, China, and Taiwan where quality fared well. Stock selection detracted from performance in Korea and Russia where quality performed the worst.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase and .50% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Performance for Class VI will vary due to different fees. Past performance is not indicative of future results. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* The S&P/IFC Investable Composite Index + represents the GMO Asia 7 Index prior to 9/22/04 and the S&P/IFC Investable Composite Index thereafter.
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 89.0 | % | |||||
Preferred Stocks | 7.3 | ||||||
Short-Term Investment(s) | 2.7 | ||||||
Debt Obligation(s) | 1.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Other | 0.0 | ||||||
100.0 | % | ||||||
Country Summary | % of Investments* | ||||||
South Korea | 19.5 | % | |||||
Taiwan | 14.6 | ||||||
Brazil | 11.2 | ||||||
South Africa | 10.4 | ||||||
China | 8.0 | ||||||
Russia | 7.5 | ||||||
India | 7.1 | ||||||
Mexico | 6.0 | ||||||
Malaysia | 3.1 | ||||||
Israel | 3.0 | ||||||
Thailand | 1.9 | ||||||
Chile | 1.6 | ||||||
Poland | 1.5 | ||||||
Indonesia | 1.3 | ||||||
Turkey | 1.1 | ||||||
United States | 1.0 | ||||||
Argentina | 0.7 | ||||||
Philippines | 0.4 | ||||||
Czech Republic | 0.1 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
1
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Investments* | ||||||
Information Technology | 26.7 | % | |||||
Energy | 19.3 | ||||||
Telecommunication Services | 15.9 | ||||||
Materials | 10.3 | ||||||
Consumer Staples | 8.2 | ||||||
Consumer Discretionary | 5.9 | ||||||
Industrials | 4.9 | ||||||
Financials | 4.4 | ||||||
Health Care | 2.4 | ||||||
U.S. Government | 1.0 | ||||||
Utilities | 1.0 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
2
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 89.0% | |||||||||||
Argentina — 0.7% | |||||||||||
25,000 | Tenaris SA ADR | 4,003,750 | |||||||||
Brazil — 4.1% | |||||||||||
46,600 | Companhia Siderurgica Nacional SA | 1,403,157 | |||||||||
133,900 | Compania Vale do Rio Doce | 6,586,228 | |||||||||
661,400 | Petroleo Brasileiro SA (Petrobras) | 15,137,292 | |||||||||
72,705 | Tele Centro Oeste Celular Participacoes SA | 1,112,744 | |||||||||
24,239,421 | |||||||||||
Chile — 1.6% | |||||||||||
27,200 | Banco De Chile ADR | 1,192,992 | |||||||||
40,300 | Banco Santander Chile SA ADR | 1,913,847 | |||||||||
82,300 | Compania Cervecerias Unidas ADR | 2,238,560 | |||||||||
84,900 | Distribucion y Servicio ADR (a) | 1,744,695 | |||||||||
55,200 | Lan Airlines SA | 2,254,920 | |||||||||
9,345,014 | |||||||||||
China — 7.8% | |||||||||||
862,000 | China Life Insurance Co Ltd * | 977,701 | |||||||||
758,116 | China Merchants Holdings International Co Ltd | 2,142,560 | |||||||||
4,893,000 | China Mobile Ltd | 23,641,227 | |||||||||
2,708,000 | China Petroleum & Chemical Corp Class H | 1,611,103 | |||||||||
342,000 | China Resources Enterprise Ltd | 747,948 | |||||||||
2,474,000 | CNOOC Ltd | 2,050,245 | |||||||||
1,154,000 | Cosco Pacific Ltd | 2,429,515 | |||||||||
816,000 | Datang International Power Generation Co Ltd | 585,660 | |||||||||
3,614,592 | Denway Motors Ltd | 1,429,222 | |||||||||
2,544,000 | Huaneng Power International Inc Class H | 1,703,072 | |||||||||
2,576,000 | Lenovo Group Ltd | 1,055,251 | |||||||||
6,072,842 | PetroChina Co Ltd Class H | 5,905,872 | |||||||||
44,000 | Sina.com * | 984,280 | |||||||||
1,033,600 | Yanzhou Coal Mining Co Ltd | 842,146 | |||||||||
46,105,802 |
See accompanying notes to the financial statements.
3
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Czech Republic — 0.1% | |||||||||||
22,300 | CEZ AS | 775,682 | |||||||||
India — 6.9% | |||||||||||
105,000 | GAIL India Ltd | 644,063 | |||||||||
64,700 | Hero Honda Motors Ltd | 1,295,810 | |||||||||
882,500 | Hindustan Lever | 4,848,291 | |||||||||
224,500 | Infosys Technologies Inc | 14,273,223 | |||||||||
911,100 | ITC Ltd | 3,541,314 | |||||||||
47,100 | Oil & Natural Gas Corp Ltd | 1,207,091 | |||||||||
75,500 | Ranbaxy Laborators | 729,374 | |||||||||
164,200 | Reliance Capital Ventures | 90,120 | |||||||||
164,200 | Reliance Communication Venture * (b) | 1,330,326 | |||||||||
164,200 | Reliance Energy Ventures * | 159,471 | |||||||||
164,200 | Reliance Industries | 2,617,864 | |||||||||
164,200 | Reliance Natural Resources Ltd * (b) | 24,069 | |||||||||
237,200 | Satyam Computer Services Ltd | 4,117,822 | |||||||||
46,300 | Tata Consultancy Services Ltd | 1,773,312 | |||||||||
345,300 | Wipro Ltd | 4,044,441 | |||||||||
40,696,591 | |||||||||||
Indonesia — 1.2% | |||||||||||
829,585 | Astra International Tbk PT | 878,520 | |||||||||
644,000 | Gudang Garam Tbk PT | 766,018 | |||||||||
7,312,000 | Telekomunikasi Indonesia Tbk PT | 4,838,106 | |||||||||
25,200 | Telekomunikasi Indonesia Tbk PT ADR | 656,460 | |||||||||
7,139,104 | |||||||||||
Israel — 2.9% | |||||||||||
190,100 | Check Point Software Technologies Ltd * | 4,041,526 | |||||||||
56,900 | Teva Pharmaceutical Industries | 2,393,358 | |||||||||
258,900 | Teva Pharmaceutical Industries ADR | 10,871,211 | |||||||||
17,306,095 |
See accompanying notes to the financial statements.
4
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Malaysia — 3.0% | |||||||||||
103,000 | British American Tobacco Berhad | 1,185,426 | |||||||||
383,000 | Genting Berhad | 2,461,046 | |||||||||
409,000 | IOI Corp Berhad | 1,519,917 | |||||||||
524,000 | Malakoff Berhad | 1,239,503 | |||||||||
1,491,800 | Maxis Communications Berhad | 3,491,776 | |||||||||
1,198,200 | MISC Berhad | 3,125,705 | |||||||||
379,000 | Resorts World Berhad | 1,325,398 | |||||||||
525,000 | Sime Darby Berhad | 875,627 | |||||||||
152,000 | Tanjong Plc | 581,033 | |||||||||
409,837 | Telekom Malaysia Berhad | 1,090,310 | |||||||||
1,293,640 | YTL Power Internationl Berhad | 776,010 | |||||||||
17,671,751 | |||||||||||
Mexico — 5.8% | |||||||||||
191,400 | America Movil SA de CV Class L ADR | 6,647,322 | |||||||||
348,000 | America Telecom SA de CV * | 2,009,928 | |||||||||
352,608 | Cemex SA de CV CPO | 2,182,635 | |||||||||
182,000 | Fomento Economico Mexicano SA de CV | 1,572,411 | |||||||||
356,000 | Grupo Modelo SA de CV Class C | 1,231,981 | |||||||||
215,000 | Grupo Televisa SA (Participating Certificates) | 854,048 | |||||||||
195,000 | Kimberly Clark (Series A) | 670,167 | |||||||||
484,300 | Telefonos de Mexico SA de CV Class L ADR | 10,843,477 | |||||||||
2,965,732 | Wal-Mart de Mexico SA de CV Class V | 8,471,093 | |||||||||
34,483,062 | |||||||||||
Philippines — 0.4% | |||||||||||
40,000 | Philippine Long Distance Telephone | 1,373,097 | |||||||||
508,101 | San Miguel Corp Class B | 815,739 | |||||||||
2,188,836 | |||||||||||
Poland — 1.5% | |||||||||||
236,000 | Polski Koncern Naftowy Orlen SA | 4,340,079 | |||||||||
15,900 | Prokom Software SA | 752,253 | |||||||||
512,700 | Telekomunikacja Polska SA | 3,569,305 | |||||||||
8,661,637 |
See accompanying notes to the financial statements.
5
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Russia — 7.3% | |||||||||||
19,500 | JSC Mining & Smelting Co ADR | 1,735,500 | |||||||||
274,500 | Lukoil ADR | 21,960,000 | |||||||||
177,700 | Mobile Telesystems ADR | 6,409,639 | |||||||||
33,600 | OAO Gazprom ADR (a) | 2,842,560 | |||||||||
19,500 | Polyus Gold Co ZAO ADR * | 702,000 | |||||||||
40,200 | Sibneft ADR | 924,600 | |||||||||
84,000 | Surgutneftegaz ADR (a) | 6,111,000 | |||||||||
51,400 | Vimpel-Communications ADR * | 2,261,600 | |||||||||
42,946,899 | |||||||||||
South Africa — 10.1% | |||||||||||
289,000 | African Bank Investments Ltd | 1,350,463 | |||||||||
28,000 | Anglo American Platinum Corp | 2,222,442 | |||||||||
99,800 | Barlow Ltd | 1,924,778 | |||||||||
192,100 | Bidvest Group Ltd | 3,230,473 | |||||||||
315,600 | Edgars Consolidated Stores Ltd | 1,720,809 | |||||||||
1,238,104 | FirstRand Ltd | 3,732,435 | |||||||||
86,500 | Gold Fields Limited | 1,904,305 | |||||||||
46,000 | Impala Platinum Holdings Ltd | 7,810,320 | |||||||||
116,367 | Imperial Holdings Ltd * | 2,911,212 | |||||||||
54,000 | JD Group Ltd | 802,339 | |||||||||
395,400 | MTN Group Ltd | 3,827,127 | |||||||||
214,740 | Nampak Ltd | 572,545 | |||||||||
48,751 | Nedcor Ltd | 940,994 | |||||||||
306,600 | Old Mutual Plc | 963,545 | |||||||||
113,900 | Remgro Ltd | 2,388,910 | |||||||||
320,600 | RMB Holdings Ltd | 1,451,799 | |||||||||
373,400 | Sasol Ltd | 12,787,010 | |||||||||
308,014 | Standard Bank Group Ltd | 3,932,349 | |||||||||
754,500 | Steinhoff International Holdings | 2,469,433 | |||||||||
102,176 | Tiger Brands Ltd | 2,532,776 | |||||||||
59,476,064 |
See accompanying notes to the financial statements.
6
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
South Korea — 18.4% | |||||||||||
50,700 | Daewoo Shipbuilding & Marine Engineering Co Ltd | 1,363,793 | |||||||||
59,900 | Doosan Infracore Co Ltd | 1,006,063 | |||||||||
29,200 | GS Engineering & Construction Corp | 1,585,708 | |||||||||
27,300 | Hyundai Engineering & Construction * | 1,313,821 | |||||||||
74,800 | Hyundai Mobis | 6,288,947 | |||||||||
72,230 | Hyundai Motor Co | 6,138,802 | |||||||||
36,900 | Kangwon Land Inc | 731,364 | |||||||||
86,940 | KIA Motors Corp | 1,866,478 | |||||||||
87,500 | KT Corp ADR | 1,786,750 | |||||||||
48,200 | KT Freetel Co Ltd | 1,282,295 | |||||||||
106,400 | KT&G Corp | 6,307,463 | |||||||||
47,300 | LG Chemicals Ltd | 2,373,305 | |||||||||
19,500 | LG Electronics Inc | 1,601,270 | |||||||||
22,100 | LG Philips LCD Co Ltd * | 989,552 | |||||||||
19,000 | NCSoft Corp * | 1,270,115 | |||||||||
14,300 | NHN Corp * | 4,031,172 | |||||||||
42,200 | POSCO | 9,945,493 | |||||||||
56,700 | Samsung Electronics Co Ltd | 39,750,893 | |||||||||
37,000 | Samsung SDI Co Ltd | 3,269,326 | |||||||||
45,600 | Samsung Techwin Co Ltd | 1,247,804 | |||||||||
9,900 | Shinsegae Co Ltd | 4,691,699 | |||||||||
10,900 | SK Telecom Co Ltd | 2,265,100 | |||||||||
313,700 | SK Telecom Co Ltd ADR | 7,575,855 | |||||||||
108,683,068 | |||||||||||
Taiwan — 14.2% | |||||||||||
1,141,420 | Acer Inc | 2,525,630 | |||||||||
2,207,690 | Asustek Computer Inc | 6,221,855 | |||||||||
509,270 | AU Optronics Corp | 813,672 | |||||||||
647,115 | Benq Corp | 634,849 | |||||||||
597,510 | China Motor Corp Ltd | 671,075 | |||||||||
1,622,250 | China Steel Corp | 1,467,831 | |||||||||
1,968,000 | Chunghwa Telecom Co Ltd | 3,582,845 | |||||||||
5,500 | Chunghwa Telecom Co Ltd ADR | 103,950 |
See accompanying notes to the financial statements.
7
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
2,018,791 | Compal Electronics Inc | 1,877,795 | |||||||||
326,002 | Delta Electronics Inc | 776,036 | |||||||||
1,608,900 | Formosa Chemicals & Fibre Co | 2,529,375 | |||||||||
489,886 | Formosa Petrochemical Corp | 874,266 | |||||||||
1,206,669 | Formosa Plastics Corp | 1,909,438 | |||||||||
31,000 | High Tech Computer Corp | 664,036 | |||||||||
2,539,949 | Hon Hai Precision Industry Co Ltd | 16,060,778 | |||||||||
662,120 | Lite-On Technology Corp | 892,314 | |||||||||
790,600 | MediaTek Inc | 8,091,953 | |||||||||
2,776,140 | Nan Ya Plastic Corp | 3,926,941 | |||||||||
179,328 | Novatek Microelectronics | 1,236,164 | |||||||||
1,577,429 | Quanta Computer Inc | 2,402,866 | |||||||||
509,250 | Realtek Semiconductor Corp | 558,391 | |||||||||
625,432 | Sunplus Technology Co Ltd | 754,718 | |||||||||
12,869,095 | Taiwan Semiconductor Manufacturing Co Ltd | 23,845,887 | |||||||||
1,777,916 | United Microelectronics Corp | 1,036,841 | |||||||||
83,459,506 | |||||||||||
Thailand — 1.9% | |||||||||||
405,000 | Advanced Info Service Pcl NVDR (b) | 975,131 | |||||||||
554,000 | Advanced Info Service Pcl (Foreign Registered) (b) | 1,333,884 | |||||||||
167,000 | PTT Exploration & Production Pcl (Foreign Registered) (b) | 2,222,033 | |||||||||
530,611 | Ptt Pcl (Foreign Registered) (b) | 3,380,155 | |||||||||
157,000 | PTT Pcl NVDR (b) | 1,000,138 | |||||||||
588,000 | Shin Corporation Pcl (Foreign Registered) (b) | 726,881 | |||||||||
65,000 | Siam Cement Pcl (Foreign Registered) NVDR (b) | 401,847 | |||||||||
48,000 | Siam Cement Pcl (Foreign Registered) (b) | 326,179 | |||||||||
2,439,000 | Tanayong Co Ltd (Foreign Registered) (b) (c) | 624 | |||||||||
397,000 | Thai Oil Pcl (Foreign Registered) (b) | 613,921 | |||||||||
10,980,793 | |||||||||||
Turkey — 1.1% | |||||||||||
230,276 | Akbank TAS | 2,331,067 | |||||||||
100,930 | Arcelik AS | 940,907 |
See accompanying notes to the financial statements.
8
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
Turkey — continued | |||||||||||
173,400 | KOC Holding AS | 1,053,373 | |||||||||
66,575 | Tupras-Turkiye Petrol Rafineriler AS | 1,269,379 | |||||||||
221,435 | Vestel Elektronik Sanayi * | 962,096 | |||||||||
6,556,822 | |||||||||||
TOTAL COMMON STOCKS (COST $394,788,011) | 524,719,897 | ||||||||||
PREFERRED STOCKS — 7.3% | |||||||||||
Brazil — 6.8% | |||||||||||
222,900 | Aracruz Class B (Registered) 1.65% | 1,102,166 | |||||||||
43,800 | Banco Bradesco SA 3.66% | 1,806,866 | |||||||||
64,200 | Banco Itau Holding Financeira SA 2.79% | 2,077,014 | |||||||||
951,100 | Caemi Mineracao e Metalurgica SA 1.35% | 1,639,287 | |||||||||
11,577,900 | Companhia de Bebidas das Americas 3.03% | 4,912,497 | |||||||||
102,700 | Companhia Vale do Rio Doce Class A 0.36% | 4,372,065 | |||||||||
68,500 | Empresa Brasileira de Aeronautica SA ADR 2.72% | 2,722,875 | |||||||||
121,200 | Gerdau SA 4.84% | 2,796,704 | |||||||||
821,700 | Petroleo Brasileiro SA (Petrobras) 0.44% | 17,316,259 | |||||||||
29,200 | Usinas Siderrurgicas de Minas Gerais SA 4.20% | 962,562 | |||||||||
39,708,295 | |||||||||||
South Korea — 0.5% | |||||||||||
5,900 | Samsung Electronics Co Ltd (Non Voting) 1.18% * | 3,121,961 | |||||||||
TOTAL PREFERRED STOCKS (COST $24,623,275) | 42,830,256 | ||||||||||
DEBT OBLIGATION(S) — 1.0% | |||||||||||
United States — 1.0% | |||||||||||
5,502,779 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (d) (e) | 5,821,985 | |||||||||
TOTAL DEBT OBLIGATION(S) (COST $5,820,109) | 5,821,985 |
See accompanying notes to the financial statements.
9
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Thailand — 0.0% | |||||||||||
480,663 | True Corp Pcl Warrants, Expires 04/03/08 * (b) | — | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | — | ||||||||||
SHORT-TERM INVESTMENT(S) — 2.7% | |||||||||||
2,000,000 | Barclays Time Deposit, 4.56%, due 03/01/06 | 2,000,000 | |||||||||
1,300,000 | Branch Bank & Trust Time Deposit, 4.52%, due 03/01/06 | 1,300,000 | |||||||||
2,000,000 | Dresdner Bank AG Time Deposit, 4.55%, due 03/01/06 | 2,000,000 | |||||||||
2,000,000 | ING Bank Time Deposit, 4.57%, due 03/01/06 | 2,000,000 | |||||||||
8,710,875 | The Boston Global Investment Trust (f) | 8,710,875 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $16,010,875) | 16,010,875 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $441,242,270) | 589,383,013 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | 13,113 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 589,396,126 |
See accompanying notes to the financial statements.
10
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
3,186,025 | USD | 1/31/2007 | Deutsche Bank | 1 Month LIBOR | Return on | ||||||||||||||||||
+ 0.55 | % | Gazprom | $ | 17,090 | |||||||||||||||||||
2,628,025 | USD | 1/31/2007 | Deutsche Bank | 1 Month LIBOR | Return on | ||||||||||||||||||
+ 0.55 | % | Gazprom | 14,097 | ||||||||||||||||||||
$ | 31,187 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ADR - American Depositary Receipt
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Bankrupt issuer.
(d) Index security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(e) All or a portion of this security has been segregated to cover open margin requirements on open swap contracts (Note 2).
(f) All or a portion of this security represents investment of security lending collateral (Note 2).
As of February 28, 2006, 64.9% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor (Note 2).
Currency Abbreviations:
USD - United States Dollar | |||
See accompanying notes to the financial statements.
11
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $8,121,335 (cost $441,242,270) (Note 2) | $ | 589,383,013 | |||||
Cash | 40,722 | ||||||
Foreign currency, at value (cost $3,385,445) (Note 2) | 3,373,994 | ||||||
Receivable for Fund shares sold | 5,000,000 | ||||||
Dividends and interest receivable | 1,450,341 | ||||||
Receivable for open swap contracts (Note 2) | 31,187 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 23,771 | ||||||
Total assets | 599,303,028 | ||||||
Liabilities: | |||||||
Collateral on securities loaned (Note 2) | 8,710,875 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 736,895 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 180,973 | ||||||
Shareholder service fee | 39,639 | ||||||
Trustees and Chief Compliance Officer fees | 1,407 | ||||||
Accrued expenses | 237,113 | ||||||
Total liabilities | 9,906,902 | ||||||
Net assets | $ | 589,396,126 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 424,319,798 | |||||
Accumulated undistributed net investment income | 636,474 | ||||||
Accumulated net realized gain | 16,956,393 | ||||||
Net unrealized appreciation | 147,483,461 | ||||||
$ | 589,396,126 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 197,026,440 | |||||
Class VI shares | $ | 392,369,686 | |||||
Shares outstanding: | |||||||
Class III | 18,990,406 | ||||||
Class VI | 37,749,505 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.38 | |||||
Class VI | $ | 10.39 |
See accompanying notes to the financial statements.
12
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,031,155) | $ | 8,701,831 | |||||
Interest (including securities lending income of $74,596) | 535,674 | ||||||
Total investment income | 9,237,505 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,565,690 | ||||||
Shareholder service fee – Class III (Note 3) | 234,648 | ||||||
Shareholder service fee – Class VI (Note 3) | 129,245 | ||||||
Custodian and fund accounting agent fees | 704,905 | ||||||
Transfer agent fees | 43,310 | ||||||
Audit and tax fees | 65,907 | ||||||
Legal fees | 11,347 | ||||||
Trustees fees and related expenses (Note 3) | 6,752 | ||||||
Registration fees | 35,284 | ||||||
Miscellaneous | 13,709 | ||||||
Total expenses | 2,810,797 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (159,490 | ) | |||||
Net expenses | 2,651,307 | ||||||
Net investment income (loss) | 6,586,198 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $17,865 and $4,903, respectively) (Note 2) | 18,135,636 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (183,348 | ) | |||||
Net realized gain (loss) | 17,952,288 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $736,895) (Note 2) | 122,775,972 | ||||||
Open swap contracts | 31,187 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (645,415 | ) | |||||
Net unrealized gain (loss) | 122,161,744 | ||||||
Net realized and unrealized gain (loss) | 140,114,032 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 146,700,230 |
See accompanying notes to the financial statements.
13
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 6,586,198 | $ | 1,656,390 | |||||||
Net realized gain (loss) | 17,952,288 | 42,887,386 | |||||||||
Change in net unrealized appreciation (depreciation) | 122,161,744 | (26,890,800 | ) | ||||||||
Net increase (decrease) in net assets from operations | 146,700,230 | 17,652,976 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,359,713 | ) | (3,327,581 | ) | |||||||
Class VI | (3,821,368 | ) | (98,389 | ) | |||||||
Total distributions from net investment income | (6,181,081 | ) | (3,425,970 | ) | |||||||
Net realized gains | |||||||||||
Class III | (823,974 | ) | (34,630,395 | ) | |||||||
Class VI | (1,152,023 | ) | (2,361,326 | ) | |||||||
Total distributions from net realized gains | (1,975,997 | ) | (36,991,721 | ) | |||||||
(8,157,078 | ) | (40,417,691 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 59,430,146 | (26,189,561 | ) | ||||||||
Class VI | 204,518,388 | 91,844,257 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 263,948,534 | 65,654,696 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 703,183 | 457,595 | |||||||||
Class VI | 895,785 | 343,428 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 1,598,968 | 801,023 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 265,547,502 | 66,455,719 | |||||||||
Total increase (decrease) in net assets | 404,090,654 | 43,691,004 | |||||||||
Net assets: | |||||||||||
Beginning of period | 185,305,472 | 141,614,468 | |||||||||
End of period (including accumulated undistributed net investment income of $636,474 and $437,476, respectively) | $ | 589,396,126 | $ | 185,305,472 |
See accompanying notes to the financial statements.
14
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 7.71 | $ | 13.77 | $ | 7.25 | $ | 8.09 | $ | 7.87 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.15 | † | 0.17 | † | 0.23 | 0.06 | 0.07 | ||||||||||||||||
Net realized and unrealized gain (loss) | 2.67 | 0.19 | 6.35 | (0.85 | ) | 0.26 | |||||||||||||||||
Total from investment operations | 2.82 | 0.36 | 6.58 | (0.79 | ) | 0.33 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.52 | ) | (0.06 | ) | (0.05 | ) | (0.11 | ) | |||||||||||||
From net realized gains | (0.04 | ) | (5.90 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.15 | ) | (6.42 | ) | (0.06 | ) | (0.05 | ) | (0.11 | ) | |||||||||||||
Net asset value, end of period | $ | 10.38 | $ | 7.71 | $ | 13.77 | $ | 7.25 | $ | 8.09 | |||||||||||||
Total Return(a) | 36.86 | % | 16.19 | % | 91.04 | % | (9.82 | )% | 4.41 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 197,026 | $ | 82,153 | $ | 141,614 | $ | 105,354 | $ | 117,878 | |||||||||||||
Net expenses to average daily net assets | 0.73 | % | 1.22 | % | 1.25 | % | 1.35 | % | 1.28 | % | |||||||||||||
Net investment income to average daily net assets | 1.71 | % | 1.84 | % | 1.76 | % | 0.80 | % | 1.01 | % | |||||||||||||
Portfolio turnover rate | 18 | % | 141 | % | 39 | % | 72 | % | 68 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | % | 0.11 | % | 0.07 | % | 0.06 | % | 0.09 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.04 | $ | 0.06 | $ | 0.02 | $ | 0.00 | (b) | $ | 0.00 | (b) |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
15
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class VI share outstanding throughout each period)
Year Ended February 28, | |||||||||||
2006 | 2005(a) | ||||||||||
Net asset value, beginning of period | $ | 7.72 | $ | 6.52 | |||||||
Income (loss) from investment operations:† | |||||||||||
Net investment income (loss) | 0.15 | 0.03 | |||||||||
Net realized and unrealized gain (loss) | 2.67 | 1.44 | |||||||||
Total from investment operations | 2.82 | 1.47 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.11 | ) | (0.01 | ) | |||||||
From net realized gains | (0.04 | ) | (0.26 | ) | |||||||
Total distributions | (0.15 | ) | (0.27 | ) | |||||||
Net asset value, end of period | $ | 10.39 | $ | 7.72 | |||||||
Total Return(b) | 36.92 | % | 23.05 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 392,370 | $ | 103,152 | |||||||
Net expenses to average daily net assets | 0.64 | % | 0.71 | %* | |||||||
Net investment income to average daily net assets | 1.66 | % | 0.99 | %* | |||||||
Portfolio turnover rate | 18 | % | 141 | %†† | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | % | 0.16 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.03 | $ | 0.04 |
(a) Period from September 23, 2004 (commencement of operations) through February 28, 2005.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
* Annualized.
** Not annualized.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2005.
See accompanying notes to the financial statements.
16
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Emerging Markets Quality Fund, (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks broad exposure to the high-quality companies of its benchmark typically through investment in equity securities traded in the securities markets of emerging countries in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging Markets"). The Fund's benchmark is the S&P/IFCI (Investable) Composite Index. Prior to September 23, 2004, the Fund's benchmark was the Asia 7 Index, an index maintained by the Manager and composed of the S&P/IFCI (Investable) Country Indices of seven Asian countries (China, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand), all of which are equally weighted.
For the year ended February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class VI. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's
17
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close, but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with
18
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the pric e of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as
19
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements
20
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
of credit, legal, market and documentation risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $8,121,335, collateralized by cash in the amount of $8,710,875, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $736,895 for potential capital gains and repatriation taxes as of February 28, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of
21
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Operations. For the year ended February 28, 2006, the Fund incurred $17,865 in capital gain taxes which is included in net realized gain (loss) in the Statement of Operations.
The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to/from the Brazilian market. For the year ended February 28, 2006, the Fund incurred $4,903 in CPMF tax which is included in the net realized gain (loss) on investments in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $7,106,894 and $3,425,970 respectively and long-term capital gains – $1,050,184 and $36,991,721, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $2,318,466 and $16,039,197 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions and passive foreign investment company transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 442,007,069 | $ | 150,150,722 | $ | (2,774,778 | ) | $ | 147,375,944 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (206,119 | ) | $ | 206,119 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
22
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the ident ified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class's net assets on the share transaction date. For the years ended February 28, 2006 and February 28, 2005, the Fund received $1,444,193 and $503,084 in purchase premiums and $154,775 and $297,939 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
Investments in emerging countries present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings.
23
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.40% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.40% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $4,306 and $3,255, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $315,038,569 and $68,874,228, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related parties
As of February 28, 2006, 55.1% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
24
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, 0.1% of the Fund's shares were held by seven related parties comprised of certain GMO employee accounts, and 98.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 14,333,276 | $ | 116,063,878 | 8,481,852 | $ | 57,280,306 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 329,743 | 2,997,691 | 4,364,286 | 28,188,546 | |||||||||||||||
Shares repurchased | (6,332,605 | ) | (59,631,423 | ) | (12,472,068 | ) | (111,658,413 | ) | |||||||||||
Purchase premiums and redemption fees | — | 703,183 | — | 457,595 | |||||||||||||||
Net increase (decrease) | 8,330,414 | $ | 60,133,329 | 374,070 | $ | (25,731,966 | ) | ||||||||||||
Year Ended February 28, 2006 | Period from September 23, 2004 (commencement of operations) through February 28, 2005 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 24,022,660 | $ | 201,253,447 | 13,013,063 | $ | 89,384,542 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 541,077 | 4,973,390 | 350,886 | 2,459,715 | |||||||||||||||
Shares repurchased | (178,181 | ) | (1,708,449 | ) | — | — | |||||||||||||
Purchase premiums and redemption fees | — | 895,785 | — | 343,428 | |||||||||||||||
Net increase (decrease) | 24,385,556 | $ | 205,414,173 | 13,363,949 | $ | 92,187,685 |
25
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Markets Quality Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Markets Quality Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Acco unting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
26
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.75 | % | $ | 1,000.00 | $ | 1,253.20 | $ | 4.19 | |||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.08 | $ | 3.76 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.65 | % | $ | 1,000.00 | $ | 1,252.20 | $ | 3.63 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.57 | $ | 3.26 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
27
GMO Emerging Markets Quality Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $1,049,020 and recognized foreign source income of $9,732,986.
The Fund's distributions to shareholders include $1,050,184 from long-term capital gains.
For taxable, non-corporate shareholders, 54.96% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $0 and $806,162, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
28
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
29
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
30
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
31
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
32
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Short-Duration Collateral Fund returned +3.9% for the fiscal year ended February 28, 2006, as compared to +3.7% for the JPMorgan U.S. 3-Month Cash Index.
The Fund outperformed the benchmark during the fiscal year by 0.2%. This outperformance was attributable to contributions from cash management strategies as well as from instrument selection. At fiscal year-end, approximately 99.4% of the portfolio was AAA-rated. At fiscal year-end, approximately 85% of the Fund was invested in highly-rated, floating rate, asset-backed securities, 3% in U.S. Treasury notes and cash, less than 1% in corporate bonds, 2% in U.S. Government-backed bonds, 9% in collateralized bonds, and less than 1% in non-AAA asset-backed securities.
The asset-backed holdings included issues backed by consumer receivables such as residential mortgages, credit card, and auto loans as well as commercial/corporate mortgages and receivables.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligation(s) | 96.5 | % | |||||
Short-Term Investment(s) | 2.8 | ||||||
Mutual Funds | 0.7 | ||||||
Swaps | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.0 | ||||||
Other | (0.1 | ) | |||||
100.0 | % | ||||||
Industry Sector Summary | % of Debt Obligations | ||||||
Residential Asset-Backed Securities (United States) | 22.6 | % | |||||
Credit Cards | 18.6 | ||||||
Auto Financing | 8.6 | ||||||
Student Loans | 6.9 | ||||||
Business Loans | 6.0 | ||||||
Residential Mortgage-Backed Securities (European) | 4.8 | ||||||
Residential Mortgage-Backed Securities (Australian) | 4.7 | ||||||
Investment Grade Corporate Collateralized Debt Obligations | 3.5 | ||||||
Insured Auto Financing | 3.0 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 2.3 | ||||||
CMBS | 2.2 | ||||||
Rate Reduction Bonds | 1.7 | ||||||
U.S. Government Agency | 1.7 | ||||||
Insured High Yield Collateralized Debt Obligations | 1.6 | ||||||
Insurance Premiums | 1.2 | ||||||
CMBS Collateralized Debt Obligations | 1.1 | ||||||
Insured Credit Cards | 1.1 | ||||||
Corporate Debt | 1.0 | ||||||
Equipment Leases | 0.9 | ||||||
Other | 0.8 | ||||||
Insured Residential Asset-Backed Securities (European) | 0.7 | ||||||
Airlines | 0.6 | ||||||
Insured Insurance Premiums | 0.6 | ||||||
Insured Business Loans | 0.5 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.5 | ||||||
Insured Time Share | 0.5 | ||||||
Emerging Markets Collateralized Debt Obligations | 0.4 |
1
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary — (Continued) | % of Debt Obligations | ||||||
Residential Mortgage-Backed Securities (United States) | 0.4 | % | |||||
ABS Collateralized Debt Obligations | 0.3 | ||||||
Insured Transportation | 0.3 | ||||||
Trade Receivable | 0.3 | ||||||
High Yield Collateralized Debt Obligations | 0.2 | ||||||
U.S. Government | 0.2 | ||||||
Collateralized Loan Obligations | 0.1 | ||||||
Insured Collateralized Loan Obligations | 0.1 | ||||||
100.0 | % |
2
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 96.5% | |||||||||||
Asset-Backed Securities — 93.7% | |||||||||||
ABS Collateralized Debt Obligations — 0.3% | |||||||||||
15,000,000 | Paragon CDO Ltd., Series 04-1A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .65%, 5.25%, due 10/20/44 | 15,000,000 | |||||||||
Airlines — 0.6% | |||||||||||
23,000,000 | Aircraft Finance Trust, Series 99-1A, Class A1, Variable Rate, 1 mo. LIBOR + .48%, 5.05%, due 05/15/24 | 14,605,000 | |||||||||
12,043,272 | Continental Airlines Inc., Series 99-1A,, 6.55%, due 02/02/19 | 11,832,515 | |||||||||
26,437,515 | |||||||||||
Auto Financing — 8.3% | |||||||||||
30,000,000 | ARG Funding Corp., Series 05-2A, Class A3, 144A, Variable Rate, 1 mo. LIBOR + .14%, 4.71%, due 05/20/10 | 30,103,140 | |||||||||
4,685,285 | Capital Auto Receivables Asset Trust (GMAC), Series 03-1, Class A3A, 2.75%, due 04/16/07 | 4,658,930 | |||||||||
13,000,000 | Chesapeake Funding Llc, Series 04-1A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .16%, 4.73%, due 07/07/16 | 12,997,920 | |||||||||
24,000,000 | Daimler Chrysler Auto Trust, Series 06-A, Class A1, 144A, 4.79%, due 03/08/07 | 24,000,000 | |||||||||
28,000,000 | Daimler Chrysler Master Owner Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 4.60%, due 01/15/09 | 27,977,600 | |||||||||
9,293,552 | Ford Credit Auto Owner Trust, Series 03-A, Class A4A, 2.70%, due 06/15/07 | 9,250,337 | |||||||||
29,000,000 | Ford Credit Auto Owner Trust, Series 06-A, Class A2B, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 09/15/08 | 28,900,312 | |||||||||
40,000,000 | Ford Credit Floorplan Master Owner Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .15%, 4.72%, due 05/15/10 | 39,957,607 | |||||||||
13,931,801 | Franklin Auto Trust, Series 05-1, Class A1, 4.50%, due 12/20/06 | 13,922,049 | |||||||||
343,683 | Honda Auto Receivables Owner Trust, Series 05-3, Class A1, 3.42%, due 06/19/06 | 343,167 | |||||||||
5,271,767 | Honda Auto Receivables Owner Trust, Series 05-6, Class A1, 4.51%, due 12/18/06 | 5,267,813 | |||||||||
15,000,000 | Nissan Auto Receivables Owner Trust, Series 04-C, Class A4, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 03/15/10 | 15,004,687 |
See accompanying notes to the financial statements.
3
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Auto Financing — continued | |||||||||||
33,370,000 | Nissan Master Owner Trust Receivables, Series 03-A, Class A1, Variable Rate, 1 mo. LIBOR + .06%, 4.63%, due 09/15/08 | 33,349,978 | |||||||||
12,000,000 | Nissan Master Owner Trust Receivables, Series 05-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 4.60%, due 07/15/10 | 12,000,000 | |||||||||
38,000,000 | Superior Wholesale Inventory Financing Trust, Series 05, Class A, Variable Rate, 1 mo. LIBOR +.18%, 4.75%, due 06/15/10 | 37,901,200 | |||||||||
32,000,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR +.27%, 4.84%, due 12/15/16 | 31,975,040 | |||||||||
16,000,000 | Volkswagen Auto Lease Trust, Series 04-A, Class A4B, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 08/20/10 | 16,009,280 | |||||||||
10,000,000 | Volkswagen Credit Auto Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .02%, 4.59%, due 07/20/10 | 9,996,880 | |||||||||
3,404,655 | World Omni Auto Receivables Trust, Series 05-B, Class A1, 3.83%, due 08/21/06 | 3,403,299 | |||||||||
14,000,000 | World Omni Auto Receivables Trust, Series 06-A, Class A1, 4.85%, due 03/15/07 | 14,000,000 | |||||||||
371,019,239 | |||||||||||
Business Loans — 5.8% | |||||||||||
10,919,159 | Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .36%, 4.94%, due 04/25/34 | 10,946,457 | |||||||||
8,775,691 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .37%, 4.95%, due 01/25/35 | 8,779,201 | |||||||||
23,846,782 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, Variable Rate, 1 mo. LIBOR + .39%, 4.97%, due 01/25/36 | 23,832,474 | |||||||||
7,239,312 | Capitalsource Commercial Loan Trust, Series 04-1A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .33%, 4.90%, due 04/20/13 | 7,245,828 | |||||||||
10,000,000 | Capitalsource Commercial Loan Trust, Series 04-2A, Class A2, Variable Rate, 1 mo. LIBOR + .25%, 4.82%, due 08/20/13 | 10,007,000 | |||||||||
6,646,076 | Capitalsource Commercial Loan Trust, Series 05-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .09%, 4.66%, due 03/22/10 | 6,640,759 | |||||||||
6,881,198 | COLTS Trust, Series 04-1A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .34%, 4.83%, due 09/15/14 | 6,887,391 | |||||||||
8,626,183 | GE Business Loan Trust, Series 04-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .29%, 4.86%, due 05/15/32 | 8,643,781 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Business Loans — continued | |||||||||||
10,941,467 | GE Business Loan Trust, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .24%, 4.81%, due 11/15/33 | 10,955,143 | |||||||||
25,000,000 | GE Commercial Equipment Financing Llc, Series 05-1, Class A3B, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 03/20/09 | 25,003,000 | |||||||||
21,971,043 | Lehman Brothers Small Balance Commercial, Series 05-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 02/25/30 | 21,971,043 | |||||||||
18,631,512 | Lehman Brothers Small Balance Commercial, Series 05-2, Class 1A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 09/25/30 | 18,637,334 | |||||||||
1,527,229 | Marlin Leasing Receivables Llc, Series 04-1A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .22%, 4.79%, due 01/15/07 | 1,527,351 | |||||||||
7,673,058 | Marlin Leasing Receivables Llc, Series 05-1A, Class A1, 144A, 4.05%, due 08/15/06 | 7,664,080 | |||||||||
13,000,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 02/25/13 | 12,989,600 | |||||||||
20,000,000 | Navistar Financial Dealer Note Master Trust, Series 98-1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 4.82%, due 07/25/11 | 20,022,600 | |||||||||
53,000,000 | Textron Financial Floorplan Master Note, Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR +.12%, 4.69%, due 05/13/10 | 53,000,000 | |||||||||
4,193,980 | The Money Store Business Loan Backed Trust, Series 99-1, Class AN, Variable Rate, 1 mo. LIBOR +.50%, 5.07%, due 09/15/17 | 4,172,800 | |||||||||
258,925,842 | |||||||||||
CMBS — 2.1% | |||||||||||
15,728,754 | Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PW10, Class A1, 5.09%, due 12/11/40 | 15,694,347 | |||||||||
10,000,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 07/15/44 | 9,992,000 | |||||||||
32,000,000 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 32,025,000 | |||||||||
18,144,006 | Greenwich Capital Commercial Funding Corp., Series 05-FL3A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .20%, 4.86%, due 10/05/20 | 18,149,676 | |||||||||
6,390,240 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 04-FL1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .17%, 4.74%, due 04/16/19 | 6,390,943 | |||||||||
14,251,500 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 13,694,244 | |||||||||
95,946,210 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
CMBS Collateralized Debt Obligations — 1.1% | |||||||||||
19,108,692 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .35%, 4.87%, due 06/28/19 | 19,119,966 | |||||||||
30,000,000 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .32%, 4.90%, due 08/26/30 | 30,000,000 | |||||||||
49,119,966 | |||||||||||
Collateralized Loan Obligations — 0.1% | |||||||||||
6,000,000 | Archimedes Funding IV (Cayman) Ltd., 4A A1, 144A, Variable Rate, 1 mo. LIBOR + .48%, 5.28%, due 02/25/13 | 6,018,000 | |||||||||
Credit Cards — 18.0% | |||||||||||
40,000,000 | Advanta Business Card Master Trust, Series 03-B, Class A, Variable Rate, 1 mo. LIBOR + .35%,, 4.92%, due 12/22/08 | 40,042,000 | |||||||||
13,500,000 | Advanta Business Card Master Trust, Series 05-A1, Class A1, Variable Rate, 1 mo. LIBOR + .07%, 4.64%, due 04/20/11 | 13,504,320 | |||||||||
20,000,000 | Advanta Business Card Master Trust, Series 05-A2, Class A2, Variable Rate, 1 mo. LIBOR + .13%, 4.70%, due 05/20/13 | 20,062,500 | |||||||||
7,000,000 | Advanta Business Card Master Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR + .06%, 4.63%, due 04/20/12 | 6,997,900 | |||||||||
27,000,000 | American Express Credit Account Master Trust, Series 01-7, Class A, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 02/16/09 | 27,014,045 | |||||||||
5,000,000 | American Express Credit Account Master Trust, Series 03-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 09/15/10 | 5,009,450 | |||||||||
9,800,000 | American Express Credit Account Master Trust, Series 05-3, Class A, Variable Rate, 1 mo. LIBOR, 4.57%, due 06/16/08 | 9,791,180 | |||||||||
35,000,000 | American Express Credit Account Master Trust, Series 05-5, Class A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 02/15/13 | 35,005,600 | |||||||||
15,000,000 | American Express Credit Account Master Trust, Series 2001-6, Class A, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 12/15/06 | 15,004,183 | |||||||||
15,000,000 | American Express Credit Account Master Trust, Series 2002-6, Class A, Variable Rate, 1 mo. LIBOR + .14%, 4.71%, due 03/15/10 | 15,031,916 | |||||||||
25,000,000 | Arran, Series 2005-A, Class A, Variable Rate, 1 mo. LIBOR + .02%, 4.59%, due 12/15/10 | 24,997,500 | |||||||||
20,000,000 | Bank One Issuance Trust, Series 02-A5, Class A5, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 06/15/10 | 20,034,600 | |||||||||
5,000,000 | Bank One Issuance Trust, Series 03-1A, Class A1, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 09/15/10 | 5,009,950 |
See accompanying notes to the financial statements.
6
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Credit Cards — continued | |||||||||||
7,670,000 | Bank One Issuance Trust, Series 03-A10, Class A10, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 06/15/11 | 7,680,738 | |||||||||
27,715,000 | Bank One Issuance Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 12/15/10 | 27,753,801 | |||||||||
12,000,000 | Capital One Master Trust, Series 01-2, Class A, Variable Rate, 1 mo. LIBOR + .14%, 4.71%, due 01/15/09 | 12,000,480 | |||||||||
15,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A3, Class A3, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 02/15/12 | 15,035,156 | |||||||||
26,275,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, Variable Rate, 3 mo. LIBOR + .15%, 4.90%, due 06/16/14 | 26,394,026 | |||||||||
25,000,000 | Chase Credit Card Master Trust, Series 01-6, Class A, Variable Rate, 1 mo. LIBOR + .13%, 4.70%, due 03/16/09 | 25,026,207 | |||||||||
15,650,000 | Chase Credit Card Master Trust, Series 02-1, Class A, Variable Rate, 1 mo. LIBOR +.10%, 4.67%, due 06/15/09 | 15,666,241 | |||||||||
22,000,000 | Citibank Credit Card Issuance Trust, Series 01-A1, Class A1, Variable Rate, 3 mo. LIBOR + .17%, 4.88%, due 02/07/10 | 22,060,362 | |||||||||
7,500,000 | Citibank Credit Card Issuance Trust, Series 03-A4, Class A4, Variable Rate, 3 mo. LIBOR + .07%, 4.57%, due 03/20/09 | 7,506,445 | |||||||||
20,000,000 | Citibank Credit Card Issuance Trust, Series 04-A3, Class A3, Variable Rate, 3 mo. LIBOR + .07%, 4.69%, due 07/25/11 | 20,018,719 | |||||||||
10,000,000 | Citibank Credit Card Issuance Trust, Series 05-A3, Class A3, Variable Rate, 1 mo. LIBOR + .07%, 4.64%, due 04/24/14 | 9,999,976 | |||||||||
28,000,000 | Discover Card Master Trust I, Series 01-3, Class A, Variable Rate, 1 mo. LIBOR + .15%, 4.72%, due 09/15/08 | 28,001,309 | |||||||||
10,000,000 | Discover Card Master Trust I, Series 02-3, Class A, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 11/17/09 | 10,008,232 | |||||||||
45,000,000 | Discover Card Master Trust I, Series 03-2, Class A, Variable Rate, 1 mo. LIBOR + .13%, 4.70%, due 08/15/10 | 45,112,500 | |||||||||
12,000,000 | Discover Card Master Trust I, Series 03-4, Class A1, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 05/15/11 | 12,027,655 | |||||||||
7,000,000 | Discover Card Master Trust I, Series 05-4, Class A1, Variable Rate, 1 mo. LIBOR + .06%, 4.63%, due 06/18/13 | 7,008,750 | |||||||||
GBP | 10,000,000 | Earls Five Ltd., Series E, MTN, Variable Rate, 3 mo. GBP LIBOR + .14%, 4.72%, due 02/27/08 | 17,618,180 | ||||||||
25,000,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 03/15/13 | 25,015,625 |
See accompanying notes to the financial statements.
7
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Credit Cards — continued | |||||||||||
5,400,000 | GE Capital Credit Card Master Note Trust, Series 2004-2, Class A, Floating Rate, 1 mo. LIBOR + .04%, 4.61%, due 09/15/10 | 5,403,375 | |||||||||
20,000,000 | Gracechurch Card Funding Plc, Series 2, Class A, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 10/15/09 | 20,034,647 | |||||||||
28,000,000 | Gracechurch Card Funding Plc, Series 4, Class A, Variable Rate, 1 mo. LIBOR + .05%, 4.62%, due 06/15/08 | 28,003,920 | |||||||||
3,000,000 | MBNA Credit Card Master Note Trust, Series 01-A5, Class A5, Variable Rate, 1 mo. LIBOR + .21%, 4.78%, due 03/15/11 | 3,014,220 | |||||||||
6,220,000 | MBNA Credit Card Master Note Trust, Series 02-A9, Class A9, Variable Rate, 3 mo. LIBOR + .09%, 4.69%, due 12/15/09 | 6,225,540 | |||||||||
31,976,000 | MBNA Credit Card Master Note Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 08/16/10 | 32,038,993 | |||||||||
14,000,000 | MBNA Credit Card Master Note Trust, Series 04-A7, Class A7, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 12/15/11 | 14,039,375 | |||||||||
15,000,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, Variable Rate, 1 mo. LIBOR + .15%, 4.72%, due 01/15/14 | 15,058,289 | |||||||||
19,000,000 | MBNA Credit Card Master Note Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR, 4.57%, due 12/15/10 | 19,000,000 | |||||||||
9,100,000 | Nordstrom Credit Card Master Note Trust, Series 02-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 4.84%, due 10/13/10 | 9,124,092 | |||||||||
25,000,000 | Pillar Funding Plc, Series 04-2, Class A, 144A, Variable Rate, 3 mo. LIBOR + .14%, 4.63%, due 09/15/11 | 25,037,732 | |||||||||
18,000,000 | World Financial Network Credit Card Master Trust, Series 02-A, Class A, Variable Rate, 1 mo. LIBOR + .43%, 5.00%, due 08/15/11 | 18,079,200 | |||||||||
31,100,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 03/15/13 | 31,165,295 | |||||||||
7,000,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class B, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 07/15/10 | 6,998,460 | |||||||||
804,662,684 | |||||||||||
Emerging Markets Collateralized Debt Obligations — 0.4% | |||||||||||
362,406 | Oasis CBO Ltd., 144A, Variable Rate, 6 mo. LIBOR + 0.38%, 4.96%, due 05/30/11 | 362,406 | |||||||||
16,000,000 | Santiago CDO Ltd., Series 05-1A, Class A, 144A, Variable Rate, 6 mo. LIBOR + .40%, 4.75%, due 04/18/17 | 16,025,600 | |||||||||
16,388,006 |
See accompanying notes to the financial statements.
8
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Equipment Leases — 0.9% | |||||||||||
7,500,000 | CNH Equipment Trust, Series 04-A, Class A4A, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 09/15/11 | 7,507,031 | |||||||||
23,000,000 | CNH Equipment Trust, Series 05-A, Class A4A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 06/15/12 | 23,003,450 | |||||||||
8,148,214 | GE Equipment Small Ticket Llc, Series 05-2A, Class A1, 144A, 4.56%, due 12/22/06 | 8,142,510 | |||||||||
38,652,991 | |||||||||||
High Yield Collateralized Debt Obligations — 0.1% | |||||||||||
572,023 | Nomura CBO Ltd., Series 97-2, Class A2, 144A, Step Up, 6.26%, due 10/30/09 | 573,453 | |||||||||
3,906,367 | Rhyno CBO Delaware Corp., Series 97-1, Class A-2, 144A, Step Up, 6.33%, due 09/15/09 | 3,914,531 | |||||||||
2,504,594 | SHYPPCO Finance Co., Series II, Class A-2B, 144A, 6.64%, due 06/15/10 | 2,379,364 | |||||||||
6,867,348 | |||||||||||
Insurance Premiums — 1.2% | |||||||||||
25,000,000 | AICCO Premium Finance Master Trust, Series 04-1A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 11/17/08 | 25,032,227 | |||||||||
16,000,000 | AICCO Premium Finance Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .08%, 4.65%, due 04/15/10 | 15,990,400 | |||||||||
11,000,000 | Mellon Bank Premium Finance Loan Master Trust, Series 04-1, Class A, Variable Rate, 3 mo. LIBOR + .16%, 4.65%, due 06/15/09 | 10,993,400 | |||||||||
52,016,027 | |||||||||||
Insured Auto Financing — 2.9% | |||||||||||
20,000,000 | Aesop Funding II Llc, Series 03-2A, Class A1, 144A, MBIA, 2.74%, due 06/20/07 | 19,920,200 | |||||||||
17,500,000 | Aesop Funding II Llc, Series 03-5A, Class A2, 144A, XL Capital Assurance, Variable Rate, 1 mo. LIBOR + .38%, 4.95%, due 12/20/09 | 17,608,675 | |||||||||
9,000,000 | Aesop Funding II Llc, Series 04-2A, Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 04/20/08 | 9,002,812 | |||||||||
10,000,000 | Aesop Funding II Llc, Series 05-1A, Class A3, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 04/20/10 | 9,935,000 | |||||||||
19,550,000 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, Variable Rate, 1 mo. LIBOR +.08%, 4.65%, due 05/06/12 | 19,565,273 |
See accompanying notes to the financial statements.
9
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Insured Auto Financing — continued | |||||||||||
1,090,944 | AmeriCredit Automobile Receivables Trust, Series 05-CF, Class A1, FSA, 3.84%, due 09/06/06 | 1,090,868 | |||||||||
17,000,000 | Capital One Auto Finance Trust, Series 04-A, Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 03/15/11 | 17,014,620 | |||||||||
11,000,000 | Capital One Auto Finance Trust, Series 04-B, Class A4, MBIA, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 08/15/11 | 11,012,430 | |||||||||
8,000,000 | Hertz Vehicle Financing Llc, Series 05-2A, Class A5, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 11/25/11 | 8,006,562 | |||||||||
15,000,000 | Rental Car Finance Corp., Series 04-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 06/25/09 | 15,024,300 | |||||||||
128,180,740 | |||||||||||
Insured Business Loans — 0.4% | |||||||||||
8,733,811 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .44%, 5.02%, due 10/25/30 | 8,793,375 | |||||||||
10,839,735 | Golden Securities Corp., Series 03-A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 4.87%, due 12/02/13 | 10,842,229 | |||||||||
19,635,604 | |||||||||||
Insured Collateralized Loan Obligations — 0.1% | |||||||||||
4,170,958 | PAMCO CLO, Series 98-1W, Class A, 144A, FSA, Variable Rate, 3 mo. LIBOR + .17%, 4.85%, due 05/01/10 | 4,166,787 | |||||||||
Insured Credit Cards — 1.0% | |||||||||||
11,000,000 | Cabela's Master Credit Card Trust, Series 03-1A, Class A, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .30%, 4.87%, due 01/15/10 | 11,046,420 | |||||||||
35,000,000 | Cabela's Master Credit Card Trust, Series 04-2A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 03/15/11 | 35,071,050 | |||||||||
46,117,470 | |||||||||||
Insured High Yield Collateralized Debt Obligations — 1.6% | |||||||||||
30,961,538 | Augusta Funding Ltd., Series 10A, Class F-1, 144A, CapMAC, Variable Rate, 3 mo. LIBOR +.25%, 4.27%, due 06/30/17 | 30,651,923 | |||||||||
2,030,223 | Cigna CBO, Series 96-1, Class A2, 144A, CapMAC, 6.46%, due 11/15/08 | 2,030,223 | |||||||||
618,815 | Clydesdale CBO I Ltd., Series 1A, Class A2, 144A, FSA, 6.83%, due 03/25/11 | 618,815 | |||||||||
1,289,248 | DLJ CBO Ltd., Series 1A, Class A2, FSA, 6.68%, due 04/15/11 | 1,302,141 |
See accompanying notes to the financial statements.
10
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Insured High Yield Collateralized Debt Obligations — continued | |||||||||||
10,000,000 | GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .46%, 5.06%, due 12/16/15 | 10,000,000 | |||||||||
5,970,094 | GSC Partners CDO Fund Ltd., Series 1A-A, 144A, FSA, Variable Rate, 6 mo. LIBOR + .40%, 4.93%, due 05/09/12 | 5,969,259 | |||||||||
19,129,167 | GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, Variable Rate, 6 mo. LIBOR + .52%, 5.09%, due 05/22/13 | 19,181,007 | |||||||||
1,047,437 | Spirit CBO, Series 03-4AW, AMBAC, Variable Rate, 6 mo. LIBOR + .55%, 5.14%, due 05/23/11 | 1,047,437 | |||||||||
70,800,805 | |||||||||||
Insured Insurance Premiums — 0.6% | |||||||||||
25,000,000 | PFS Financing Corp., Series 01-FA, Class A, MBIA, 144A, Variable Rate, 1 mo. LIBOR + .33%, 4.90%, due 06/15/08 | 25,021,000 | |||||||||
Insured Residential Asset-Backed Securities (European) — 0.7% | |||||||||||
GBP | 7,771,598 | RMAC Plc, Series 03-NS1A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.09%, due 06/12/35 | 13,679,874 | ||||||||
GBP | 9,940,449 | RMAC Plc, Series 03-NS2A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.04%, due 09/12/35 | 17,476,647 | ||||||||
31,156,521 | |||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.5% | |||||||||||
9,067,380 | Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .38%, 4.96%, due 12/25/33 | 9,109,090 | |||||||||
3,856,169 | Quest Trust, Series 03-X4A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .43%, 5.01%, due 12/25/33 | 3,862,713 | |||||||||
3,452,595 | Quest Trust, Series 04-X1, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .33%, 4.91%, due 03/25/34 | 3,455,012 | |||||||||
4,346,778 | Residential Asset Securities Corp., Series 02-KS3, Class A1B, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 05/25/32 | 4,347,778 | |||||||||
2,028,236 | Residential Asset Securities Corp., Series 02-KS5, Class AIB3, AMBAC, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 08/25/32 | 2,032,039 | |||||||||
22,806,632 |
See accompanying notes to the financial statements.
11
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Insured Residential Mortgage-Backed Securities (United States) — 2.2% | |||||||||||
3,815,516 | Chevy Chase Mortgage Funding Corp., Series 03-4, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .34%, 4.72%, due 10/25/34 | 3,820,095 | |||||||||
10,288,186 | Chevy Chase Mortgage Funding Corp., Series 04-1A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .33%, 4.71%, due 01/25/38 | 10,295,388 | |||||||||
37,000,000 | GMAC Mortgage Corp. Loan Trust, Series 05-HE3, Class A1, AMBAC, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 02/25/36 | 37,005,781 | |||||||||
2,352,723 | GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 07/25/29 | 2,353,829 | |||||||||
2,828,914 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .28%, 4.85%, due 08/15/30 | 2,833,214 | |||||||||
6,314,517 | Lehman ABS Corp., Series 04-2, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .22%, 4.80%, due 06/25/34 | 6,316,491 | |||||||||
2,026,508 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, Variable Rate, 1 mo. LIBOR + .29%, 4.87%, due 12/25/32 | 2,027,774 | |||||||||
14,383,257 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, Variable Rate, 1 mo. LIBOR + .19%, 4.77%, due 11/25/35 | 14,383,257 | |||||||||
9,831,220 | Wachovia Asset Securitization Inc., Series 02-HE1, Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .37%, 4.95%, due 09/27/32 | 9,856,290 | |||||||||
10,949,416 | Wachovia Asset Securitization Inc., Series 04-HE1, Class A, MBIA, Variable Rate, 1 mo. LIBOR + .22%, 4.80%, due 06/25/34 | 10,953,686 | |||||||||
99,845,805 | |||||||||||
Insured Time Share — 0.5% | |||||||||||
6,953,383 | Cendant Timeshare Receivables Funding Llc, Series 04-1A, Class A2, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 05/20/16 | 6,953,362 | |||||||||
14,817,116 | Cendant Timeshare Receivables Funding Llc, Series 05-1A, Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 05/20/17 | 14,817,116 | |||||||||
21,770,478 | |||||||||||
Insured Transportation — 0.3% | |||||||||||
12,250,000 | GE Seaco Finance, Series 04-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 4.87%, due 04/17/19 | 12,250,000 | |||||||||
Investment Grade Corporate Collateralized Debt Obligations — 3.3% | |||||||||||
20,000,000 | Counts Trust, Series 04-2, 144A, Variable Rate, 3 mo. LIBOR + .95%, 5.45%, due 09/20/09 | 20,419,200 |
See accompanying notes to the financial statements.
12
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Investment Grade Corporate Collateralized Debt Obligations — continued | |||||||||||
10,000,000 | Morgan Stanley ACES SPC, Series 04-12, Class A, 144A, Variable Rate, 3 mo. LIBOR + .60%, 5.31%, due 08/05/09 | 10,019,125 | |||||||||
7,000,000 | Morgan Stanley ACES SPC, Series 04-12, Class I, 144A, Variable Rate, 3 mo. LIBOR + .80%, 5.51%, due 08/05/09 | 6,993,000 | |||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, Variable Rate, 3 mo. LIBOR + .45%, 4.95%, due 12/20/09 | 6,008,437 | |||||||||
11,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, Variable Rate, 3 mo. LIBOR + .65%, 5.15%, due 12/20/09 | 11,021,270 | |||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class III, 144A, Variable Rate, 3 mo. LIBOR + .75%, 5.25%, due 12/20/09 | 2,993,400 | |||||||||
16,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .52%, 5.02%, due 03/20/10 | 16,000,000 | |||||||||
30,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, Variable Rate, 3 mo. LIBOR + .40%, 4.90%, due 12/20/10 | 30,037,500 | |||||||||
16,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .45%, 4.95%, due 03/20/10 | 16,000,000 | |||||||||
30,000,000 | Salisbury International Investments Ltd., Series E, MTN, Variable Rate, 3 mo. LIBOR + .42%, 4.92%, due 06/22/10 | 29,865,000 | |||||||||
149,356,932 | |||||||||||
Other — 0.8% | |||||||||||
5,000,000 | Ensec Home Finance Pool Ltd., Series 05-R1A, 144A, Variable Rate, 1 mo. LIBOR + .20%, 4.77%, due 05/15/14 | 5,003,754 | |||||||||
29,000,000 | TIB Card Receivables Fund, 144A, FGIC, Variable Rate, 4 mo. LIBOR + .25%, 4.79%, due 01/05/14 | 28,982,600 | |||||||||
33,986,354 | |||||||||||
Rate Reduction Bonds — 1.6% | |||||||||||
6,640,682 | California Infrastructure PG&E, Series 97-1, Class A7, 6.42%, due 09/25/08 | 6,664,522 | |||||||||
3,510,000 | Connecticut RRB Special Purpose Trust CL&P-1, Series 01-1, Class A4, Variable Rate, 3 mo. LIBOR + .31%, 4.84%, due 12/30/10 | 3,509,812 | |||||||||
23,000,000 | Massachusetts RRB Special Purpose Trust, Series 2005-1, Class A3, 4.13%, due 09/15/13 | 22,242,478 | |||||||||
30,000,000 | PG&E Energy Recovery Funding Llc, Series 05-1, Class A4, 4.37%, due 06/25/14 | 28,973,220 |
See accompanying notes to the financial statements.
13
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Rate Reduction Bonds — continued | |||||||||||
12,500,000 | PSE&G Transition Funding Llc, Series 01-1, Class A4, Variable Rate, 3 mo. LIBOR + .30%, 4.79%, due 06/15/11 | 12,560,457 | |||||||||
73,950,489 | |||||||||||
Residential Asset-Backed Securities (United States) — 21.8% | |||||||||||
6,682,588 | ACE Securities Corp., Series 04-OP1, Class A2B, Variable Rate, 1 mo. LIBOR + .22%, 4.80%, due 04/25/34 | 6,683,590 | |||||||||
16,378,000 | ACE Securities Corp., Series 05-AG1, Class A2B, Variable Rate, 1 mo. LIBOR + .21%, 4.79%, due 08/25/35 | 16,380,457 | |||||||||
20,000,000 | ACE Securities Corp., Series 05-ASP1, Class A2B, Variable Rate, 1 mo. LIBOR + .21%, 4.85%, due 09/25/35 | 20,022,400 | |||||||||
7,000,000 | ACE Securities Corp., Series 05-ASP1, Class A2C, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 09/25/35 | 7,006,720 | |||||||||
36,409,000 | ACE Securities Corp., Series 06-ASP1, Class A2B, 4.73%, due 12/25/35 | 36,409,000 | |||||||||
8,184,000 | ACE Securities Corp., Series 06-ASP1, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 4.73%, due 12/25/35 | 8,187,437 | |||||||||
34,170,473 | ACE Securities Corp., Series 06-SL1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 09/25/35 | 34,175,940 | |||||||||
3,331,908 | Aegis Asset Backed Securities Trust, Series 04-1, Class A, Variable Rate, 1 mo. LIBOR + .35%, 4.93%, due 04/25/34 | 3,333,973 | |||||||||
15,000,000 | Aegis Asset Backed Securities Trust, Series 04-5, Class 1A2, Variable Rate, 1 mo. LIBOR + .34%, 4.92%, due 03/25/31 | 15,016,350 | |||||||||
29,835,000 | Aegis Asset Backed Securities Trust, Series 04-6, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 03/25/25 | 29,872,294 | |||||||||
14,346,555 | Aegis Asset Backed Securities Trust, Series 05-3, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 08/25/35 | 14,347,114 | |||||||||
7,000,000 | Aegis Asset Backed Securities Trust, Series 05-5 , Class 1A2, Variable Rate, 1 mo. LIBOR + .18%, 4.76%, due 12/25/35 | 7,009,870 | |||||||||
5,034,681 | Ameriquest Mortgage Securities, Inc., Series 04-R2, Class A3, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 04/25/34 | 5,035,271 | |||||||||
22,000,000 | Argent Securities, Inc., Series 04-W8, Class A5, Variable Rate, 1 mo. LIBOR + .52%, 5.10%, due 05/25/34 | 22,079,062 | |||||||||
35,000,000 | Argent Securities, Inc., Series 06-W2, Class A2B, Variable Rate, 1 mo. LIBOR + .19%, 4.77%, due 03/25/36 | 35,000,000 | |||||||||
10,000,000 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 5.11%, due 05/28/39 | 10,010,937 |
See accompanying notes to the financial statements.
14
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
10,400,000 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .65%, 5.26%, due 05/28/39 | 10,411,375 | |||||||||
15,000,000 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 5.11%, due 02/28/40 | 15,030,469 | |||||||||
4,000,000 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1B, Variable Rate, 1 mo. LIBOR + .15%, 4.73%, due 05/25/35 | 3,996,800 | |||||||||
26,000,000 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1C, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 05/25/35 | 25,979,200 | |||||||||
3,409,065 | Centex Home Equity, Series 04-B, Class AV3, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 03/25/34 | 3,409,597 | |||||||||
202,296 | Centex Home Equity, Series 04-C, Class AV3, Variable Rate, 1 mo. LIBOR + .13%, 4.71%, due 11/25/28 | 202,300 | |||||||||
9,400,000 | Centex Home Equity, Series 05-A, Class AV2, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 07/25/34 | 9,400,000 | |||||||||
7,000,000 | Centex Home Equity, Series 05-A, Class AV3, Variable Rate, 1 mo. LIBOR + .34%, 4.92%, due 01/25/35 | 7,008,750 | |||||||||
32,000,000 | Centex Home Equity, Series 05-C, Class AV3, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 06/25/35 | 32,040,000 | |||||||||
1,418,157 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 04/25/33 | 1,419,575 | |||||||||
2,081,365 | Citifinancial Mortgage Securities, Inc., Series 04-1, Class AF1, Variable Rate, 1 mo. LIBOR + .09%, 4.67%, due 04/25/34 | 2,080,117 | |||||||||
4,212,238 | Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, Variable Rate, 1 mo. LIBOR + .41%, 4.99%, due 10/25/34 | 4,227,402 | |||||||||
6,607,171 | Countrywide Asset-Backed Certificates, Series 04-9, Class 2AV2, Variable Rate, 1 mo. LIBOR + .34%, 4.92%, due 05/25/33 | 6,611,115 | |||||||||
16,812,355 | Countrywide Asset-Backed Certificates, Series 05-4, Class AF1, Variable Rate, 1 mo. LIBOR + .13%, 4.71%, due 10/25/35 | 16,812,519 | |||||||||
6,421,182 | Credit-Based Asset Servicing and Securitization, Series 04-CB6, Class AV1, Variable Rate, 1 mo. LIBOR + .33%, 4.91%, due 07/25/35 | 6,432,219 | |||||||||
2,810,101 | Equity One ABS, Inc., Series 04-1, Class AV2, Variable Rate, 1 mo. LIBOR + .30%, 4.88%, due 04/25/34 | 2,810,979 | |||||||||
30,000,000 | Fremont Home Loan Trust, Series 05-B, Class 2A2, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 04/25/35 | 29,985,613 | |||||||||
11,000,000 | Fremont Home Loan Trust, Series 05-C, Class 2A2, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 07/25/35 | 11,003,437 |
See accompanying notes to the financial statements.
15
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
29,477,000 | GE-WMC Mortgage Securities, Series 05-2, Class A2B, Variable Rate, 1 mo. LIBOR + .17%, 4.75%, due 12/25/35 | 29,500,029 | |||||||||
26,800,000 | Greenpoint Mortgage Funding Trust, Series 05-HE1, Class A2, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 09/25/34 | 26,800,000 | |||||||||
10,659,000 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 07/25/30 | 10,668,993 | |||||||||
19,145,000 | GSAMP Trust, Series 05-HE3, Class A2B, Variable Rate, 1 mo. LIBOR + .22%, 4.80%, due 06/25/35 | 19,136,507 | |||||||||
10,874,342 | Household Home Equity Loan Trust, Series 05-2, Class A2, Variable Rate, 1 mo. LIBOR + .31%, 4.88%, due 01/20/35 | 10,894,731 | |||||||||
11,822,070 | Household Home Equity Loan Trust, Series 05-3, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 4.86%, due 01/20/35 | 11,838,233 | |||||||||
5,352,164 | Household Mortgage Loan Trust, Series 04-HC1, Class A, Variable Rate, 1 mo. LIBOR + .35%, 4.92%, due 02/20/34 | 5,355,391 | |||||||||
691,754 | Indy Mac Home Equity Loan Asset-Backed Trust, Series 04-C, Class 2A1, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 03/25/35 | 691,761 | |||||||||
3,586,332 | Master Asset Backed Securities Trust, Series 04-OPT1, Class A3, Variable Rate, 1 mo. LIBOR + .26%, 4.84%, due 02/25/34 | 3,587,049 | |||||||||
10,000,000 | Master Asset Backed Securities Trust, Series 05-FRE1, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 10/25/35 | 9,999,000 | |||||||||
10,321,812 | Master Asset Backed Securities Trust, Series 05-HE1, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 05/25/35 | 10,320,780 | |||||||||
14,000,000 | Master Asset Backed Securities Trust, Series 06-HE1, Class A1, Variable Rate, 1 mo. LIBOR + .08%, 4.66%, due 01/25/36 | 14,000,000 | |||||||||
30,828,000 | Master Second Lien Trust, Series 06-1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 4.73%, due 09/25/08 | 30,803,338 | |||||||||
15,000,000 | Morgan Stanley ABS Capital I, Series 04-HE5, Class A4, Variable Rate, 1 mo. LIBOR + .53%, 5.11%, due 06/25/34 | 15,121,875 | |||||||||
8,191,456 | Morgan Stanley ABS Capital I, Series 04-HE9, Class A3C, Variable Rate, 1 mo. LIBOR + .30%, 4.88%, due 11/25/34 | 8,206,815 | |||||||||
6,467,993 | Morgan Stanley ABS Capital I, Series 04-NC4, Class A3, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 04/25/34 | 6,470,768 | |||||||||
8,487,067 | Morgan Stanley ABS Capital I, Series 04-SD1, Class A, Variable Rate, 1 mo. LIBOR + .40%, 4.98%, due 08/25/34 | 8,495,023 | |||||||||
11,795,600 | New Century Home Equity Loan Trust, Series 04-3, Class A5, Variable Rate, 1 mo. LIBOR + .35%, 4.93%, due 11/25/34 | 11,814,031 |
See accompanying notes to the financial statements.
16
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
10,527,521 | New Century Home Equity Loan Trust, Series 05-3, Class A2A, Variable Rate, 1 mo. LIBOR + .09%, 4.67%, due 07/25/35 | 10,531,216 | |||||||||
20,000,000 | Nomura Home Equity Loan, Inc., Series 05-FM1, Class 2A2, Variable Rate, 1 mo. LIBOR + .22%, 4.80%, due 05/25/35 | 20,000,000 | |||||||||
16,016,000 | Nomura Home Equity Loan, Inc., Series 06-FM1, Class 2A2, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 11/25/35 | 16,016,000 | |||||||||
4,000,000 | Option One Mortgage Loan Trust, Series 05-3, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 08/25/35 | 4,000,000 | |||||||||
12,003,526 | Ownit Mortgage Loan Asset Backed Certificates, Series 05-2, Class A2A, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 03/25/36 | 12,003,526 | |||||||||
33,000,000 | Park Place Securities, Inc., Series 05-WCW2, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 4.73%, due 07/25/35 | 32,967,000 | |||||||||
28,000,000 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, Variable Rate, 1 mo. LIBOR + .26%, 4.84%, due 12/25/35 | 28,048,160 | |||||||||
25,000,000 | People's Choice Home Loan Securities, Series 05-3, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 08/25/35 | 25,031,250 | |||||||||
22,751,937 | RAAC, Series 05-RP3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 05/29/39 | 22,743,519 | |||||||||
16,000,000 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 04/25/35 | 16,012,500 | |||||||||
12,000,000 | Residential Asset Mortgage Products, Inc., Series 05-RS8 Class A2, 4.82%, due 10/25/33 | 12,025,308 | |||||||||
3,830,304 | Saxon Asset Securities Trust, Series 04-1, Class A, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 03/25/35 | 3,832,697 | |||||||||
8,864,395 | Security National Mortgage Loan Trust, Series 05-2A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .29%, 4.87%, due 02/25/36 | 8,869,935 | |||||||||
14,455,000 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, Variable Rate, 1 mo. LIBOR + .26%, 4.84%, due 10/25/35 | 14,479,863 | |||||||||
5,465,372 | Specialty Underwriting & Residential Finance, Series 05-BC2, Class A2A, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 12/25/35 | 5,464,518 | |||||||||
13,000,000 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 01/25/36 | 13,002,032 | |||||||||
34,000,000 | Structured Asset Securities Corp., Series 05-S6, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 4.87%, due 11/25/35 | 34,053,142 | |||||||||
4,294,679 | Wells Fargo Home Equity Trust, Series 04-2, Class AI1A, Variable Rate, 1 mo. LIBOR + .17%, 4.75%, due 02/25/18 | 4,294,008 | |||||||||
976,510,880 |
See accompanying notes to the financial statements.
17
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Mortgage-Backed Securities (Australian) — 4.5% | |||||||||||
18,121,765 | Australian Mortgage Securities II, G3 A1A, Variable Rate, 3 mo. LIBOR + .21%, 4.76%, due 01/10/35 | 18,161,271 | |||||||||
18,358,665 | Crusade Global Trust, Series 04-2, Class A1, Variable Rate, 3 mo. LIBOR + .13%, 4.90%, due 11/19/37 | 18,381,949 | |||||||||
8,865,184 | Crusade Global Trust, Series 05-1, Class A1, Variable Rate, 3 mo. LIBOR + .06%, 4.56%, due 06/17/37 | 8,860,042 | |||||||||
25,000,000 | Crusade Global Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .06%, 4.74%, due 07/20/38 | 25,000,000 | |||||||||
14,567,770 | Interstar Millennium Trust, Series 03-3G, Class A2, Variable Rate, 3 mo. LIBOR + .25%, 4.77%, due 09/27/35 | 14,600,031 | |||||||||
14,224,355 | Interstar Millennium Trust, Series 03-5G, Class A2, Variable Rate, 3 mo. LIBOR + .25%, 4.85%, due 01/20/36 | 14,254,420 | |||||||||
14,795,109 | Interstar Millennium Trust, Series 04-2G, Class A, Variable Rate, 3 mo. LIBOR + .20%, 4.69%, due 03/14/36 | 14,818,257 | |||||||||
9,307,726 | Medallion Trust, Series 03-1G, Class A, Variable Rate, 3 mo. LIBOR + .19%, 4.69%, due 12/21/33 | 9,327,551 | |||||||||
7,872,363 | Medallion Trust, Series 04-1G, Class A1, Variable Rate 3 mo. LIBOR + .13%, 4.93%, due 05/25/35 | 7,875,512 | |||||||||
5,711,969 | Medallion Trust, Series 04-1G, Class A1, Variable Rate, 3 mo. LIBOR + .13%, 4.93%, due 05/25/35 | 5,714,254 | |||||||||
7,201,924 | Medallion Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .08%, 4.80%, due 05/10/36 | 7,200,340 | |||||||||
23,503,453 | National RMBS Trust, Series 04-1, Class A1, Variable Rate, 3 mo. LIBOR + .11%, 4.61%, due 03/20/34 | 23,521,081 | |||||||||
7,826,455 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, Variable Rate, 3 mo. LIBOR + .14%, 4.60%, due 03/09/36 | 7,833,655 | |||||||||
6,593,710 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, Variable Rate, 3 mo. LIBOR + .07%, 4.64%, due 01/12/37 | 6,594,738 | |||||||||
21,423,706 | Westpac Securitization Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .07%, 4.57%, due 03/23/36 | 21,412,780 | |||||||||
203,555,881 | |||||||||||
Residential Mortgage-Backed Securities (European) — 4.6% | |||||||||||
15,000,000 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 4.60%, due 10/11/41 | 14,995,076 | |||||||||
8,571,425 | Granite Master Issuer Plc, Series 05-1, Class A1, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 12/20/19 | 8,571,401 |
See accompanying notes to the financial statements.
18
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||
9,000,000 | Granite Master Issuer Plc, Series 05-2, Class A4, Variable Rate, 3 mo. LIBOR + .08%, 4.85%, due 12/20/54 | 9,004,219 | |||||||||
15,000,000 | Granite Mortgages Plc, Series 04-3, Class 2A1, Variable Rate, 3 mo. LIBOR + .14%, 4.64%, due 09/20/44 | 15,027,000 | |||||||||
18,668,200 | Leek Finance Plc, Series 14A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .18%, 4.83%, due 09/21/36 | 18,673,800 | |||||||||
22,113,250 | Leek Finance Plc, Series 15A, Class AB, 144A, Variable Rate, 3 mo. LIBOR + .14%, 4.64%, due 03/21/37 | 22,102,193 | |||||||||
8,000,000 | Leek Finance Plc, Series 16A, Class A1B, 144A, Variable Rate, 3 mo. LIBOR + .06%, 4.36%, due 09/21/37 | 7,997,600 | |||||||||
9,888,200 | Lothian Mortgages Plc, Series 3A, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .14%, 4.76%, due 07/24/19 | 9,895,122 | |||||||||
14,000,000 | Paragon Mortgages Plc, Series 6A, Class A2A, 144A, Variable Rate, 3 mo. LIBOR + .35%, 4.84%, due 03/15/30 | 14,013,791 | |||||||||
15,951,288 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, Variable Rate, 3 mo. LIBOR + .46%, 4.96%, due 05/15/34 | 15,961,698 | |||||||||
20,000,000 | Permanent Financing Plc, Series 5, Class 2A, Variable Rate, 3 mo. LIBOR + .11%, 4.59%, due 06/10/11 | 20,016,000 | |||||||||
10,000,000 | Permanent Financing Plc, Series 6, Class 2A, Variable Rate, 3 mo. LIBOR + .09%, 4.57%, due 12/10/11 | 9,989,000 | |||||||||
5,000,000 | Permanent Financing Plc, Series 7, Class 2A, Variable Rate, 3 mo. LIBOR + .04%, 4.52%, due 09/10/14 | 5,000,000 | |||||||||
22,500,000 | Permanent Financing Plc, Series 8, Class 2A, Variable Rate, 3 mo. LIBOR + .07%, 4.55%, due 06/10/14 | 22,482,000 | |||||||||
13,998,720 | Residential Mortgage Securities, Series 20A, Class A1B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 4.79%, due 08/10/30 | 13,989,971 | |||||||||
207,718,871 | |||||||||||
Residential Mortgage-Backed Securities (United States) — 0.4% | |||||||||||
5,480,182 | Chevy Chase Mortgage Funding Corp., Series 04-3, Class A2, Variable Rate, 1 mo. LIBOR + .25%, 4.63%, due 08/25/35 | 5,431,956 | |||||||||
13,284,492 | Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 02/26/34 | 13,284,492 | |||||||||
18,716,448 |
See accompanying notes to the financial statements.
19
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Student Loans — 6.7% | |||||||||||
22,000,000 | College Loan Corp. Trust, Series 04-1, Class A2, Variable Rate, 3 mo. LIBOR + .11%, 4.73%, due 04/25/16 | 22,028,600 | |||||||||
8,000,000 | College Loan Corp. Trust, Series 05-1, Class A1, Variable Rate, 3 mo. LIBOR + .03%, 4.65%, due 01/25/14 | 7,997,600 | |||||||||
16,969,513 | Collegiate Funding Services Education Loan Trust I, Series 05-A, Class A1, Variable Rate, 3 mo. LIBOR + .02%, 4.54%, due 09/29/14 | 16,968,850 | |||||||||
19,500,000 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, Variable Rate, 3 mo. LIBOR + .05%, 4.24%, due 09/27/21 | 19,491,030 | |||||||||
11,351,290 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, Variable Rate, 3 mo. LIBOR +.04%, 4.54%, due 06/20/15 | 11,344,479 | |||||||||
17,589,268 | National Collegiate Student Loan Trust, Series 04-1, Class A1, Variable Rate, 3 mo. LIBOR +.12%, 4.64%, due 06/25/14 | 17,594,545 | |||||||||
15,494,015 | National Collegiate Student Loan Trust, Series 04-2, Class A1, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 04/25/23 | 15,488,902 | |||||||||
20,000,000 | Nelnet Educational Loan Funding Corp., Series 04-2A, Class A3, Variable Rate, 3 mo. LIBOR + .10%, 4.90%, due 11/25/15 | 20,011,600 | |||||||||
37,000,000 | Nelnet Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .05%, 4.55%, due 06/22/17 | 37,000,000 | |||||||||
20,000,000 | SLM Student Loan Trust, Series 05-10, Class A2, Variable Rate, 3 mo. LIBOR + .01%, 4.57%, due 04/25/15 | 19,989,063 | |||||||||
17,000,000 | SLM Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .03%, 4.65%, due 07/25/16 | 16,975,727 | |||||||||
30,000,000 | SLM Student Loan Trust, Series 05-6, Class A2, Variable Rate, 3 mo. LIBOR, 4.62%, due 07/25/16 | 29,990,625 | |||||||||
28,449,755 | SLM Student Loan Trust, Series 05-7, Class A1, Variable Rate, 3 mo. LIBOR, 4.62%, due 01/25/18 | 28,055,726 | |||||||||
28,000,000 | SLM Student Loan Trust, Series 06-1, Class A1, Variable Rate, 3 mo. LIBOR - .02%, 4.61%, due 01/25/12 | 28,000,000 | |||||||||
7,691,815 | SMS Student Loan Trust, Series 97-A, Class A, Variable Rate, 3 mo. U.S. Treasury Bill + .60%, 5.16%, due 10/27/25 | 7,726,197 | |||||||||
298,662,944 | |||||||||||
Trade Receivable — 0.3% | |||||||||||
13,000,000 | SSCE Funding Llc, Series 04-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .23%, 4.80%, due 11/15/10 | 13,008,125 | |||||||||
Total Asset-Backed Securities | 4,198,272,594 |
See accompanying notes to the financial statements.
20
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Corporate Debt — 1.0% | |||||||||||
22,000,000 | TIAA Global Markets, 144A, Variable Rate, 3 mo. LIBOR + .10%, 4.67%, due 01/12/11 | 22,011,000 | |||||||||
20,500,000 | Westralia Airports Corp., 144A, MBIA, 6.48%, due 04/01/10 | 21,358,745 | |||||||||
43,369,745 | |||||||||||
U.S. Government — 0.2% | |||||||||||
10,000,000 | U.S. Treasury Note, 2.25%, due 04/30/06(a) | 9,959,375 | |||||||||
U.S. Government Agency — 1.6% | |||||||||||
800,000 | Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 5.25%, due 01/01/14 | 799,000 | |||||||||
2,920,000 | Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.15%, due 10/01/12 | 2,909,050 | |||||||||
1,203,594 | Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 4.49%, due 10/01/11 | 1,195,320 | |||||||||
15,000,000 | Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 4.79%, due 02/01/27 | 14,887,500 | |||||||||
4,244,853 | Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 5.50%, due 03/30/19 | 4,258,118 | |||||||||
19,000,000 | Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015%, 4.93%, due 02/01/25 | 18,750,625 | |||||||||
15,000,000 | Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15%, 5.09%, due 10/29/26 | 14,962,500 | |||||||||
1,008,720 | Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45%, 5.20%, due 11/15/14 | 1,003,677 | |||||||||
1,856,571 | Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 5.10%, due 05/01/14 | 1,843,806 | |||||||||
12,337,500 | Agency for International Development Floater (Support of Tunisia), Variable Rate, 6 mo. LIBOR, 4.94%, due 07/01/23 | 12,244,969 | |||||||||
1,000,001 | Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill X 115%, 4.82%, due 01/01/12 | 988,126 | |||||||||
73,842,691 | |||||||||||
TOTAL DEBT OBLIGATION(S) (COST $4,327,276,662) | 4,325,444,405 |
See accompanying notes to the financial statements.
21
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Principal Amount / Shares / Par Value ($) | Description | Value ($) | |||||||||
CALL OPTIONS PURCHASED — 0.0% | |||||||||||
Options on Bonds — 0.0% | |||||||||||
25,000,000 | Bellsouth Telecommunications, 7.00%, due 12/01/95, Expires 10/26/06, Strike 100.00 | 777,585 | |||||||||
TOTAL CALL OPTIONS PURCHASED (COST $2,281,250) | 777,585 | ||||||||||
MUTUAL FUNDS — 0.7% | |||||||||||
29,902,734 | Merrimac Cash Series, Premium Class | 29,902,734 | |||||||||
TOTAL MUTUAL FUNDS (COST $29,902,734) | 29,902,734 | ||||||||||
SHORT-TERM INVESTMENT(S) — 2.8% | |||||||||||
50,000,000 | Rabobank USA Financial Corp. Commercial Paper, 4.54%, due 03/01/2006 | 50,000,000 | |||||||||
75,000,000 | UBS Financial Corp. Commercial Paper, 4.48%, due 03/01/2006 | 75,000,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $125,000,000) | 125,000,000 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $4,484,460,646) | 4,481,124,724 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (812,341 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 4,480,312,383 |
See accompanying notes to the financial statements.
22
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
260 | U.S. Treasury Note 5 Yr. (CBT) | June 2006 | $ | 27,296,962 | $ | (51,788 | ) |
At February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Forward currency contracts
Settlement Date | Deliver | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
4/11/06 | GBP | 25,000,000 | $ | 43,861,810 | $ | 535,690 |
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable on Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
60,000,000 | USD | 9/20/2010 | Morgan Stanley | Credit Swap | |||||||||||||||||||||||
Capital Services Inc. | Receive | 0.40 | % | Eagle Creek | |||||||||||||||||||||||
CDO | $ | 94,172 | |||||||||||||||||||||||||
31,000,000 | USD | 3/20/2013 | Morgan Stanley | ||||||||||||||||||||||||
Capital Services Inc. | Receive | 0.25 | % | MS Synthetic | |||||||||||||||||||||||
2006-1 | (184,701 | ) | |||||||||||||||||||||||||
28,000,000 | USD | 3/20/2015 | Lehman Brothers | Receive | 0.88 | % | Credit Swap AAA | ||||||||||||||||||||
CDO | (442,696 | ) | |||||||||||||||||||||||||
$ | (533,225 | ) |
See accompanying notes to the financial statements.
23
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
50,000,000 | USD | 1/09/2008 | JP Morgan | ||||||||||||||||||||||||
Chase Bank | (Pay) | 3.43 | % | 3 month LIBOR | $ | 1,581,460 | |||||||||||||||||||||
45,000,000 | USD | 3/04/2008 | JP Morgan | ||||||||||||||||||||||||
Chase Bank | (Pay) | 3.10 | % | 3 month LIBOR | 1,751,611 | * | |||||||||||||||||||||
40,000,000 | USD | 1/24/2011 | Goldman Sachs | (Pay) | 6.07 | % | 3 month LIBOR | (1,704,741 | )** | ||||||||||||||||||
30,000,000 | USD | 2/07/2012 | Deutsche Bank | ||||||||||||||||||||||||
AG | (Pay) | 4.33 | % | 3 month LIBOR | 1,129,204 | ||||||||||||||||||||||
38,100,000 | USD | 2/24/2013 | JP Morgan | ||||||||||||||||||||||||
Chase Bank | (Pay) | 4.54 | % | 3 month LIBOR | 1,180,781 | * | |||||||||||||||||||||
$ | 3,938,315 |
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
50,000,000 | USD | 3/01/2006 | Citigroup | 1 month LIBOR | Return on Lehman | ||||||||||||||||||
- 0.025% | Brothers CMBS AAA | $ | (98,876 | ) | |||||||||||||||||||
65,000,000 | USD | 3/31/2006 | Citigroup | 1 month LIBOR | Return on Lehman | ||||||||||||||||||
+ 0.15% | Brothers CMBS AAA | (137,071 | ) | ||||||||||||||||||||
$ | (235,947 | ) |
* Includes unrealized gains of $513,041 incurred by GMO Alpha LIBOR Fund prior to transfer to the Fund on March 31, 2004.
** Includes unrealized gains of $4,887,149 incurred by GMO Alpha LIBOR Fund prior to transfer to the Fund on November 27, 2002.
See accompanying notes to the financial statements.
24
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ACES - Aerolineas Centrales de Colombia
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
C.A.B.E.I. - Central American Bank of Economic Integration
CapMAC - Insured as to the payment of principal and interest by Capital Markets Assurance Corporation.
CBO - Collateralized Bond Obligation
CDO - Collateralized Debt Obligation
CLO - Collateralized Loan Obligation
CMBS - Commercial Mortgage Backed Security
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
GBP - British Pound
GMAC - Insured as to the payment of principal and interest by General Motors Acceptance Corporation.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MTN - Medium Term Note
USD - United States Dollar
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
See accompanying notes to the financial statements.
25
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $4,484,460,646) (Note 2) | $ | 4,481,124,724 | |||||
Cash | 3,851,104 | ||||||
Receivable for Fund shares sold | 15,475,000 | ||||||
Interest receivable | 14,792,382 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 535,690 | ||||||
Receivable for open swap contracts (Note 2) | 5,737,228 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 67,389 | ||||||
Total assets | 4,521,583,517 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 38,000,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 6,971 | ||||||
Interest payable for open swap contracts (Note 2) | 380,244 | ||||||
Payable for open swap contracts (Note 2) | 2,568,085 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 60,315 | ||||||
Accrued expenses | 255,519 | ||||||
Total liabilities | 41,271,134 | ||||||
Net assets | $ | 4,480,312,383 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 4,449,646,723 | |||||
Accumulated undistributed net investment income | 57,266,002 | ||||||
Accumulated net realized loss | (31,531,841 | ) | |||||
Net unrealized appreciation | 4,931,499 | ||||||
$ | 4,480,312,383 | ||||||
Net assets: | $ | 4,480,312,383 | |||||
Shares outstanding | 175,028,944 | ||||||
Net asset value per share | $ | 25.60 |
See accompanying notes to the financial statements.
26
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Interest (including securities lending income of $435) | $ | 159,156,464 | |||||
Total investment income | 159,156,464 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 448,389 | ||||||
Audit and tax fees | 112,236 | ||||||
Legal fees | 96,258 | ||||||
Trustees fees and related expenses (Note 3) | 74,980 | ||||||
Interest expense (Note 2) | 529,506 | ||||||
Miscellaneous | 70,513 | ||||||
Total expenses | 1,331,882 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (677,613 | ) | |||||
Net expenses | 654,269 | ||||||
Net investment income (loss) | 158,502,195 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 826,998 | ||||||
Closed futures contracts | 735,354 | ||||||
Closed swap contracts | 2,505,303 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 3,559,937 | ||||||
Net realized gain (loss) | 7,627,592 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (12,899,266 | ) | |||||
Open futures contracts | (323,172 | ) | |||||
Open swap contracts | (111,928 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 2,083,982 | ||||||
Net unrealized gain (loss) | (11,250,384 | ) | |||||
Net realized and unrealized gain (loss) | (3,622,792 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 154,879,403 |
See accompanying notes to the financial statements.
27
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 158,502,195 | $ | 65,897,081 | |||||||
Net realized gain (loss) | 7,627,592 | (9,874,861 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (11,250,384 | ) | 5,200,805 | ||||||||
Net increase (decrease) in net assets from operations | 154,879,403 | 61,223,025 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | (117,072,626 | ) | (43,986,168 | ) | |||||||
Net realized gains | — | (1,370,773 | ) | ||||||||
(117,072,626 | ) | (45,356,941 | ) | ||||||||
Net share transactions (Note 7): | 958,616,426 | 1,716,487,912 | |||||||||
Total increase (decrease) in net assets | 996,423,203 | 1,732,353,996 | |||||||||
Net assets: | |||||||||||
Beginning of period | 3,483,889,180 | 1,751,535,184 | |||||||||
End of period (including accumulated undistributed net investment income of $57,266,002 and $7,014,031, respectively) | $ | 4,480,312,383 | $ | 3,483,889,180 |
See accompanying notes to the financial statements.
28
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Year Ended February 28/29 | |||||||||||||||||||
2006 | 2005 | 2004 | 2003(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 25.33 | $ | 25.18 | $ | 25.01 | $ | 25.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 1.01 | 0.59 | 0.56 | 0.18 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.03 | ) | (0.09 | ) | 0.06 | (b) | (0.12 | ) | |||||||||||
Total from investment operations | 0.98 | 0.50 | 0.62 | 0.06 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.71 | ) | (0.34 | ) | (0.45 | ) | (0.05 | ) | |||||||||||
From net realized gains | — | (0.01 | ) | — | — | ||||||||||||||
Total distributions | (0.71 | ) | (0.35 | ) | (0.45 | ) | (0.05 | ) | |||||||||||
Net asset value, end of period | $ | 25.60 | $ | 25.33 | $ | 25.18 | $ | 25.01 | |||||||||||
Total Return(c) | 3.89 | % | 2.01 | % | 2.48 | % | 0.24 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 4,480,312 | $ | 3,483,889 | $ | 1,751,535 | $ | 1,146,954 | |||||||||||
Net operating expenses to average daily net assets(d) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | %* | |||||||||||
Interest expense to average daily net assets | 0.02 | % | — | 0.00 | %(e) | — | |||||||||||||
Total net expenses to average daily net assets | 0.02 | % | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %* | |||||||||||
Net investment income to average daily net assets | 3.96 | % | 2.31 | % | 2.51 | % | 2.94 | %* | |||||||||||
Portfolio turnover rate | 45 | % | 34 | % | 33 | % | 15 | %** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | % | 0.02 | % | 0.02 | % | 0.05 | %* |
(a) Period from November 26, 2002 (commencement of operations) through February 28, 2003.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Net operating expenses were less than 0.01% to average daily net assets.
(e) Interest expense was less than 0.01% to average daily net assets.
(f) Total net expenses were less than 0.01% to average daily net assets.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
29
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Short-Duration Collateral Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks total return in excess of its benchmark. The Fund seeks to achieve its objective by investing primarily in relatively high quality fixed income instruments. The Fund's benchmark is the J.P. Morgan U.S. 3-Month Cash Index.
Shares of the Fund are not publicly offered and are principally available only to other funds of the Trust and certain accredited investors.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value or exchange rate may be deemed unreliable if, for example, the Manager becomes aware o f information or events that would materially affect its value.
30
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund. As of February 28, 2006, the total value of these securities represented 30.6% of net assets.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
31
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
32
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Loan agreements
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both t he borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. As of February 28, 2006, the Fund did not enter into any loan agreements.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. As of February 28, 2006, the Fund did not hold any indexed securities.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the
33
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market r ate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
34
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $117,072,626 and $44,069,070, respectively and long-term capital gains – $0 and $1,287,871, respectively.
35
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $59,255,603 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to derivative contracts transactions.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $29,576,884, $142,552 and $614,650 expiring in 2011, 2012 and 2014, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $1,248,363.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 4,484,202,390 | $ | 10,128,516 | $ | (13,206,182 | ) | $ | (3,077,666 | ) |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to derivative contract transactions and certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | 8,822,402 | $ | (9,166,947 | ) | $ | 344,545 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income.
36
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
3. Fees and other transactions with affiliates
GMO does not charge the Fund any management or service fees for its services. In addition, effective until at least June 30, 2007, GMO has contractually agreed to reimburse all of the Fund's expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes).
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $43,328 and $26,129, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 137,989,920 | |||||||
Investments (non-U.S. Government securities) | 2,854,185,802 | 1,550,687,196 |
37
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 60.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. All of the shareholders are other funds of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 100% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 96,847,329 | $ | 2,480,509,800 | 107,900,318 | $ | 2,728,975,542 | * | ||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,614,675 | 117,072,626 | 1,801,070 | 45,356,941 | |||||||||||||||
Shares repurchased | (63,990,041 | ) | (1,638,966,000 | ) | (41,697,536 | ) | (1,057,844,571 | ) | |||||||||||
Net increase (decrease) | 37,471,963 | $ | 958,616,426 | 68,003,852 | $ | 1,716,487,912 |
* Shares sold amount is reduced by unrealized loss on investments of $2,036,420 incurred by GMO Alpha LIBOR Fund prior to conversion to the Fund on March 31, 2004.
38
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Short-Duration Collateral Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Short-Duration Collateral Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Acc ounting Oversight Board (Untied States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
39
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 0.02 | % | $ | 1,000.00 | $ | 1,021.10 | $ | 0.10 | |||||||||||
2) Hypothetical | 0.02 | % | $ | 1,000.00 | $ | 1,024.70 | $ | 0.10 |
* Expenses are calculated using the annualized net expense ratio (including interest expense), for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
40
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $83,913,391 or if determined to be different, the qualified interest income of such year.
41
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
42
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
43
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
44
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
45
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Core Plus Bond Fund returned +3.1% for the fiscal year ended February 28, 2006, as compared to +2.7% for the Lehman Brothers U.S. Aggregate Index. The Fund's exposure to various issues is achieved directly and indirectly through its investment in certain underlying GMO mutual funds, primarily in the GMO Emerging Country Debt Fund, the GMO World Opportunity Overlay Fund, and the GMO Short-Duration Collateral Fund.
The Fund outperformed the benchmark during the fiscal year by 0.4%. Value added from currency selection, emerging debt exposure, and cash management offset interest rate strategy underperformance.
Global bond yields fell across the board during the first half of 2005, although they began heading higher in the third quarter of 2005 and carrying into the New Year. Major, sustained bond market positions included overweights in Sweden and Canada and underweights in the U.K. and Switzerland. The Fund had been overweight Australia early in 2005 and moved to an underweight position later in the year. U.S., Canada, Australia, and Euro-area positions were the largest positive contributors. Underweights in the U.K. and Switzerland and a recent overweight in Japan detracted from performance.
The U.S. dollar gained versus most currencies in 2005, began weakening in December, then stabilized in February. For much of 2005 the Fund had been overweight relatively higher yielding currencies like Australian dollars, New Zealand dollars, and British sterling and underweight lower yielding currencies such as Japanese yen and euro. In general, the underweights added value, while the overweights did not.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class IV will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 98.2 | % | |||||
Short-Term Investment(s) | 2.4 | ||||||
Mutual Funds | 0.9 | ||||||
Call Options Purchased | 0.2 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Put Options Purchased | 0.2 | ||||||
Forward Currency Contracts | 0.2 | ||||||
Preferred Stocks | 0.1 | ||||||
Forward Start Options | 0.0 | ||||||
Futures | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.1 | ||||||
Swaps | 0.0 | ||||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Other | (2.0 | ) | |||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
United States | 95.3 | % | |||||
Sweden | 18.2 | ||||||
Canada | 15.7 | ||||||
Euro Region*** | 5.1 | ||||||
Japan | 3.3 | ||||||
Switzerland | (7.7 | ) | |||||
Australia | (13.5 | ) | |||||
United Kingdom | (16.4 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
1
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 6.2% | |||||||||||
Albania — 0.2% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 15,681,227 | Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a)(b) | 5,716,759 | ||||||||
Austria — 0.2% | |||||||||||
Corporate Debt | |||||||||||
GBP | 500,000 | Bank Austria Creditanstalt AG, 8.38%, due 11/04/11 | 1,022,070 | ||||||||
USD | 4,175,000 | Bank Austria Creditanstalt AG, 144A, 7.25%, due 02/15/17 | 4,832,104 | ||||||||
Total Austria | 5,854,174 | ||||||||||
Brazil — 0.2% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 10,000,000 | Brazil Discount Bond, Principal Strip, Series D1A, Zero Coupon, due 04/15/24 (a)(b) | 3,889,821 | ||||||||
Canada — 0.1% | |||||||||||
Foreign Government Obligations | |||||||||||
CAD | 4,000,000 | Government of Canada (Cayman), 7.25%, due 06/01/08 | 3,739,434 | ||||||||
Luxembourg — 0.3% | |||||||||||
Corporate Debt | |||||||||||
USD | 8,000,000 | Tyco International Group SA, 5.80%, due 08/01/06 | 8,019,040 | ||||||||
United States — 5.2% | |||||||||||
Corporate Debt — 0.9% | |||||||||||
USD | 10,000,000 | General Electric Capital Corp, Series MTNA, 5.88%, due 02/15/12 | 10,350,800 | ||||||||
USD | 5,000,000 | Wells Fargo & Co, 5.00%, due 11/15/14 | 4,899,900 | ||||||||
USD | 5,000,000 | Target Corp, 4.00%, due 06/15/13 | 4,681,500 | ||||||||
USD | 5,000,000 | Verizon Global Funding Corp, 4.38%, due 06/01/13 | 4,689,100 | ||||||||
24,621,300 |
See accompanying notes to the financial statements.
2
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value / Principal Amount | Description | Value ($) | |||||||||
U.S. Government — 2.1% | |||||||||||
USD | 5,000,000 | U.S. Treasury Note, 4.00%, due 09/30/07 | 4,944,531 | ||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/10 (b) | 8,206,949 | ||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/12 (b) | 7,402,611 | ||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 08/15/12 (b) | 7,210,463 | ||||||||
USD | 30,458,500 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (c)(d) | 31,534,066 | ||||||||
59,298,620 | |||||||||||
U.S. Government Agency — 2.2% | |||||||||||
USD | 60,000,000 | Fannie Mae, TBA, 6.00%, due 03/01/36 | 60,562,500 | ||||||||
Total United States | 144,482,420 | ||||||||||
TOTAL DEBT OBLIGATION(S) (COST $166,996,220) | 171,701,648 | ||||||||||
CALL OPTIONS PURCHASED — 0.1% | |||||||||||
Currency Options — 0.1% | |||||||||||
130,300,000 | AUD Call/USD Put, Expires 06/07/06, Strike 0.744 | 1,516,327 | |||||||||
TOTAL CALL OPTIONS PURCHASED (COST $2,409,414) | 1,516,327 | ||||||||||
PUT OPTIONS PURCHASED — 0.2% | |||||||||||
Currency Options — 0.2% | |||||||||||
14,500,000,000 | USD Put/JPY Call, Expires 04/04/06, Strike 116.30 | 1,979,105 | |||||||||
14,700,000,000 | USD Put/JPY Call, Expires 04/18/06, Strike 118.50 | 3,961,650 | |||||||||
5,940,755 | |||||||||||
TOTAL PUT OPTIONS PURCHASED (COST $4,842,401) | 5,940,755 |
See accompanying notes to the financial statements.
3
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Principal Amount | Description | Value ($) | |||||||||
FORWARD START OPTIONS — 0.0% | |||||||||||
Currency Options — 0.0% | |||||||||||
18,080,000,000 | JPY Put/USD Call, Expires 09/18/06, Strike TBD | 69,789 | |||||||||
TOTAL FORWARD START OPTIONS (COST $0) | 69,789 | ||||||||||
PREFERRED STOCKS — 0.1% | |||||||||||
United States — 0.1% | |||||||||||
10,000 | Home Ownership Funding 2 Preferred 144A, 13.338% | 2,791,760 | |||||||||
TOTAL PREFERRED STOCKS (COST $3,318,495) | 2,791,760 | ||||||||||
MUTUAL FUNDS — 95.4% | |||||||||||
Affiliated Issuer(s) — 95.4% | |||||||||||
7,359,112 | GMO Emerging Country Debt Fund, Class IV | 83,157,963 | |||||||||
78,174,311 | GMO Short-Duration Collateral Fund | 2,001,262,353 | |||||||||
93,858 | GMO Special Purpose Holding Fund | 772,451 | |||||||||
21,968,896 | GMO World Opportunity Overlay Fund | 554,275,256 | |||||||||
TOTAL MUTUAL FUNDS (COST $2,624,482,314) | 2,639,468,023 | ||||||||||
TOTAL INVESTMENTS — 102.0% (Cost $2,802,048,844) | 2,821,488,302 | ||||||||||
Other Assets and Liabilities (net) — (2.0%) | (55,001,365 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,766,486,937 |
See accompanying notes to the financial statements.
4
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3/21/06 | AUD | 475,900,000 | $ | 353,191,817 | $ | (1,344,854 | ) | ||||||||||||
4/18/06 | CHF | 141,000,000 | 107,981,494 | (1,067,230 | ) | ||||||||||||||
4/11/06 | GBP | 92,100,000 | 161,586,908 | 788,213 | |||||||||||||||
3/07/06 | JPY | 30,560,000,000 | 264,173,222 | 135,803 | |||||||||||||||
5/02/06 | NZD | 231,300,000 | 152,500,716 | 511,690 | |||||||||||||||
$ | (976,378 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
3/21/06 | AUD | 369,000,000 | $ | 273,855,391 | $ | 3,017,943 | |||||||||||||
3/28/06 | CAD | 125,900,000 | 110,853,821 | (1,736,270 | ) | ||||||||||||||
4/18/06 | CHF | 198,400,000 | 151,939,918 | 529,569 | |||||||||||||||
4/25/06 | EUR | 277,500,000 | 331,826,380 | (212,350 | ) | ||||||||||||||
4/11/06 | GBP | 61,000,000 | 107,022,816 | 1,307,084 | |||||||||||||||
3/07/06 | JPY | 93,470,000,000 | 807,993,164 | 5,355,388 | |||||||||||||||
$ | 8,261,364 |
Forward cross currency contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
3/14/06 | EUR | 161,500,000 | NOK | 1,281,550,950 | $ | (2,595,827 | ) | ||||||||
4/04/06 | EUR | 132,500,000 | SEK | 1,224,559,700 | (3,126,638 | ) | |||||||||
3/14/06 | NOK | 636,093,965 | EUR | 79,100,000 | 23,899 | ||||||||||
4/04/06 | SEK | 1,859,791,661 | EUR | 199,000,000 | 2,081,065 | ||||||||||
$ | (3,617,501 | ) |
See accompanying notes to the financial statements.
5
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Futures contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
4,270 | Canadian Government Bond 10 Yr. | June 2006 | $ | 423,712,350 | $ | (560,877 | ) | ||||||||||||
299 | EURO BOBL | March 2006 | 39,967,382 | (66,462 | ) | ||||||||||||||
623 | EURO Bund | March 2006 | 89,411,041 | (130,513 | ) | ||||||||||||||
63 | Japanese Government Bond 10 Yr. (TSE) | March 2006 | 74,012,958 | (105,736 | ) | ||||||||||||||
1,406 | U.S. Long Bond | June 2006 | 159,009,812 | (268,301 | ) | ||||||||||||||
2,133 | U.S. Treasury Note 10 Yr. | June 2006 | 230,164,031 | (234,176 | ) | ||||||||||||||
$ | (1,366,065 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
1,653 | Australian Government Bond 10 Yr. | March 2006 | $ | 129,386,745 | $ | 677,001 | |||||||||||||
3,258 | Australian Government Bond 3 Yr. | March 2006 | 246,815,206 | 433,814 | |||||||||||||||
445 | U.S. Treasury Note 5 Yr. (CBT) | June 2006 | 46,808,437 | (45,265 | ) | ||||||||||||||
2,521 | UK Gilt Long Bond | June 2006 | 501,508,785 | 2,115,038 | |||||||||||||||
$ | 3,180,588 |
See accompanying notes to the financial statements.
6
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
5,000,000 | USD | 4/2/2007 | Lehman Brothers | Receive | 0.52 | % | General Electric | ||||||||||||||||||||||||
Capital Corp. | $ | 29,055 | |||||||||||||||||||||||||||||
3,000,000 | USD | 4/17/2007 | UBS AG | Receive | 0.80 | % | EOP Operating LP | 25,544 | |||||||||||||||||||||||
3,000,000 | USD | 4/17/2007 | UBS AG | Receive | 0.47 | % | Goldman Sachs Group, Inc. | 14,434 | |||||||||||||||||||||||
3,000,000 | USD | 4/17/2007 | Bear Stearns | Receive | 1.28 | % | National Rural Utilities Cooperative Finance Corp. | 44,470 | |||||||||||||||||||||||
10,000,000 | USD | 12/20/2007 | Citigroup | Receive | 2.41 | % | AOL Time Warner, Inc. | 428,168 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Lehman Brothers | Receive | 0.50 | % | Dominion Resources, Inc. | 32,323 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.48 | % | Household Finance Corp. | 46,253 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.65 | % | Kraft Foods, Inc. | 64,847 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.40 | % | Norfolk Southern Corp. | 36,141 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2008 | Deutsche Bank AG | Receive | 0.40 | % | Washington Mutual, Inc. | 25,613 | |||||||||||||||||||||||
10,000,000 | USD | 9/20/2008 | Deutsche Bank AG | Receive | 0.32 | % | American International Group, Inc. | 57,962 | |||||||||||||||||||||||
10,000,000 | USD | 12/20/2008 | Lehman Brothers | Receive | 0.27 | % | Federal Home Loan Bank System | 61,098 |
See accompanying notes to the financial statements.
7
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
5,000,000 | USD | 5/20/2009 | JP Morgan | United | |||||||||||||||||||||||||||
Chase Bank | Receive | 1.13 | % | Mexican States | $ | 129,050 | |||||||||||||||||||||||||
5,000,000 | USD | 6/20/2009 | Citigroup | Receive | 0.25 | % | ConocoPhillips Co. | 20,496 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2009 | Barclays Bank PLC | Receive | 0.91 | % | Sprint Capital Corp. | 114,975 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2009 | Lehman Brothers | Receive | 0.67 | % | Wyeth Energy | 89,488 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | UBS AG | Receive | 0.59 | % | Capital One Bank | 73,377 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Citigroup | Receive | 0.30 | % | Coca-Cola Enterprises, Inc. | 23,888 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Citigroup | Receive | 0.69 | % | Comcast Cable Communications, Inc. | 69,971 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | UBS AG | Receive | 0.62 | % | Devon Energy Corp. | 77,480 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Barclays Bank PLC | Receive | 0.54 | % | Duke Energy Corp. | 50,919 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | Citigroup | Receive | 0.25 | % | International Business Machines | 23,481 | |||||||||||||||||||||||
5,000,000 | USD | 9/20/2009 | UBS AG | Receive | 0.53 | % | Kinder Morgan Energy Partners LP | 48,891 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.25 | % | AT&T Wireless Services, Inc. | 4,036 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.21 | % | Bank of America Corp. | 19,877 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.30 | % | Boeing Capital Corp. | 32,124 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.21 | % | Citigroup, Inc. | 19,527 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.82 | % | Clear Channel Communications, Inc. | 27,007 |
See accompanying notes to the financial statements.
8
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche | Daimler- | |||||||||||||||||||||||||||
Bank AG | Receive | 0.66 | % | Chrysler AG | $ | 32,945 | |||||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.26 | % | Morgan Stanley | 16,715 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.39 | % | SBC Communications, Inc. | 35,277 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Deutsche Bank AG | Receive | 0.35 | % | The Kroger Co. | (8,436 | ) | ||||||||||||||||||||||
5,000,000 | USD | 12/20/2009 | Barclays Bank PLC | Receive | 0.38 | % | Weyerhaueser Co. | (1,019 | ) | ||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.30 | % | Credit Suisse First Boston (USA), Inc. | 22,258 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.31 | % | HSBC Finance Corp. | 28,246 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.29 | % | JP Morgan Chase Bank | 24,709 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.31 | % | Lehman Brothers Holdings, Inc. | 21,286 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.29 | % | Merrill Lynch & Co., Inc. | 18,693 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays Bank PLC | Receive | 0.27 | % | Merrill Lynch & Co., Inc. | 22,773 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Lehman Brothers | Receive | 0.40 | % | PSEG Energy LLC | 15,208 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Lehman Brothers | Receive | 0.20 | % | Royal Bank of Scotland PLC | 17,523 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.36 | % | The Bear Stearns Companies, Inc. | 32,065 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.34 | % | The Goldman Sachs Group, Inc. | 32,305 | |||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | UBS AG | Receive | 0.52 | % | TXU Electric Delivery Co. | (61,298 | ) |
See accompanying notes to the financial statements.
9
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
5,000,000 | USD | 6/20/2010 | Barclays | ||||||||||||||||||||||||||||
Bank PLC | Receive | 0.17 | % | Wachovia Corp. | $ | 10,830 | |||||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.20 | % | Bank of America Corp. | 5,140 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.19 | % | Citigroup, Inc. | 1,913 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Deutsche Bank AG | Receive | 0.75 | % | Enterprise Products Partners LP | 51,850 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Citigroup | Receive | 0.39 | % | Exelon Generation Co. LLC | 18,523 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.45 | % | First Energy Corp. | 12,114 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | Barclays Bank PLC | Receive | 0.28 | % | JP Morgan Chase Bank | 9,319 | |||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | UBS AG | Receive | 0.47 | % | Progress Energy, Inc. | 25,018 | |||||||||||||||||||||||
5,000,000 | USD | 3/20/2011 | Barclays Bank PLC | Receive | 0.25 | % | Bell South | 7,517 | |||||||||||||||||||||||
5,000,000 | USD | 3/20/2011 | Barclays Bank PLC | Receive | 0.25 | % | HSBC Finance Corp. | 10,770 | |||||||||||||||||||||||
5,000,000 | USD | 3/20/2013 | Barclays Bank PLC | Receive | 0.25 | % | Goldman Sachs Group, Inc. | (4,274 | ) | ||||||||||||||||||||||
15,376,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 0.70 | % | Reference security within CDX Index | 97,208 | |||||||||||||||||||||||
24,800,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 0.70 | % | Reference security within CDX Index | 156,788 | |||||||||||||||||||||||
9,920,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 0.70 | % | Reference security within CDX Index | 62,715 | |||||||||||||||||||||||
25,000,000 | USD | 6/20/2015 | JP Morgan Chase Bank | Receive | 0.65 | % | Reference security within CDX Index | (86,377 | ) |
See accompanying notes to the financial statements.
10
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
5,000,000 | USD | 6/20/2015 | Lehman Brothers | Receive | 0.65 | % | Reference | ||||||||||||||||||||||||
security within | |||||||||||||||||||||||||||||||
CDX Index | $ | (17,275 | ) | ||||||||||||||||||||||||||||
25,000,000 | USD | 6/20/2015 | Lehman Brothers | Receive | 0.65 | % | Reference security within CDX Index | (86,377 | ) | ||||||||||||||||||||||
20,000,000 | USD | 12/20/2015 | Deutsche Bank AG | Receive | 0.70 | % | Reference security within CDX Index | (48,588 | ) | ||||||||||||||||||||||
15,000,000 | USD | 12/20/2015 | Lehman Brothers | Receive | 0.70 | % | Reference security within CDX Index | (36,441 | ) | ||||||||||||||||||||||
10,000,000 | USD | 12/20/2015 | Lehman Brothers | Receive | 0.70 | % | Reference security within CDX Index | (24,294 | ) | ||||||||||||||||||||||
25,000,000 | USD | 12/20/2015 | Lehman Brothers | Receive | 0.70 | % | Reference security within CDX Index | (60,735 | ) | ||||||||||||||||||||||
$ | 2,045,089 |
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
26,000,000 | SEK | 3/17/2008 | Deutsche | 3 Month SEK | |||||||||||||||||||||||||||
Bank AG | Receive | 2.90 | % | STIBOR | $ | 2,368 | |||||||||||||||||||||||||
430,000,000 | SEK | 3/17/2008 | JP Morgan Chase Bank | Receive | 2.90 | % | 3 Month SEK STIBOR | 39,380 | |||||||||||||||||||||||
10,100,000 | USD | 2/15/2010 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 Month LIBOR | (885,560 | ) | ||||||||||||||||||||||
394,000,000 | SEK | 3/15/2011 | Citigroup | Receive | 3.40 | % | 3 Month SEK STIBOR | 10,942 |
See accompanying notes to the financial statements.
11
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
839,000,000 | SEK | 3/15/2011 | Deutsche | 3 Month SEK | |||||||||||||||||||||||||||
Bank AG | Receive | 3.40 | % | STIBOR | $ | 23,301 | |||||||||||||||||||||||||
112,000,000 | SEK | 3/15/2011 | JP Morgan Chase Bank | Receive | 3.40 | % | 3 Month SEK STIBOR | 3,110 | |||||||||||||||||||||||
167,000,000 | CHF | 3/15/2011 | Deutsche Bank AG | (Pay) | 2.25 | % | 6 Month CHF LIBOR | 100,513 | |||||||||||||||||||||||
10,100,000 | USD | 2/15/2012 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 Month LIBOR | (868,477 | ) | ||||||||||||||||||||||
10,100,000 | USD | 8/15/2012 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 Month LIBOR | (872,121 | ) | ||||||||||||||||||||||
168,000,000 | SEK | 3/15/2013 | Deutsche Bank AG | Receive | 3.50 | % | 3 Month SEK STIBOR | (46,857 | ) | ||||||||||||||||||||||
324,000,000 | SEK | 3/15/2013 | JP Morgan Chase Bank | Receive | 3.50 | % | 3 Month SEK STIBOR | (90,368 | ) | ||||||||||||||||||||||
65,000,000 | CHF | 3/15/2013 | JP Morgan Chase Bank | (Pay) | 2.40 | % | 6 Month CHF LIBOR | (2,729 | ) | ||||||||||||||||||||||
8,500,000 | USD | 10/24/2013 | JP Morgan Chase Bank | (Pay) | 4.70 | % | 3 Month LIBOR | 200,543 | |||||||||||||||||||||||
540,000,000 | SEK | 3/15/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 Month SEK STIBOR | 524,057 | |||||||||||||||||||||||
294,000,000 | SEK | 3/15/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 Month SEK STIBOR | 285,320 | |||||||||||||||||||||||
80,000,000 | SEK | 3/15/2016 | Merrill Lynch | Receive | 3.75 | % | 3 Month SEK STIBOR | 77,638 | |||||||||||||||||||||||
71,600,000 | CHF | 3/15/2016 | Deutsche Bank AG | (Pay) | 2.50 | % | 6 Month CHF LIBOR | 178,183 | |||||||||||||||||||||||
10,000,000 | USD | 4/15/2024 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 Month LIBOR | (845,113 | ) | ||||||||||||||||||||||
15,680,000 | USD | 8/31/2025 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 Month LIBOR | (1,314,490 | ) | ||||||||||||||||||||||
$ | (3,480,360 | ) |
See accompanying notes to the financial statements.
12
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
88,000,000 | USD | 3/1/2006 | Lehman Brothers | 1 month LIBOR | Return on Lehman | ||||||||||||||||||||||
–0.03% | Mortgage Total | ||||||||||||||||||||||||||
Return Index | $ | 73,844 | |||||||||||||||||||||||||
35,000,000 | USD | 3/1/2006 | UBS AG | 1 month LIBOR – 0.03% | Return on Lehman Mortgage Total Return Index | 29,370 | |||||||||||||||||||||
335,000,000 | USD | 4/28/2006 | UBS AG | 1 month LIBOR | Return on Lehman Mortgage Total Return Index | 273,573 | |||||||||||||||||||||
15,000,000 | USD | 4/30/2006 | JP Morgan Chase Bank | 1 month LIBOR – 0.01% | Return on Lehman Aggregate Total Return Index | (4,172 | ) | ||||||||||||||||||||
25,000,000 | USD | 4/30/2006 | JP Morgan Chase Bank | 1 month LIBOR – 0.11% | Return on Lehman Mortgage Total Return Index | 22,478 | |||||||||||||||||||||
50,000,000 | USD | 5/31/2006 | UBS AG | 1 month LIBOR – 0.03% | Return on Lehman Mortgage Total Return Index | 41,957 | |||||||||||||||||||||
105,000,000 | USD | 5/31/2006 | UBS AG | 1 month LIBOR – 0.02% | Return on Lehman Mortgage Total Return Index | 87,322 | |||||||||||||||||||||
245,000,000 | USD | 6/30/2006 | UBS AG | 1 month LIBOR – 0.01% | Return on Lehman Mortgage Total Return Index | 201,913 | |||||||||||||||||||||
30,000,000 | USD | 7/31/2006 | JP Morgan Chase Bank | 1 month LIBOR – 0.01% | Return on Lehman Aggregate Total Return Index | (8,345 | ) | ||||||||||||||||||||
150,000,000 | USD | 7/31/2006 | Lehman Brothers | 1 month LIBOR – 0.04% | Return on Lehman Brothers U.S. Government Index | (275,862 | ) | ||||||||||||||||||||
75,000,000 | USD | 7/31/2006 | Lehman Brothers | 1 month LIBOR – 0.05% | Return on Lehman Brothers U.S. Government Index | (137,368 | ) |
See accompanying notes to the financial statements.
13
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements — continued
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
55,000,000 | USD | 8/31/2006 | JP Morgan | 1 month LIBOR | Return on Lehman | ||||||||||||||||||||||
Chase Bank | –0.01% | Aggregate Total | |||||||||||||||||||||||||
Return Index | $ | 0 | |||||||||||||||||||||||||
163,000,000 | USD | 8/31/2006 | Lehman Brothers | 1 month LIBOR – 0.01% | Return on Lehman Mortgage Total Return Index | 0 | |||||||||||||||||||||
130,000,000 | USD | 8/31/2006 | UBS AG | 1 month LIBOR – 0.01% | Return on Lehman Mortgage Total Return Index | 0 | |||||||||||||||||||||
350,000,000 | USD | 1/31/2007 | Lehman Brothers | 1 month LIBOR – 0.04% | Return on Lehman Brothers U.S. Government Index | (643,677 | ) | ||||||||||||||||||||
$ | (338,967 | ) |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
MTN - Medium Term Note
TBA - To Be Announced - Delayed Delivery Security (Note 2)
TBD - To Be Determined
(a) Security is backed by the U.S. Government.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
Currency Abbreviations:
AUD - Australian Dollar | JPY - Japanese Yen | ||||||
CAD - Canadian Dollar | NOK - Norwegian Krone | ||||||
CHF - Swiss Franc | NZD - New Zealand Dollar | ||||||
EUR - Euro | SEK - Swedish Krona | ||||||
GBP - British Pound | USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
14
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $177,566,530) (Note 2) | $ | 182,020,279 | |||||
Investments in affiliated issuers, at value (cost $2,624,482,314) (Notes 2 and 8) | 2,639,468,023 | ||||||
Cash | 697,705 | ||||||
Receivable for investments sold - delayed delivery (Note 2) | 80,722,266 | ||||||
Receivable for Fund shares sold | 2,000,000 | ||||||
Interest receivable | 744,841 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 13,750,654 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 2,135,167 | ||||||
Receivable for realized swap contracts | 100,893 | ||||||
Receivable for open swap contracts (Note 2) | 4,656,015 | ||||||
Periodic payments from open swap agreements (Note 2) | 1,756,042 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 251,050 | ||||||
Total assets | 2,928,302,935 | ||||||
Liabilities: | |||||||
Foreign cash due to custodian (cost $445,358) | 302,592 | ||||||
Payable for investments purchased (Note 2) | 3,000,000 | ||||||
Payable for investments purchased - delayed delivery (Note 2) | 140,841,250 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 529,755 | ||||||
Shareholder service fee | 218,926 | ||||||
Trustees and Chief Compliance Officer fees | 5,928 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 10,083,169 | ||||||
Payable for realized swap contracts | 11,357 | ||||||
Payable for open swap contracts (Note 2) | 6,430,253 | ||||||
Accrued expenses | 392,768 | ||||||
Total liabilities | 161,815,998 | ||||||
Net assets | $ | 2,766,486,937 |
See accompanying notes to the financial statements.
15
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006 — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,796,355,537 | |||||
Distributions in excess of net investment income | (29,333,970 | ) | |||||
Accumulated net realized loss | (29,469,514 | ) | |||||
Net unrealized appreciation | 28,934,884 | ||||||
$ | 2,766,486,937 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 148,475,890 | |||||
Class IV shares | $ | 2,618,011,047 | |||||
Shares outstanding: | |||||||
Class III | 14,383,699 | ||||||
Class IV | 253,442,607 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.32 | |||||
Class IV | $ | 10.33 |
See accompanying notes to the financial statements.
16
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 57,267,130 | |||||
Interest (including securities lending income of $1,152) | 5,921,847 | ||||||
Dividends | 236,264 | ||||||
Total investment income | 63,425,241 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 4,966,203 | ||||||
Shareholder service fee – Class III (Note 3) | 1,063,582 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,277,427 | ||||||
Custodian, fund accounting agent and transfer agent fees | 723,590 | ||||||
Audit and tax fees | 58,085 | ||||||
Legal fees | 48,564 | ||||||
Trustees fees and related expenses (Note 3) | 35,413 | ||||||
Registration fees | 164,748 | ||||||
Miscellaneous | 42,712 | ||||||
Total expenses | 8,380,324 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (1,013,658 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (242,019 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (67,622 | ) | |||||
Net expenses | 7,057,025 | ||||||
Net investment income (loss) | 56,368,216 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (12,870,216 | ) | |||||
Investments in affiliated issuers | (2,215,708 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 4,020,615 | ||||||
Closed futures contracts | (9,411,994 | ) | |||||
Closed swap contracts | (13,765,787 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 18,168,408 | ||||||
Net realized gain (loss) | (16,074,682 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (975,869 | ) | |||||
Open futures contracts | 5,722,620 | ||||||
Open swap contracts | 8,124,835 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 5,380,590 | ||||||
Net unrealized gain (loss) | 18,252,176 | ||||||
Net realized and unrealized gain (loss) | 2,177,494 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 58,545,710 |
See accompanying notes to the financial statements.
17
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 56,368,216 | $ | 15,604,929 | |||||||
Net realized gain (loss) | (16,074,682 | ) | 36,570,115 | ||||||||
Change in net unrealized appreciation (depreciation) | 18,252,176 | (10,346,019 | ) | ||||||||
Net increase (decrease) in net assets from operations | 58,545,710 | 41,829,025 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (8,334,939 | ) | (24,425,784 | ) | |||||||
Class IV | (78,000,540 | ) | — | ||||||||
Total distributions from net investment income | (86,335,479 | ) | (24,425,784 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (20,284,796 | ) | ||||||||
(86,335,479 | ) | (44,710,580 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (1,076,194,776 | ) | 616,308,628 | ||||||||
Class IV | 2,654,220,272 | — | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 1,578,025,496 | 616,308,628 | |||||||||
Total increase (decrease) in net assets | 1,550,235,727 | 613,427,073 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,216,251,210 | 602,824,137 | |||||||||
End of period (including distributions in excess of net investment income of $29,333,970 and accumulated undistributed net investment income of $2,622,009, respectively) | $ | 2,766,486,937 | $ | 1,216,251,210 |
See accompanying notes to the financial statements.
18
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 10.35 | $ | 10.40 | $ | 9.95 | $ | 10.39 | $ | 10.17 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.15 | 0.18 | 0.25 | 0.20 | 0.77 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.17 | 0.24 | 0.91 | 0.44 | 0.07 | ||||||||||||||||||
Total from investment operations | 0.32 | 0.42 | 1.16 | 0.64 | 0.84 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.35 | ) | (0.25 | ) | (0.28 | ) | (0.47 | ) | (0.62 | ) | |||||||||||||
From net realized gains | — | (0.22 | ) | (0.43 | ) | (0.61 | ) | — | (b) | ||||||||||||||
Total distributions | (0.35 | ) | (0.47 | ) | (0.71 | ) | (1.08 | ) | (0.62 | ) | |||||||||||||
Net asset value, end of period | $ | 10.32 | $ | 10.35 | $ | 10.40 | $ | 9.95 | $ | 10.39 | |||||||||||||
Total Return(c) | 3.10 | % | 4.01 | % | 11.99 | % | 6.45 | % | 8.53 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 148,476 | $ | 1,216,251 | $ | 602,824 | $ | 286,030 | $ | 340,039 | |||||||||||||
Net expenses to average daily net assets(d) | 0.39 | % | 0.39 | % | 0.39 | % | 0.38 | % | 0.38 | % | |||||||||||||
Net investment income to average daily net assets(a) | 1.40 | % | 1.77 | % | 2.43 | % | 1.91 | % | 7.38 | % | |||||||||||||
Portfolio turnover rate | 62 | % | 108 | % | 114 | % | 108 | % | 113 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | % | 0.07 | % | 0.09 | % | 0.09 | % | 0.09 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The distribution from net realized gains was less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
19
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout the period)
Period from July 26, 2005 (commencement of operations) through February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 10.46 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.23 | (b) | |||||
Net realized and unrealized gain (loss) | (0.01 | ) | |||||
Total from investment operations | 0.22 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.35 | ) | |||||
Total distributions | (0.35 | ) | |||||
Net asset value, end of period | $ | 10.33 | |||||
Total Return(c) | 2.06 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 2,618,011 | |||||
Net expenses to average daily net assets(d) | 0.34 | %* | |||||
Net investment income to average daily net assets(a) | 2.16 | %(e) | |||||
Portfolio turnover rate | 62 | %†† | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.07 | %* |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The per share amount is not in accord with the net realized and unrealized gain (loss) on investments for the period because of the timing of sales of Fund shares and the amount of the per share realized and unrealized gains and losses at such time.
(c) The total return would have been lower had certain expenses not been reimbursed during periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(e) The ratio for the period ended February 28, 2006 has not been annualized since the Fund believes it would not be appropriate because the Fund's net income is not earned ratably throughout the fiscal year.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Core Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks a high total return through direct and indirect investment in U.S. securities, with additional return sought through exposure to foreign bond and currency markets. The Fund achieves U.S. interest rate market exposure by investing in other fund(s) of the Trust ("underlying fund(s)"), primarily GMO Emerging Country Debt Fund, GMO Short-Duration Collateral Fund, and GMO World Opportunity Overlay Fund, and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent or another fixed income security) and/or directly in U.S. Government securities and other high-quality U.S. dollar denominated fixed income securities. The Fund's benchmark is the Lehman Brothers U.S. Aggregate Bond Index.
As of February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. Effective July 26, 2005, Class IV shares commenced operations. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). Shares of the GMO Short-Duration Collateral Fund, the GMO World Opportunity Overlay Fund and the GMO Special Purpose Holding Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations
21
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 29.3% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $585,387 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $3,258,666 in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
22
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund
23
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the
24
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market r ate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash
25
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Delayed delivery commitments
The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained with the custodian in an amount at least equal to these commitments. See the Schedule of Investments for delayed delivery commitments entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had no securities on loan.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
26
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income - $86,335,479 and $39,264,226, respectively and long-term capital gains - $0 and $5,446,354, respectively.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $45,859,280 expiring in 2014. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital and currency losses of $11,821,136 and $2,454,565, respectively.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,797,051,073 | $ | 27,144,809 | $ | (2,707,580 | ) | $ | 24,437,229 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | (1,988,716 | ) | $ | (22,267,321 | ) | $ | 24,256,037 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
27
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the ident ified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Fund may invest in GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in GMO Short-Duration Collateral Fund ("SDCF"), GMO Special Purpose Holding Fund (" SPHF"), and GMO World Opportunity Overlay Fund ("Overlay Fund").
28
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying fund(s) exceed 0.25% of the average daily net assets, with such indirect expenses subject to a maximum total reimbursement to the Fund equal to 0.25% of the Fund's average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying fund(s) excludes investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.016 | % | 0.003 | % | 0.016 | % | 0.035 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $21,773 and $15,731, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 1,195,254,564 | $ | 1,136,824,805 | |||||||
Investments (non-U.S. Government securities) | 1,697,802,367 | 158,277,324 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in
29
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 67.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares was held by five related parties comprised of certain GMO employee accounts, and 94.6% of the Fund's shares was held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 65,768,202 | $ | 689,623,823 | 57,848,297 | $ | 599,398,741 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 589,802 | 6,119,804 | 4,307,518 | 44,152,060 | |||||||||||||||
Shares repurchased | (169,430,468 | ) | (1,771,938,403 | ) | (2,681,366 | ) | (27,242,173 | ) | |||||||||||
Net increase (decrease) | (103,072,464 | ) | $ | (1,076,194,776 | ) | 59,474,449 | $ | 616,308,628 |
Period from July 26, 2005 (commencement of operations) through February 28, 2006 | |||||||||||
Class IV: | Shares | Amount | |||||||||
Shares sold | 247,726,958 | $ | 2,595,011,214 | ||||||||
Shares issued to shareholders in reinvestment of distributions | 7,535,843 | 78,000,540 | |||||||||
Shares repurchased | (1,820,194 | ) | (18,791,482 | ) | |||||||
Net increase (decrease) | 253,442,607 | $ | 2,654,220,272 |
30
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 35,506,057 | $ | 17,978,061 | $ | 54,464,555 | $ | 159,365 | $ | 918,696 | $ | — | |||||||||||||||
GMO Emerging Country Debt Fund, Class IV | — | 83,912,059 | — | 7,869,753 | 2,277,750 | 83,157,963 | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | 815,781,713 | 1,312,538,012 | 134,100,000 | 49,238,012 | — | 2,001,262,353 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 1,455,738 | — | — | — | 824,169 | 772,451 | * | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 241,800,555 | 317,740,000 | 8,150,000 | — | — | 554,275,256 | |||||||||||||||||||||
Totals | $ | 1,094,544,063 | $ | 1,732,168,132 | $ | 196,714,555 | $ | 57,267,130 | $ | 4,020,615 | $ | 2,639,468,023 |
* After the effect of return of capital distributions of $517,416 and $139,040 on April 5, 2005 and February 21, 2006, respectively.
31
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Core Plus Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Core Plus Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Ove rsight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
32
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.43 | % | $ | 1,000.00 | $ | 1,010.70 | $ | 2.14 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,022.66 | $ | 2.16 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.38 | % | $ | 1,000.00 | $ | 1,011.90 | $ | 1.90 | |||||||||||
2) Hypothetical | 0.38 | % | $ | 1,000.00 | $ | 1,022.91 | $ | 1.91 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
33
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $34,338,263 or if determined to be different, the qualified interest income of such year.
34
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
35
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
36
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
37
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
38
GMO Global Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Global Bond Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Global Bond Fund returned -4.3% for the fiscal year ended February 28, 2006, as compared to -4.6% for the JPMorgan Global Government Bond Index. The Fund's exposure to various issues is achieved directly and indirectly through its investment in certain underlying GMO mutual funds, primarily in the GMO Emerging Country Debt Fund, the GMO World Opportunity Overlay Fund, and the GMO Short-Duration Collateral Fund.
The Fund outperformed the benchmark during the fiscal year by 0.3%. Value added from currency selection, emerging debt exposure, and cash management offset interest rate strategy underperformance.
Global bond yields fell across the board during the first half of 2005, although they began heading higher in the third quarter of 2005 and carrying into the New Year. Major, sustained bond market positions included overweights in Sweden and Canada and underweights in the U.K. and Switzerland. The Fund had been overweight Australia early in 2005 and moved to an underweight position later in the year. U.S., Canada, Australia, and Euro-area positions were the largest positive contributors. Underweights in the U.K. and Switzerland and a recent overweight in Japan detracted from performance.
The U.S. dollar gained versus most currencies in 2005, began weakening in December, then stabilized in February. For much of 2005 the Fund had been overweight relatively higher yielding currencies like Australian dollars, New Zealand dollars, and British sterling and underweight lower yielding currencies such as Japanese yen and euro. In general, the underweights added value, while the overweights did not.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Global Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 95.3 | % | |||||
Short-Term Investment(s) | 2.2 | ||||||
Mutual Funds | 1.6 | ||||||
Swaps | 0.7 | ||||||
Put Options Purchased | 0.3 | ||||||
Forward Currency Contracts | 0.2 | ||||||
Call Options Purchased | 0.2 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Written Options | 0.0 | ||||||
Forward Start Options | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Rights and Warrants | (0.1 | ) | |||||
Futures | (0.1 | ) | |||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Euro Region*** | 44.4 | % | |||||
Japan | 33.8 | ||||||
Sweden | 19.1 | ||||||
Canada | 18.0 | ||||||
United States | 14.5 | ||||||
Denmark | 0.6 | ||||||
Switzerland | (7.6 | ) | |||||
United Kingdom | (9.6 | ) | |||||
Australia | (13.2 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
1
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 11.5% | |||||||||||
Australia — 0.9% | |||||||||||
Asset-Backed Securities | |||||||||||
USD | 1,512,505 | Medallion Trust, Series 03-1G, Class A, Variable Rate, 3 mo. LIBOR + .19%, 4.69%, due 12/21/33 | 1,515,727 | ||||||||
Austria — 1.7% | |||||||||||
Corporate Debt | |||||||||||
USD | 2,500,000 | Bank Austria Creditanstalt AG, 144A, 7.25%, due 02/15/17 | 2,893,475 | ||||||||
Canada — 1.2% | |||||||||||
Foreign Government Obligations | |||||||||||
GBP | 1,000,000 | Province of Quebec, 8.63%, due 11/04/11 | 2,078,468 | ||||||||
United Kingdom — 4.7% | |||||||||||
Asset-Backed Securities | |||||||||||
GBP | 1,883,978 | RMAC, Series 03-NS1X Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .45%, 5.09%, due 06/12/35 | 3,316,253 | ||||||||
GBP | 2,565,277 | RMAC, Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .40%, 5.04%, due 09/12/35 | 4,510,101 | ||||||||
Total United Kingdom | 7,826,354 | ||||||||||
United States — 3.0% | |||||||||||
U.S. Government | |||||||||||
3,600,510 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) | 3,809,227 | |||||||||
USD | 1,169,890 | U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (a) | 1,273,535 | ||||||||
Total United States | 5,082,762 | ||||||||||
TOTAL DEBT OBLIGATION(S) (COST $18,107,561) | 19,396,786 |
See accompanying notes to the financial statements.
2
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Principal Amount / Shares | Description | Value ($) | |||||||||
CALL OPTIONS PURCHASED — 0.1% | |||||||||||
Currency Options — 0.1% | |||||||||||
8,700,000 | AUD Call/USD Put, Expires 06/07/06, Strike 0.744 | 101,244 | |||||||||
TOTAL CALL OPTIONS PURCHASED (COST $160,874) | 101,244 | ||||||||||
PUT OPTIONS PURCHASED — 0.2% | |||||||||||
Currency Options — 0.2% | |||||||||||
1,000,000,000 | USD Put/JPY Call, Expires 04/04/06, Strike 116.30 | 136,490 | |||||||||
1,000,000,000 | USD Put/JPY Call, Expires 04/18/06, Strike 118.50 | 269,500 | |||||||||
405,990 | |||||||||||
TOTAL PUT OPTIONS PURCHASED (COST $331,659) | 405,990 | ||||||||||
FORWARD START OPTIONS — 0.0% | |||||||||||
Currency Options — 0.0% | |||||||||||
1,220,000,000 | JPY Put/USD Call, Expires 09/18/06, Strike TBD | 4,709 | |||||||||
TOTAL FORWARD START OPTIONS (COST $0) | 4,709 | ||||||||||
MUTUAL FUNDS — 87.7% | |||||||||||
447,123 | GMO Emerging Country Debt Fund, Class III (c) | 5,052,494 | |||||||||
4,159,420 | GMO Short-Duration Collateral Fund (c) | 106,481,153 | |||||||||
45,838 | GMO Special Purpose Holding Fund (c) | 377,249 | |||||||||
1,364,018 | GMO World Opportunity Overlay Fund (c) | 34,414,166 | |||||||||
1,264,698 | Merrimac Cash Series, Premium Class | 1,264,698 | |||||||||
TOTAL MUTUAL FUNDS (COST $145,073,529) | 147,589,760 | ||||||||||
TOTAL INVESTMENTS — 99.5% (Cost $163,673,623) | 167,498,489 | ||||||||||
Other Assets and Liabilities (net) — 0.5% | 825,737 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 168,324,226 |
See accompanying notes to the financial statements.
3
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3/21/06 | AUD | 31,600,000 | $ | 23,452,116 | $ | (94,447 | ) | ||||||||||||
3/28/06 | CAD | 1,300,000 | 1,144,638 | 31,148 | |||||||||||||||
4/18/06 | CHF | 9,400,000 | 7,198,766 | (71,149 | ) | ||||||||||||||
4/25/06 | EUR | 50,000,000 | 59,788,537 | (156,163 | ) | ||||||||||||||
4/11/06 | GBP | 6,700,000 | 11,754,965 | 59,226 | |||||||||||||||
3/07/06 | JPY | 5,560,000,000 | 48,062,929 | 25,548 | |||||||||||||||
5/02/06 | NZD | 14,000,000 | 9,230,480 | 30,862 | |||||||||||||||
$ | (174,975 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
3/21/06 | AUD | 24,500,000 | $ | 18,182,810 | $ | 184,626 | |||||||||||||
3/28/06 | CAD | 5,100,000 | 4,490,504 | (37,847 | ) | ||||||||||||||
4/18/06 | CHF | 12,700,000 | 9,725,993 | 41,982 | |||||||||||||||
4/25/06 | EUR | 12,300,000 | 14,707,980 | (28,646 | ) | ||||||||||||||
4/11/06 | GBP | 4,800,000 | 8,421,468 | 102,852 | |||||||||||||||
3/07/06 | JPY | 3,710,000,000 | 32,070,767 | 364,615 | |||||||||||||||
$ | 627,582 |
Forward cross currency contracts
Settlement Date | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
3/14/06 | EUR | 10,400,000 | NOK | 82,527,120 | $ | (167,162 | ) | ||||||||
4/04/06 | EUR | 9,100,000 | SEK | 84,101,836 | (214,735 | ) | |||||||||
4/04/06 | SEK | 109,395,740 | EUR | 11,700,000 | 115,867 | ||||||||||
3/14/06 | NOK | 42,623,175 | EUR | 5,300,000 | 1,235 | ||||||||||
$ | (264,795 | ) |
See accompanying notes to the financial statements.
4
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
271 | Canadian Government Bond 10 Yr. | June 2006 | $ | 26,891,346 | $ | (35,188 | ) | ||||||||||||
61 | EURO BOBL | March 2006 | 8,153,881 | (26,261 | ) | ||||||||||||||
68 | EURO Bund | March 2006 | 9,759,150 | (9,021 | ) | ||||||||||||||
15 | Japanese Government Bond 10 Yr. (TSE) | March 2006 | 17,622,133 | (171,353) | |||||||||||||||
$ | (241,823 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
99 | Australian Government Bond 10 Yr. | March 2006 | $ | 7,749,115 | $ | 40,651 | |||||||||||||
196 | Australian Government Bond 3 Yr. | March 2006 | 14,848,306 | 26,065 | |||||||||||||||
9 | U.S. Long Bond | June 2006 | 1,017,844 | (1,219 | ) | ||||||||||||||
20 | U.S. Treasury Note 10 Yr. | June 2006 | 2,158,125 | 219 | |||||||||||||||
103 | U.S. Treasury Note 5 Yr. (CBT) | June 2006 | 10,834,312 | (19,249 | ) | ||||||||||||||
137 | UK Gilt Long Bond | June 2006 | 27,253,750 | 114,939 | |||||||||||||||
$ | 161,406 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
5
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
36,000,000 | SEK | 3/17/2008 | JP Morgan Chase Bank | Receive | 2.90 | % | 3 month SEK STIBOR | $ | 3,297 | ||||||||||||||||||||||
31,000,000 | SEK | 3/15/2011 | Citigroup | Receive | 3.40 | % | 3 month SEK STIBOR | 861 | |||||||||||||||||||||||
16,000,000 | SEK | 3/15/2011 | Deutsche Bank AG | Receive | 3.40 | % | 3 month SEK STIBOR | 444 | |||||||||||||||||||||||
9,000,000 | CHF | 3/15/2011 | Deutsche Bank AG | (Pay) | 2.25 | % | 6 month CHF LIBOR | 5,417 | |||||||||||||||||||||||
47,000,000 | SEK | 3/15/2013 | Deutsche Bank AG | Receive | 3.50 | % | 3 month SEK STIBOR | (13,109 | ) | ||||||||||||||||||||||
15,000,000 | SEK | 3/15/2013 | JP Morgan Chase Bank | Receive | 3.50 | % | 3 month SEK STIBOR | (4,184 | ) | ||||||||||||||||||||||
4,000,000 | CHF | 3/15/2013 | JP Morgan Chase Bank | (Pay) | 2.40 | % | 6 month CHF LIBOR | (168 | ) | ||||||||||||||||||||||
30,000,000 | SEK | 3/15/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 month SEK STIBOR | 29,114 | |||||||||||||||||||||||
20,000,000 | SEK | 3/15/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 month SEK STIBOR | 19,410 | |||||||||||||||||||||||
4,800,000 | CHF | 3/15/2016 | Deutsche Bank AG | (Pay) | 2.50 | % | 6 month CHF LIBOR | 11,945 | |||||||||||||||||||||||
3,000,000 | EUR | 3/21/2030 | UBS Warburg | Receive | 5.90 | % | 3 month Floating Rate EUR LIBOR | 1,122,493 | |||||||||||||||||||||||
$ | 1,175,520 |
See accompanying notes to the financial statements.
6
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
31,000,000 | USD | 7/21/2006 | JP Morgan | 1 month LIBOR | Return on | ||||||||||||||||||||||
Chase Bank | JP Morgan | ||||||||||||||||||||||||||
Non - U.S. Hedged | |||||||||||||||||||||||||||
Traded Total Return | |||||||||||||||||||||||||||
Government | |||||||||||||||||||||||||||
Bond Index | $ | (84,446 | ) | ||||||||||||||||||||||||
75,000,000 | USD | 9/24/2006 | JP Morgan | 1 month LIBOR | Return on | ||||||||||||||||||||||
Chase Bank | JP Morgan Hedged | ||||||||||||||||||||||||||
Traded Total Return | |||||||||||||||||||||||||||
Government | |||||||||||||||||||||||||||
Bond Index | 25,010 | ||||||||||||||||||||||||||
$ | (59,436 | ) |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
LIBOR - London Interbank Offered Rate
STIBOR - Stockholm Interbank Offered Rate
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
(a) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2).
(b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
(c) Affiliated issuer (Note 8).
Currency Abbreviations:
AUD - Australian Dollar | JPY - Japanese Yen | ||||||
CAD - Canadian Dollar | NOK - Norwegian Krone | ||||||
CHF - Swiss Franc | NZD - New Zealand Dollar | ||||||
EUR - Euro | SEK - Swedish Krona | ||||||
GBP - British Pound | USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
7
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $19,864,792) (Note 2) | $ | 21,173,427 | |||||
Investments in affiliated issuers, at value (cost $143,808,831) (Notes 2 and 8) | 146,325,062 | ||||||
Cash | 1,177 | ||||||
Interest receivable | 182,733 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 957,961 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 35,674 | ||||||
Receivable for open swap contracts (Note 2) | 1,217,991 | ||||||
Periodic payments from open swap agreements (Note 2) | 143,778 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,335 | ||||||
Total assets | 170,044,138 | ||||||
Liabilities: | |||||||
Foreign cash due to custodian (cost $113,994) | 105,866 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 24,404 | ||||||
Shareholder service fee | 19,266 | ||||||
Trustees and Chief Compliance Officer fees | 227 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 770,149 | ||||||
Payable for open swap contracts (Note 2) | 101,907 | ||||||
Payable for closed swap contracts (Note 2) | 632,953 | ||||||
Accrued expenses | 65,140 | ||||||
Total liabilities | 1,719,912 | ||||||
Net assets | $ | 168,324,226 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 184,854,232 | |||||
Distributions in excess of net investment income | (4,986,613 | ) | |||||
Accumulated net realized loss | (16,454,932 | ) | |||||
Net unrealized appreciation | 4,911,539 | ||||||
$ | 168,324,226 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 168,324,226 | |||||
Shares outstanding: | |||||||
Class III | 19,727,974 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.53 |
See accompanying notes to the financial statements.
8
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 3,437,670 | |||||
Interest | 733,532 | ||||||
Total investment income | 4,171,202 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 318,918 | ||||||
Shareholder service fee – Class III (Note 3) | 251,778 | ||||||
Custodian, fund accounting agent and transfer agent fees | 96,235 | ||||||
Audit and tax fees | 55,219 | ||||||
Legal fees | 3,822 | ||||||
Trustees fees and related expenses (Note 3) | 3,232 | ||||||
Registration fees | 5,001 | ||||||
Miscellaneous | 3,485 | ||||||
Total expenses | 737,690 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (94,151 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (21,843 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (7,972 | ) | |||||
Net expenses | 613,724 | ||||||
Net investment income (loss) | 3,557,478 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (568,802 | ) | |||||
Investments in affiliated issuers | (978,309 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 654,967 | ||||||
Closed futures contracts | 841,158 | ||||||
Closed swap contracts | 513,162 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (9,498,124 | ) | |||||
Net realized gain (loss) | (9,035,948 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (1,404,278 | ) | |||||
Open futures contracts | 209,568 | ||||||
Open swap contracts | 333,602 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,119,004 | ) | |||||
Net unrealized gain (loss) | (1,980,112 | ) | |||||
Net realized and unrealized gain (loss) | (11,016,060 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (7,458,582 | ) |
See accompanying notes to the financial statements.
9
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,557,478 | $ | 3,535,655 | |||||||
Net realized gain (loss) | (9,035,948 | ) | 8,728,147 | ||||||||
Change in net unrealized appreciation (depreciation) | (1,980,112 | ) | 1,684,945 | ||||||||
Net increase (decrease) in net assets from operations | (7,458,582 | ) | 13,948,747 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (3,512,926 | ) | (8,082,420 | ) | |||||||
Net share transactions (Note 7): | |||||||||||
Class III | 8,545,306 | 26,199,761 | |||||||||
Total increase (decrease) in net assets | (2,426,202 | ) | 32,066,088 | ||||||||
Net assets: | |||||||||||
Beginning of period | 170,750,428 | 138,684,340 | |||||||||
End of period (including distributions in excess of net investment income of $4,986,613 and accumulated undistributed net investment income of $1,906,362, respectively) | $ | 168,324,226 | $ | 170,750,428 |
See accompanying notes to the financial statements.
10
GMO Global Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 9.11 | $ | 8.73 | $ | 9.20 | $ | 9.33 | $ | 10.04 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.18 | 0.21 | 0.12 | 0.09 | 0.52 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.57 | ) | 0.63 | 1.42 | 1.49 | (0.65 | ) | ||||||||||||||||
Total from investment operations | (0.39 | ) | 0.84 | 1.54 | 1.58 | (0.13 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.19 | ) | (0.46 | ) | — | (1.51 | ) | (0.39 | ) | ||||||||||||||
From net realized gains | — | — | (1.90 | ) | (0.20 | ) | (0.19 | ) | |||||||||||||||
Return of capital | — | — | (0.11 | ) | — | — | |||||||||||||||||
Total distributions | (0.19 | ) | (0.46 | ) | (2.01 | ) | (1.71 | ) | (0.58 | ) | |||||||||||||
Net asset value, end of period | $ | 8.53 | $ | 9.11 | $ | 8.73 | $ | 9.20 | $ | 9.33 | |||||||||||||
Total Return(b) | (4.33 | )% | 9.52 | % | 20.21 | % | 17.76 | % | (1.34 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 168,324 | $ | 170,750 | $ | 138,684 | $ | 235,842 | $ | 273,074 | |||||||||||||
Net expenses to average daily net assets(c) | 0.37 | % | 0.33 | % | 0.32 | % | 0.33 | % | 0.32 | % | |||||||||||||
Net investment income to average daily net assets(a) | 2.12 | % | 2.40 | % | 1.44 | % | 1.10 | % | 5.36 | % | |||||||||||||
Portfolio turnover rate | 20 | % | 38 | % | 45 | % | 50 | % | 28 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.07 | % | 0.12 | % | 0.12 | % | 0.08 | % | 0.08 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
11
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in global bond and currency markets, primarily by investing in other fund(s) of the Trust ("underlying fund(s)"), including GMO Short-Duration Collateral Fund and GMO World Opportunity Overly Fund and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent, or another fixed income security). The Fund's benchmark is the JPMorgan Global Government Bond Index.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available without charge, upon request by calling (617) 346-7646 (collect). Shares of the GMO Short-Duration Collateral Fund, the GMO World Opportunity Overlay Fund and the GMO Special Purpose Holding Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
12
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 26.8% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), an investment of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $285,890 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $1,591,463 (approximately $0.08 per share as of April 18, 2006) in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the
13
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over
14
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the
15
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's defaul t. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
16
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $3,512,926 and $8,082,420, respectively.
17
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $10,615,925 and $15,114,495 expiring in 2012 and 2014, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
The Fund elected to defer to March 1, 2006 post-October capital and currency losses of $64,919 and $2,877,065, respectively.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 156,267,074 | $ | 11,319,506 | $ | (88,091 | ) | $ | 11,231,415 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | (6,937,527 | ) | $ | 1,273,117 | $ | 5,664,410 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
18
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. The Fund may invest in Class III shares of GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in GMO Short-Duration Collateral Fund ("SDCF"), GMO Special Purpose Holding Fund ("SPHF") and GMO World Opportunity Overlay Fund ("Overlay Fund").
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total direct annual expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying fund(s) exceed 0.25% of the average daily net assets, with such indirect expenses subject to a maximum total reimbursement to the Fund equal to 0.25% of the Fund's average daily net assets. Prior to July 1, 2005, GMO agreed to reimburse the Fund to the extent that the Fund's total direct annual expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying fund(s) exceeded 0.19% of the average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including leg al fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-
19
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying fund(s) excludes investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.019 | % | 0.005 | % | 0.015 | % | 0.039 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $1,850 and $1,048, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $35,727,333 and $32,935,961, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 73.8% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
20
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, 0.2% of the Fund's shares were held by three related parties comprised of certain GMO employee accounts, and 6.5% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 701,206 | $ | 6,078,711 | 2,193,277 | $ | 20,132,327 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 407,835 | 3,466,595 | 864,819 | 7,947,689 | |||||||||||||||
Shares repurchased | (115,877 | ) | (1,000,000 | ) | (217,972 | ) | (1,880,255 | ) | |||||||||||
Net increase (decrease) | 993,164 | $ | 8,545,306 | 2,840,124 | $ | 26,199,761 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 4,994,024 | $ | 829,430 | $ | 900,000 | $ | 577,620 | $ | 251,810 | $ | 5,052,494 | |||||||||||||||
GMO Short-Duration Collateral Fund | 97,283,265 | 32,660,050 | 24,500,000 | 2,860,050 | — | 106,481,153 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 710,951 | — | — | — | 403,157 | 377,249 | * | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 34,194,946 | 150,000 | — | — | — | 34,414,166 | |||||||||||||||||||||
Totals | $ | 137,183,186 | $ | 33,639,480 | $ | 25,400,000 | $ | 3,437,670 | $ | 654,967 | $ | 146,325,062 |
* After the effect of return of capital distributions of $252,695 and $67,253 on April 5, 2005 and February 21, 2006, respectively.
21
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Global Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversig ht Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
22
GMO Global Bond Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.43 | % | $ | 1,000.00 | $ | 980.50 | $ | 2.11 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,022.66 | $ | 2.16 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
23
GMO Global Bond Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $0 or if determined to be different, the qualified interest income of such year.
24
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
25
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
26
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
27
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
28
GMO U.S. Sector Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO U.S. Sector Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO U.S. Sector Fund returned +6.5% for the fiscal year ended February 28, 2006, as compared to +10.4% for the Russell 3000 Index. Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was exposed substantially to common stocks through its investment in underlying GMO mutual funds.
Implementation was negative, as the underlying GMO mutual funds underperformed their respective benchmarks by approximately 2.7%.
Asset allocation detracted approximately 1.2%. The Fund's allocations to the GMO U.S. Core Equity Fund and GMO U.S. Quality Equity Fund were the biggest detractors.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .04% on the purchase and .04% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* Russell 3000 Index + represents the S&P 500 Index prior to 2/28/03 and the Russell 3000 Index thereafter.
GMO U.S. Sector Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 95.7 | % | |||||
Short-Term Investment(s) | 11.0 | ||||||
Futures | 0.0 | ||||||
Other | (6.7 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO U.S. Sector Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuer(s) — 100.0% | |||||||||||
8,868,942 | GMO U.S. Core Equity Fund, Class III | 128,599,664 | |||||||||
1,547,494 | GMO U.S. Quality Equity Fund, Class III | 32,203,358 | |||||||||
317,113 | GMO U.S. Small/Mid Cap Growth Fund, Class III | 6,237,620 | |||||||||
580,969 | GMO U.S. Small/Mid Cap Value Fund, Class III | 6,111,798 | |||||||||
TOTAL MUTUAL FUNDS (COST $161,405,559) | 173,152,440 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
15,607 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $15,609 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $15,920. | 15,607 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $15,607) | 15,607 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $161,421,166) | 173,168,047 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (21,574 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 173,146,473 |
See accompanying notes to the financial statements.
2
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $15,607) (Note 2) | $ | 15,607 | |||||
Investments in affiliated issuers, at value (cost $161,405,559) (Notes 2 and 8) | 173,152,440 | ||||||
Receivable for investments sold | 3,000,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 67,151 | ||||||
Miscellaneous receivable | 1,201 | ||||||
Total assets | 176,236,399 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 3,001,200 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 44,343 | ||||||
Shareholder service fee | 20,155 | ||||||
Trustees and Chief Compliance Officer fees | 256 | ||||||
Accrued expenses | 23,972 | ||||||
Total liabilities | 3,089,926 | ||||||
Net assets | $ | 173,146,473 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 156,171,244 | |||||
Accumulated undistributed net investment income | 727,370 | ||||||
Accumulated net realized gain | 4,500,978 | ||||||
Net unrealized appreciation | 11,746,881 | ||||||
$ | 173,146,473 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 173,146,473 | |||||
Shares outstanding: | |||||||
Class III | 26,375,925 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.56 |
See accompanying notes to the financial statements.
3
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 2,327,720 | |||||
Interest | 5,374 | ||||||
Total investment income | 2,333,094 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 502,360 | ||||||
Shareholder service fee – Class III (Note 3) | 228,346 | ||||||
Custodian, fund accounting agent and transfer agent fees | 17,687 | ||||||
Audit and tax fees | 23,646 | ||||||
Legal fees | 3,507 | ||||||
Trustees fees and related expenses (Note 3) | 2,750 | ||||||
Registration fees | 5,566 | ||||||
Miscellaneous | 2,766 | ||||||
Total expenses | 786,628 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (51,599 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (490,601 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (228,235 | ) | |||||
Net expenses | 16,193 | ||||||
Net investment income (loss) | 2,316,901 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 2,664,253 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 6,101,698 | ||||||
Net realized gain (loss) | 8,765,951 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (947,845 | ) | |||||
Net realized and unrealized gain (loss) | 7,818,106 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 10,135,007 |
See accompanying notes to the financial statements.
4
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,316,901 | $ | 1,726,696 | |||||||
Net realized gain (loss) | 8,765,951 | 5,585,264 | |||||||||
Change in net unrealized appreciation (depreciation) | (947,845 | ) | 1,814,127 | ||||||||
Net increase (decrease) in net assets from operations | 10,135,007 | 9,126,087 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,798,187 | ) | (2,495,238 | ) | |||||||
Net realized gains | |||||||||||
Class III | (3,368,950 | ) | (5,083,911 | ) | |||||||
(6,167,137 | ) | (7,579,149 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 17,780,604 | 76,428,482 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 20,076 | 60,143 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 17,800,680 | 76,488,625 | |||||||||
Total increase (decrease) in net assets | 21,768,550 | 78,035,563 | |||||||||
Net assets: | |||||||||||
Beginning of period | 151,377,923 | 73,342,360 | |||||||||
End of period (including accumulated undistributed net investment income of $727,370 and $832,772, respectively) | $ | 173,146,473 | $ | 151,377,923 |
See accompanying notes to the financial statements.
5
GMO U.S. Sector Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 6.41 | $ | 6.40 | $ | 4.53 | $ | 5.45 | $ | 5.11 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.10 | 0.11 | 0.08 | 0.09 | 0.11 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.31 | 0.34 | 1.89 | (1.00 | ) | 0.39 | |||||||||||||||||
Total from investment operations | 0.41 | 0.45 | 1.97 | (0.91 | ) | 0.50 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.14 | ) | (0.02 | ) | (0.01 | ) | (0.16 | ) | |||||||||||||
From net realized gains | (0.14 | ) | (0.30 | ) | (0.08 | ) | — | — | |||||||||||||||
Total distributions | (0.26 | ) | (0.44 | ) | (0.10 | ) | (0.01 | ) | (0.16 | ) | |||||||||||||
Net asset value, end of period | $ | 6.56 | $ | 6.41 | $ | 6.40 | $ | 4.53 | $ | 5.45 | |||||||||||||
Total Return(b) | 6.45 | %(c) | 7.18 | %(c) | 43.72 | %(c) | (16.78 | )% | 9.80 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 173,146 | $ | 151,378 | $ | 73,342 | $ | 13,144 | $ | 270 | |||||||||||||
Net expenses to average daily net assets(d) | 0.01 | % | 0.00 | %(e) | 0.00 | %(e) | 0.02 | % | 0.00 | %(e) | |||||||||||||
Net investment income to average daily net assets(a) | 1.52 | % | 1.75 | % | 1.43 | % | 1.93 | % | 1.99 | % | |||||||||||||
Portfolio turnover rate | 13 | % | 16 | % | 17 | % | 24 | % | 2 | % | |||||||||||||
Fees and expenses reimbursed and/or wavied by the Manager to average daily net assets: | 0.51 | % | 0.54 | % | 0.58 | % | 0.88 | % | 8.97 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown.
(c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investments in underlying fund(s). (See Note 3).
(e) Net expenses were less than 0.01%.
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
6
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks total return greater than that of the Russell 3000 Index, its benchmark. The Fund pursues its objective through investments in common stocks, either directly or indirectly through investments in shares of other domestic equity funds of the Trust ("underlying fund(s)").
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Shares of the underlying fund(s) are valued at their net asset value. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last quoted sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction.
7
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $2,820,714 and $2,711,100, respectively and long-term capital gains – $3,346,423 and $4,868,049, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $727,370 and $5,195,255 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to capital loss carryforwards.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $581,632 expiring in 2012. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
8
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 161,533,811 | $ | 12,340,419 | $ | (706,183 | ) | $ | 11,634,236 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 375,884 | $ | (375,884 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
9
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.04% of the amount invested or redeemed. For the period June 30, 2004 to June 29, 2005, the premium on cash purchases and fee on redemptions of Fund shares were each 0.08%. The redemption fee is only applicable to shares acquired on or after June 30, 2003. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended Februa ry 28, 2006 and February 28, 2005, the Fund received $10,965 and $60,023 in purchase premiums and $9,111 and $120 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. As described in Note 1, the Fund invests in certain underlying fund(s). The Fund invests in Class III shares of each underlying fund(s) being offered. Like the management fee (as described below), the Fund's shareholder service fee is waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying fund(s).
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees and the following expenses: fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes (collectively, "fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees and fund expenses (as defined above), incurred indirectly by the Fund through investment in the underlying fund(s), exceed 0.33% of the Fund's average daily net assets. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed 0.33% of the Fund's average daily net assets, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses (as defined above)) incurred indirectly by the Fund through its investment in the underlying fund(s) may exceed 0.33% of the Fund's average daily net assets.
10
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As noted above, the Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.326 | % | 0.150 | % | 0.476 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $1,718 and $949, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $40,449,920 and $20,361,383, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $117,471,328 and $117,471,328, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 39.2% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 0.2% of the Fund's shares were held by two related parties comprised of certain GMO employee accounts.
11
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,237,227 | $ | 27,401,967 | 11,159,900 | $ | 70,254,066 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 960,534 | 6,158,153 | 1,144,256 | 7,226,158 | |||||||||||||||
Shares repurchased | (2,430,815 | ) | (15,779,516 | ) | (162,091 | ) | (1,051,742 | ) | |||||||||||
Purchase premiums and redemption fees | — | 20,076 | — | 60,143 | |||||||||||||||
Net increase (decrease) | 2,766,946 | $ | 17,800,680 | 12,142,065 | $ | 76,488,625 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Real Estate Fund, Class III | $ | 4,290,702 | $ | 755,329 | $ | 4,926,022 | $ | 52,277 | $ | 703,052 | $ | — | |||||||||||||||
GMO Small/Mid Cap Growth Fund, Class III (formerly GMO Small Cap Growth Fund) | 5,194,424 | 429,123 | 5,487,266 | 10,211 | 418,913 | — | |||||||||||||||||||||
GMO Small/Mid Cap Value Fund, Class III (formerly GMO Small Cap Value Fund) | 6,300,437 | 558,998 | 6,745,142 | 80,208 | 478,790 | — | |||||||||||||||||||||
GMO U.S. Core Fund, Class III | 109,034,777 | 4,845,643 | 115,210,919 | 1,007,643 | — | — |
12
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class III | $ | — | $ | 131,923,755 | $ | 3,989,362 | $ | 850,324 | $ | 2,632,009 | $ | 128,599,664 | |||||||||||||||
GMO U.S. Quality Equity Fund, Class III | 26,554,454 | 5,929,541 | 1,474,000 | 298,827 | 50,714 | 32,203,358 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Growth Fund, Class III | — | 6,710,790 | — | 6,085 | 917,439 | 6,237,620 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Value Fund, Class III | — | 6,768,068 | — | 22,145 | 900,781 | 6,111,798 | |||||||||||||||||||||
Totals | $ | 151,374,794 | $ | 157,921,247 | $ | 137,832,711 | $ | 2,327,720 | $ | 6,101,698 | $ | 173,152,440 |
9. Subsequent event
Effective June 30, 2006, the Fund's name will be the U.S. Equity Allocation Fund. In connection with this change, the Fund's principal investment strategies will be revised to eliminate the Fund's ability to directly invest in portfolio securities (as opposed to underlying funds). In addition, the Fund will no longer directly bear management and shareholder service fees.
13
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Sector Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Sector Fund (the "Fund") ( a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Overs ight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
14
GMO U.S. Sector Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.49 | % | $ | 1,000.00 | $ | 1,050.00 | $ | 2.49 | |||||||||||
2) Hypothetical | 0.49 | % | $ | 1,000.00 | $ | 1,022.36 | $ | 2.46 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
15
GMO U.S. Sector Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $3,346,423 from long-term capital gains.
For taxable, non-corporate shareholders, 70.43% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 54.10% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006 of $73,086 and $0, respectively, or if determined to be different, the qualiified interest income of such year.
16
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
17
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
18
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
19
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
GMO International Small Companies Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO International Small Companies Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO International Small Companies Fund returned +25.8% for the fiscal year ended February 28, 2006, as compared to +17.4% for the MSCI EAFE Index and +23.8% for the S&P/Citigroup EMI World ex-U.S. Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in equity securities of small companies in countries outside of the U.S. throughout the fiscal year.
Among the portfolio holdings with the largest positive impact to relative returns were German steel maker Salzgitter, Japanese heavy equipment maker Ishikawajima-Harima, French steel manufacturer Vallourec, Japanese steel maker Daido Steel Co., and Japanese real estate developer Urban Corp. Less successful holdings included German travel and logistics company TUI, Canadian printer Quebecor World, Italian insurer Unipol, and Irish sales and distribution company DCC.
The portfolio benefited slightly from an allocation to emerging markets and to Canada. This was offset somewhat by overweights to Ireland and Italy.
The strong U.S. dollar relative to most foreign currencies detracted from returns for U.S. investors. The MSCI EAFE Index returned 12% less in U.S. dollar terms than in local currency.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .60% on the purchase and .60% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.5 | % | |||||
Preferred Stocks | 2.8 | ||||||
Mutual Funds | 0.2 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures Contracts | 0.1 | ||||||
Short-Term Investment(s) | 14.6 | ||||||
Other | (13.2 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 24.6 | % | |||||
United Kingdom | 20.1 | ||||||
Germany | 9.7 | ||||||
Canada | 4.9 | ||||||
France | 4.7 | ||||||
Netherlands | 4.6 | ||||||
Italy | 4.0 | ||||||
Australia | 3.5 | ||||||
Singapore | 2.5 | ||||||
Sweden | 2.5 | ||||||
South Korea | 2.3 | ||||||
Taiwan | 1.9 | ||||||
Finland | 1.9 | ||||||
Ireland | 1.6 | ||||||
Spain | 1.6 | ||||||
Switzerland | 1.4 | ||||||
Austria | 1.2 | ||||||
Brazil | 1.2 | ||||||
Belgium | 1.1 | ||||||
Hong Kong | 1.0 | ||||||
South Africa | 0.8 | ||||||
China | 0.8 | ||||||
Mexico | 0.6 | ||||||
Denmark | 0.3 | ||||||
Russia | 0.2 | ||||||
Israel | 0.2 | ||||||
Turkey | 0.2 | ||||||
Poland | 0.2 | ||||||
Greece | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Thailand | 0.1 | ||||||
Philippines | 0.1 | ||||||
Indonesia | 0.0 | ||||||
100.0 | % |
1
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Consumer Discretionary | 20.8 | % | |||||
Industrials | 20.6 | ||||||
Financials | 18.5 | ||||||
Materials | 11.4 | ||||||
Information Technology | 6.7 | ||||||
Consumer Staples | 6.5 | ||||||
Energy | 5.6 | ||||||
Health Care | 5.3 | ||||||
Utilities | 2.5 | ||||||
Telecommunication Services | 2.1 | ||||||
100.0 | % |
2
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.5% | |||||||||||
Australia — 3.4% | |||||||||||
94,063 | Australian Stock Exchange Ltd | 2,256,301 | |||||||||
604,294 | Babcock & Brown Infrastructure Group (a) | 692,102 | |||||||||
390,066 | Boral Ltd | 2,531,690 | |||||||||
81,940 | Cochlear Ltd | 2,971,119 | |||||||||
1,285,421 | Commonwealth Property Office Fund | 1,284,179 | |||||||||
939,440 | CSR Ltd | 2,644,282 | |||||||||
2,895,911 | DB RREEF Trust | 3,024,921 | |||||||||
295,773 | Healthscope Ltd (a) | 841,222 | |||||||||
1,836,163 | Investa Property Group | 2,735,019 | |||||||||
406,418 | James Hardies Industries NV | 2,664,136 | |||||||||
906,845 | Mirvac Group Ltd | 2,828,535 | |||||||||
880,266 | Oil Search Ltd | 2,374,324 | |||||||||
512,233 | Promina Group Ltd | 2,064,029 | |||||||||
52,474 | Ramsay Health Care Ltd | 388,147 | |||||||||
62,826 | Record Investments Ltd | 454,578 | |||||||||
52,231 | SFE Corp NPV | 493,173 | |||||||||
359,660 | Valad Property Group | 366,576 | |||||||||
165,944 | Worleyparsons Ltd | 1,948,115 | |||||||||
209,838 | Zinifex Ltd | 1,192,592 | |||||||||
33,755,040 | |||||||||||
Austria — 1.2% | |||||||||||
76,675 | Austrian Airlines * (a) | 766,790 | |||||||||
5,954 | Betandwin.com Interactive * (a) | 692,244 | |||||||||
10,610 | Boehler Uddeholm (Bearer) | 1,990,458 | |||||||||
43,618 | Flughafen Wien AG | 3,517,848 | |||||||||
9,616 | Mayr-Melnhof Karton AG (Bearer) | 1,415,125 | |||||||||
63,248 | RHI AG * (a) | 1,804,197 | |||||||||
14,465 | Voestalpine AG | 1,685,902 | |||||||||
11,872,564 |
See accompanying notes to the financial statements.
3
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Belgium — 1.1% | |||||||||||
25,508 | CMB Cie Maritime Belge | 826,309 | |||||||||
4,721 | Cofinimmo SA | 748,399 | |||||||||
12,350 | Colruyt SA | 1,779,136 | |||||||||
28,089 | Euronav SA | 815,746 | |||||||||
50,136 | Tessenderlo Chemie (a) | 1,767,003 | |||||||||
36,623 | Umicore | 5,202,168 | |||||||||
11,138,761 | |||||||||||
Brazil — 0.4% | |||||||||||
115,200 | Companhia de Concessoes Rodoviarias | 1,087,714 | |||||||||
3,945,916 | Companhia Saneamento Basico SAO PA | 317,940 | |||||||||
22,527,200 | Electrobras (Centro) | 477,277 | |||||||||
15,244 | Tele Centro Oeste Celular Participacoes SA | 233,308 | |||||||||
19,700 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 1,732,615 | |||||||||
3,848,854 | |||||||||||
Canada — 4.7% | |||||||||||
36,000 | ARC Energy Trust | 837,872 | |||||||||
82,300 | Biovail Corp | 2,071,169 | |||||||||
30,000 | Bonavista Energy Trust | 909,411 | |||||||||
13,000 | Calfrac Well Services Ltd | 387,215 | |||||||||
19,384 | Canadian Tire Corp Class A | 1,134,265 | |||||||||
61,600 | Canadian Utilities Class A | 2,192,547 | |||||||||
23,700 | CCS Income Trust | 761,186 | |||||||||
52,400 | Duvernay Oil Corp * | 1,791,776 | |||||||||
43,300 | Ensign Resource Service Group | 1,478,323 | |||||||||
49,400 | First Quantum Minerals Ltd | 1,573,132 | |||||||||
65,300 | FNX Mining Co Inc * | 769,959 | |||||||||
27,900 | Gildan Activewear Inc Class A * | 1,393,220 | |||||||||
64,000 | GMP Capital Fund | 1,304,835 | |||||||||
25,625 | Harvest Energy Trust | 746,348 | |||||||||
123,702 | Hudson's Bay Co | 1,654,512 | |||||||||
35,800 | Inmet Mining Corp | 998,601 | |||||||||
30,900 | Mega Bloks Inc * | 712,104 |
See accompanying notes to the financial statements.
4
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Canada — continued | |||||||||||
26,900 | Metro Inc Class A | 701,821 | |||||||||
27,200 | NuVista Energy Ltd * | 341,062 | |||||||||
64,366 | Onex Corp | 1,141,818 | |||||||||
45,900 | Opti CDA Inc * | 1,688,257 | |||||||||
45,400 | Paramount Energy Trust | 770,216 | |||||||||
17,600 | Paramount Resources Ltd * | 565,269 | |||||||||
35,200 | Primewest Energy Trust | 1,028,945 | |||||||||
190,771 | Quebecor Inc Class B | 4,532,375 | |||||||||
126,456 | Quebecor World Inc | 1,285,201 | |||||||||
54,400 | Real Resources Inc * | 995,662 | |||||||||
20,500 | Ritchie Brothers Auctioneers | 979,678 | |||||||||
38,600 | Russel Metals Inc | 879,704 | |||||||||
47,004 | Sobeys Inc | 1,565,490 | |||||||||
57,100 | Total Energy Trust Ltd | 843,097 | |||||||||
70,900 | Trican Well Service Ltd * | 3,013,305 | |||||||||
21,400 | Trilogy Energy Trust | 350,060 | |||||||||
34,600 | TSX Group Inc | 1,467,482 | |||||||||
21,600 | Vermilion Trust | 583,501 | |||||||||
60,500 | Western Oil Sands Inc Class A * | 1,650,315 | |||||||||
93,700 | Yamana Gold Inc * | 842,636 | |||||||||
45,942,369 | |||||||||||
China — 0.7% | |||||||||||
664,000 | Aluminum Corp of China Ltd | 676,650 | |||||||||
1,136,000 | Bank of Communications Co Ltd * | 681,360 | |||||||||
1,096,000 | China Life Insurance Co Ltd * | 1,243,110 | |||||||||
3,830,992 | China Petroleum & Chemical Corp Class H | 2,279,218 | |||||||||
638,000 | China Shenhua Energy Co Ltd * | 962,917 | |||||||||
24,000 | China Telecom Corp Ltd ADR (a) | 880,560 | |||||||||
447,500 | China Telecom Corp Ltd Class H | 163,526 | |||||||||
1,108,000 | Denway Motors Ltd | 438,107 | |||||||||
7,325,448 |
See accompanying notes to the financial statements.
5
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Denmark — 0.3% | |||||||||||
15,153 | Danske Bank A/S | 2,035,123 | |||||||||
10,125 | East Asiatic Co | 1,012,187 | |||||||||
3,047,310 | |||||||||||
Finland — 1.8% | |||||||||||
93,502 | Amer Group Class A (a) | 1,955,052 | |||||||||
58,176 | Elcoteq Network Corp | 1,284,725 | |||||||||
105,103 | Kemira Oyj | 1,818,983 | |||||||||
110,779 | Kesko Oyj Class B | 3,481,488 | |||||||||
273,819 | M-real Oyj Class B | 1,373,704 | |||||||||
204,629 | OKO Bank | 3,442,725 | |||||||||
83,800 | Outokumpu Oyj | 1,520,577 | |||||||||
4,739 | Rautaruukki Oyj | 159,701 | |||||||||
58,600 | Yit Yhtymae Oyj | 2,973,228 | |||||||||
18,010,183 | |||||||||||
France — 4.6% | |||||||||||
5,649 | Alstom * | 482,814 | |||||||||
9,846 | Bourbon SA | 1,005,598 | |||||||||
70,542 | Business Objects SA * | 2,618,172 | |||||||||
19,537 | Cap Gemini SA * | 963,240 | |||||||||
17,816 | Dassault Systemes SA | 994,926 | |||||||||
12,655 | Etablissements Economiques du Casino Guichard-Perrachon SA | 788,824 | |||||||||
10,036 | Eurazeo | 1,086,161 | |||||||||
48,917 | Euronext NV | 3,066,375 | |||||||||
30,225 | Generale de Sante | 869,563 | |||||||||
11,997 | Groupe Steria SCA | 650,056 | |||||||||
228,916 | Havas SA (a) | 1,079,965 | |||||||||
57,244 | Michelin SA Class B | 3,492,007 | |||||||||
19,431 | Nexans SA | 1,282,300 | |||||||||
155,406 | Publicis Groupe | 5,929,249 | |||||||||
37,363 | Remy Cointreau SA | 1,857,038 | |||||||||
1,602,586 | SCOR SA | 3,851,262 | |||||||||
46,888 | Soitec * | 1,248,984 |
See accompanying notes to the financial statements.
6
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
33,768 | Technip SA | 2,029,141 | |||||||||
19,003 | Ubisoft Entertainment SA * | 739,588 | |||||||||
7,553 | Vallourec | 5,909,415 | |||||||||
5,747 | Wendel Investissement | 657,760 | |||||||||
81,602 | Zodiac SA | 5,122,179 | |||||||||
45,724,617 | |||||||||||
Germany — 8.1% | |||||||||||
88,493 | Aareal Bank AG * | 3,918,487 | |||||||||
37,798 | Altana AG | 2,030,016 | |||||||||
29,514 | Balda AG | 373,974 | |||||||||
60,321 | Bankgesellschaft Berlin AG * (a) | 349,541 | |||||||||
48,270 | Bilfinger & Berger AG | 2,775,795 | |||||||||
404,305 | Depfa Bank Plc | 6,741,198 | |||||||||
4,281 | Deutsche Wohnen AG | 1,224,623 | |||||||||
114,593 | Hannover Rueckversicherungs AG (Registered) (a) | 4,350,092 | |||||||||
59,624 | Hochtief AG (a) | 3,199,907 | |||||||||
18,691 | IKB Deutsche Industriebank AG | 661,133 | |||||||||
33,136 | IVG Immobilien AG | 860,823 | |||||||||
69,718 | IWKA AG | 1,877,100 | |||||||||
156,921 | KarstadtQuelle AG * (a) | 3,787,011 | |||||||||
40,319 | Lanxess AG * | 1,390,557 | |||||||||
24,275 | MAN AG | 1,531,758 | |||||||||
101,603 | Merck KGaA | 10,174,764 | |||||||||
57,629 | Mobilcom AG | 1,517,669 | |||||||||
26,772 | Norddeutsche Affinerie AG | 743,237 | |||||||||
57,755 | Rheinmetall AG | 4,500,680 | |||||||||
26,182 | Rhoen-Klinikum AG | 1,138,654 | |||||||||
174,333 | Salzgitter AG | 11,846,187 | |||||||||
24,607 | Software AG | 1,419,182 | |||||||||
4,375 | Solarworld AG | 1,142,840 | |||||||||
223,778 | Suedzucker AG (a) | 5,912,303 | |||||||||
335,528 | TUI AG (a) | 6,626,717 | |||||||||
80,094,248 |
See accompanying notes to the financial statements.
7
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Greece — 0.1% | |||||||||||
140,813 | Hellenic Technodomiki Tev SA | 1,215,413 | |||||||||
Hong Kong — 0.9% | |||||||||||
381,000 | Asia Satellite Telecommunications Holdings Ltd | 651,647 | |||||||||
334,800 | Dah Sing Financial Services | 2,336,604 | |||||||||
1,650,000 | First Pacific Co | 585,675 | |||||||||
117,000 | Guoco Group | 1,456,185 | |||||||||
1,038,000 | Hang Lung Group Co Ltd | 2,285,944 | |||||||||
242,000 | Orient Overseas International Ltd | 887,685 | |||||||||
192,000 | Television Broadcasts Ltd | 1,078,899 | |||||||||
9,282,639 | |||||||||||
Indonesia — 0.0% | |||||||||||
343,315 | Astra International Tbk PT | 363,566 | |||||||||
Ireland — 1.6% | |||||||||||
126,599 | C&C Group Plc | 845,552 | |||||||||
375,097 | DCC Plc | 8,543,576 | |||||||||
1,881,721 | Fyffes Plc | 4,711,392 | |||||||||
67,400 | Olivetti SPA | 1,491,580 | |||||||||
15,592,100 | |||||||||||
Israel — 0.2% | |||||||||||
195,000 | Bank Hapoalim B.M. | 892,427 | |||||||||
128,800 | Bank Leumi Le | 464,745 | |||||||||
34,400 | Check Point Software Technologies Ltd * | 731,344 | |||||||||
2,088,516 | |||||||||||
Italy — 3.5% | |||||||||||
38,341 | Aedes (a) | 265,266 | |||||||||
1,980,759 | AEM SPA (a) | 4,199,742 | |||||||||
193,764 | Banca Popolare di Lodi (a) | 2,123,085 | |||||||||
75,090 | Banca Popolare di Milano | 949,125 | |||||||||
52,997 | Benetton Group SPA | 675,281 |
See accompanying notes to the financial statements.
8
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Italy — continued | |||||||||||
101,712 | Buzzi Unicem SPA | 2,104,454 | |||||||||
143,782 | Cementir SPA | 950,821 | |||||||||
14,775 | Datamat SPA | 168,864 | |||||||||
152,093 | ERG SPA | 3,579,423 | |||||||||
22,065 | Fondiaria - Sai SPA - Di RISP | 657,355 | |||||||||
102,000 | Fornara & Co SPA * (b) (c) | — | |||||||||
213,400 | Grassetto SPA * (b) (c) | 2,544 | |||||||||
506,840 | IFIL SPA | 2,597,594 | |||||||||
497,335 | Impregilo SPA * (a) | 2,129,600 | |||||||||
134,019 | Italcementi SPA (a) | 2,743,500 | |||||||||
362,996 | Italcementi SPA - Di RISP | 5,173,734 | |||||||||
35,710 | Italmobiliare SPA - RNC | 2,197,241 | |||||||||
277,957 | Milano Assicurazioni SPA | 2,125,361 | |||||||||
45,557 | Recordati Aor Post Fraz | 337,136 | |||||||||
129,387 | Risanamento SPA | 730,322 | |||||||||
6,953 | Tod's SPA | 508,387 | |||||||||
34,218,835 | |||||||||||
Japan — 24.2% | |||||||||||
169,700 | Aderans Co Ltd | 4,691,689 | |||||||||
26,000 | Alfresa Holdings Corp | 1,517,222 | |||||||||
82,000 | Alps Electric Co Ltd | 1,282,201 | |||||||||
114,000 | Amada Co Ltd | 1,075,925 | |||||||||
59,000 | Amano Corp | 1,062,485 | |||||||||
72,000 | AOC Holdings Inc | 1,294,767 | |||||||||
600 | Aoyama Trading Co Ltd | 18,482 | |||||||||
104 | Aplix Corp * (a) | 843,348 | |||||||||
17,800 | Arrk Corp | 1,273,953 | |||||||||
39,000 | Asahi Denka Co Ltd | 622,532 | |||||||||
150,000 | Asics Corp | 1,422,580 | |||||||||
33,800 | Autobacs Seven Co Ltd | 1,697,153 | |||||||||
39,000 | Avex Group Holding Inc (a) | 1,032,201 | |||||||||
127,000 | Bosch Automotive Systems Corp (a) | 549,736 | |||||||||
112,000 | Brother Industries Ltd | 1,201,841 |
See accompanying notes to the financial statements.
9
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
212,000 | Calsonic Kansei Corp | 1,467,093 | |||||||||
22,000 | Canon Sales Co Inc | 470,433 | |||||||||
128,000 | Central Glass Co Ltd | 721,560 | |||||||||
55,000 | Chiba Kogyo Bank Ltd * | 1,007,031 | |||||||||
1,000 | Chudenko Corp | 18,234 | |||||||||
70,000 | CKD Corporation (a) | 1,054,408 | |||||||||
78,900 | Coca-Cola West Japan Co Ltd (a) | 1,890,523 | |||||||||
507,000 | Cosmo Oil Co Ltd | 2,577,697 | |||||||||
310 | Creed Corp | 1,305,750 | |||||||||
177,350 | Daiei Inc * (a) | 4,892,734 | |||||||||
113,000 | Daifuku | 2,086,260 | |||||||||
17,000 | Daiichikosho Co Ltd | 453,658 | |||||||||
590,000 | Daikyo Inc * | 3,105,621 | |||||||||
34,000 | Daimaru Inc | 457,228 | |||||||||
109,000 | Daio Paper Corp (a) | 1,157,802 | |||||||||
91,000 | Denki Kogyo Co Ltd (a) | 1,022,056 | |||||||||
35,000 | Edion Corp | 730,269 | |||||||||
24,000 | Exedy Corp | 706,758 | |||||||||
349,000 | Fuji Electric Holdings Co Ltd | 1,631,623 | |||||||||
197,000 | Fujikura Ltd | 2,187,718 | |||||||||
281,000 | Furakawa Co Ltd * (a) | 678,091 | |||||||||
118,100 | Futaba Industrial Co Ltd (a) | 2,669,779 | |||||||||
57,100 | H.I.S. Co Ltd (a) | 1,455,446 | |||||||||
4,000 | Hakuhodo Dy Holdings Inc | 324,440 | |||||||||
82,000 | Hankyu Department Stores Inc (a) | 723,792 | |||||||||
225,000 | Hanwa Co Ltd | 984,444 | |||||||||
1,922,400 | Haseko Corp * (a) | 6,698,448 | |||||||||
215,000 | Heiwa Real Estate Co Ltd (a) | 1,527,306 | |||||||||
27,000 | Hisamitsu Pharmaceutical Co Inc | 644,226 | |||||||||
1,685,000 | Hitachi Zosen Corp * (a) | 3,141,672 | |||||||||
41,000 | Horiba Ltd (a) | 1,189,089 | |||||||||
129,700 | Hosiden Corp | 1,502,537 | |||||||||
51,000 | Intec Corp | 767,094 | |||||||||
9,819 | Invoice Inc (a) | 509,739 |
See accompanying notes to the financial statements.
10
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
55,000 | Ito En Ltd (a) | 1,709,007 | |||||||||
625,000 | Iwatani International Corp (a) | 2,091,797 | |||||||||
15,000 | Izumi Co Ltd (a) | 510,722 | |||||||||
257,000 | JACCS Co Ltd | 2,539,198 | |||||||||
54,000 | Japan Securities Finance Co | 610,293 | |||||||||
385,000 | Japan Steel Works Ltd (a) | 2,381,998 | |||||||||
46,000 | Joint Corp | 1,320,598 | |||||||||
219,000 | Juki Corp | 1,229,508 | |||||||||
43,000 | Kaga Electronics Co Ltd | 1,085,345 | |||||||||
101,000 | Kandenko Co | 727,379 | |||||||||
43,000 | Kanto Tsukuba Bank Ltd * | 810,477 | |||||||||
126,000 | Kawasaki Kisen Kaisha Ltd (a) | 783,745 | |||||||||
252,000 | Kayaba Industry Co (a) | 860,535 | |||||||||
265,000 | Keisei Electric Railway Co (a) | 1,704,347 | |||||||||
513 | Kenedix Inc | 2,386,729 | |||||||||
400,000 | Kiyo Holdings Inc * | 1,095,417 | |||||||||
51,000 | Kohnan Shoji Co Ltd (a) | 673,445 | |||||||||
160,000 | Koito Manufacturing Co Ltd | 1,985,416 | |||||||||
85,000 | Kojima Co Ltd (a) | 961,424 | |||||||||
127,200 | Konami Corp (a) | 3,136,148 | |||||||||
475,000 | Kurabo Industries Ltd | 1,639,233 | |||||||||
209,000 | Kyokuyo Co Ltd (a) | 515,014 | |||||||||
104,000 | Kyudenko Corp | 656,626 | |||||||||
27,400 | Lintec Corp | 667,756 | |||||||||
365,000 | Maeda Corp | 2,261,979 | |||||||||
90,000 | Makino Milling Machine Co Ltd | 1,037,659 | |||||||||
287,000 | Maruha Group Inc (a) | 646,525 | |||||||||
90,000 | Marusan Securities Co Ltd | 1,050,869 | |||||||||
110,000 | Matsuzakaya Co Ltd (a) | 881,879 | |||||||||
158,000 | Mediceo Paltac Holdings Co Ltd (a) | 2,597,757 | |||||||||
34,000 | Miraca Holdings Inc | 669,188 | |||||||||
177,000 | Mitsubishi Rayon Co Ltd | 1,422,263 | |||||||||
176,000 | Mitsubishi Steel Manufacturing Co Ltd (a) | 1,107,950 | |||||||||
250,000 | Nagase & Co | 3,194,361 |
See accompanying notes to the financial statements.
11
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
205,000 | Nichiro Corp (a) | 444,379 | |||||||||
30,000 | Nidec Sankyo Corp | 452,695 | |||||||||
9,000 | Nihon Dempa Kogyo Co Ltd | 376,381 | |||||||||
191,000 | Nippon Corp | 1,506,789 | |||||||||
1,426,000 | Nippon Light Metal (a) | 3,991,441 | |||||||||
271,000 | Nippon Soda Co Ltd | 1,012,460 | |||||||||
22,000 | Nippon System Development Co Ltd | 727,087 | |||||||||
61,000 | Nipro Corp (a) | 906,564 | |||||||||
449,000 | Nishimatsu Construction (a) | 1,904,751 | |||||||||
37,000 | Nishimatsuya Chain Co Ltd | 712,595 | |||||||||
238,000 | Nissan Chemical Industries Ltd | 3,916,294 | |||||||||
353,000 | Nissan Diesel Motor Co (a) | 1,944,751 | |||||||||
460,000 | Nissan Shatai Co Ltd | 3,167,360 | |||||||||
244,000 | Nisshin Seifun Group Inc | 2,476,566 | |||||||||
685,500 | Nissin Company Ltd (a) | 1,319,554 | |||||||||
12,000 | Nissin Kogyo Co Ltd | 706,207 | |||||||||
26,000 | Nitori Co Ltd | 1,279,723 | |||||||||
97,000 | NOF Corp (a) | 588,119 | |||||||||
178,000 | Okasan Securities Co Ltd (a) | 1,859,275 | |||||||||
14,000 | Okinawa Electric Power Co | 869,080 | |||||||||
182,000 | Okuma Corp (a) | 2,199,341 | |||||||||
484,000 | Orient Corp * | 1,716,666 | |||||||||
26,000 | Park24 Co Ltd (a) | 836,130 | |||||||||
900,000 | Penta Ocean Construction Co Ltd * (a) | 1,841,574 | |||||||||
28,000 | Point Inc | 2,074,037 | |||||||||
144,900 | Q.P. Corp | 1,386,558 | |||||||||
402 | Round One Corp (a) | 1,634,726 | |||||||||
159,000 | Ryobi Ltd | 1,149,149 | |||||||||
11,800 | Ryohin Keikaku Co Ltd | 885,453 | |||||||||
130,300 | Ryosan Co | 3,554,511 | |||||||||
4,000 | Sanden Corp | 17,276 | |||||||||
67,000 | Sanki Engineering | 571,454 | |||||||||
339,000 | Sankyo-Tateyama Holdings Inc | 762,196 | |||||||||
548,000 | Sankyu Inc (a) | 3,087,539 |
See accompanying notes to the financial statements.
12
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
145,000 | Sanyo Securities Co Ltd * (b) (c) | 1,253 | |||||||||
96,000 | Sanyo Shokai Ltd | 700,808 | |||||||||
220,000 | Seino Holdings Co Ltd (a) | 2,147,652 | |||||||||
29,000 | Shinko Electric Industries | 2,124,055 | |||||||||
41,000 | Showa Corp | 675,519 | |||||||||
118,290 | Sojitz Corp * (a) | 649,109 | |||||||||
41,000 | Star Micronics Co Ltd | 632,696 | |||||||||
42,000 | Sugi Pharmacy Co Ltd (a) | 987,696 | |||||||||
1,131,000 | Sumitomo Light Metal Industry (a) | 2,846,364 | |||||||||
287,000 | Sumitomo Warehouse | 2,262,636 | |||||||||
17,000 | Sundrug Co Ltd | 857,879 | |||||||||
110,100 | Suzuken Co Ltd | 3,273,048 | |||||||||
196,000 | Taiheiyo Cement Co Ltd | 843,369 | |||||||||
388 | Take And Give Needs Co Ltd * | 626,550 | |||||||||
53,000 | Tamura Taiko Holdings Inc | 311,114 | |||||||||
142,000 | Tanabe Seiyaku Co Ltd | 1,567,999 | |||||||||
398,000 | TOA Corp (a) | 739,263 | |||||||||
207,000 | Toagosei Co Ltd | 897,955 | |||||||||
1,420,000 | Toho Gas Co Ltd | 5,761,822 | |||||||||
121,000 | Toho Zinc Co Ltd (a) | 1,013,921 | |||||||||
29,300 | Tokyo Seimitsu Co Ltd | 1,707,111 | |||||||||
320,000 | Tokyo Tatemono Co Ltd | 3,095,087 | |||||||||
54,000 | Tokyo Tomin Bank Ltd (a) | 2,425,710 | |||||||||
127,000 | Topy Industries Ltd | 518,501 | |||||||||
159,000 | Toshiba Machine Co Ltd | 1,684,660 | |||||||||
331,000 | Toyo Construction Co * | 566,391 | |||||||||
236,000 | Toyo Engineering (a) | 1,383,327 | |||||||||
43,000 | Toyo Suisan Kaisha Ltd | 626,959 | |||||||||
995,000 | Toyo Tire & Rubber Co Ltd | 4,673,761 | |||||||||
19,100 | Trans Cosmos Inc (a) | 1,127,163 | |||||||||
157,000 | Tsugami Corp | 1,097,704 | |||||||||
171,000 | Tsumura & Co (a) | 4,429,436 | |||||||||
1,041,000 | Ube Industries Ltd | 3,071,688 | |||||||||
118,000 | Uchida Yoko Co Ltd | 713,323 |
See accompanying notes to the financial statements.
13
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
383,000 | Unitika Ltd | 699,175 | |||||||||
120,000 | Urban Corp | 1,758,304 | |||||||||
123,000 | Venture Link Co Ltd * (a) | 411,844 | |||||||||
66,000 | Yamatake Honeywell | 1,575,339 | |||||||||
94,000 | Yamato Kogyo Co | 1,951,038 | |||||||||
152,000 | Yaskawa Electric Corp * (a) | 1,655,474 | |||||||||
706,000 | Yokohama Rubber Co | 3,756,283 | |||||||||
96,000 | Zeon Corp | 1,209,429 | |||||||||
239,236,357 | |||||||||||
Malaysia — 0.1% | |||||||||||
208,800 | Maxis Communications Berhad | 488,727 | |||||||||
167,400 | MISC Berhad | 436,691 | |||||||||
357,000 | Promet Berhad * (b) (c) | 961 | |||||||||
312,000 | Rekapacific Berhad * (b) (c) | 840 | |||||||||
927,219 | |||||||||||
Mexico — 0.6% | |||||||||||
171,000 | Carso Global Telecom Class A * | 411,379 | |||||||||
136,000 | Controladora Comercial Mexicana SA de CV | 245,384 | |||||||||
140,000 | Fomento Economico Mexicano SA de CV | 1,209,547 | |||||||||
245,000 | Grupo Financiero Banorte SA de CV | 597,823 | |||||||||
318,100 | Grupo Mexico SA Class B | 815,369 | |||||||||
104,000 | Grupo Modelo SA de CV Class C | 359,905 | |||||||||
293,000 | Grupo Televisa SA (Participating Certificates) | 1,163,888 | |||||||||
41,000 | Telefonos de Mexico SA de CV Class L ADR | 917,990 | |||||||||
5,721,285 | |||||||||||
Netherlands — 4.6% | |||||||||||
48,275 | Boskalis Westminster NV | 3,057,806 | |||||||||
412,043 | Buhrmann NV (a) | 6,903,766 | |||||||||
56,340 | Chicago Bridge & Iron ADR | 1,378,640 | |||||||||
38,435 | Corio NV | 2,525,430 | |||||||||
151,067 | CSM | 4,511,449 |
See accompanying notes to the financial statements.
14
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Netherlands — continued | |||||||||||
632,561 | Hagemeyer NV * (a) | 2,545,760 | |||||||||
32,902 | Heineken Holding NV | 1,144,629 | |||||||||
27,549 | Hunter Douglas NV | 1,660,282 | |||||||||
39,702 | Imtech NV | 1,658,277 | |||||||||
35,735 | Koninklijke Wessanen NV | 562,141 | |||||||||
25,157 | Nutreco Holding NV | 1,478,199 | |||||||||
194,591 | OCE NV (a) | 3,366,446 | |||||||||
31,623 | Ordina NV | 633,768 | |||||||||
10,722 | Sbm Offshore NV | 1,056,095 | |||||||||
28,706 | Stork NV | 1,638,251 | |||||||||
18,491 | Univar NV | 971,024 | |||||||||
131,792 | Van der Moolen Holding NV (a) | 1,185,766 | |||||||||
80,200 | Van Ommeren Vopak NV | 2,551,869 | |||||||||
20,051 | Vastned NV | 1,481,476 | |||||||||
44,144 | Wereldhave NV | 4,706,059 | |||||||||
45,017,133 | |||||||||||
Philippines — 0.1% | |||||||||||
149,600 | Bank of the Philippine Islands | 170,315 | |||||||||
12,882 | Philippine Long Distance Telephone | 442,206 | |||||||||
612,521 | |||||||||||
Poland — 0.2% | |||||||||||
47,300 | Polski Koncern Naftowy Orlen SA | 869,855 | |||||||||
90,200 | Telekomunikacja Polska SA | 627,953 | |||||||||
1,497,808 | |||||||||||
Russia — 0.2% | |||||||||||
34,300 | Mobile Telesystems ADR | 1,237,201 | |||||||||
4,300 | Tatneft ADR | 489,125 | |||||||||
1,726,326 |
See accompanying notes to the financial statements.
15
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Singapore — 2.5% | |||||||||||
501,000 | Ascendas Real Estate Investment Trust | 666,199 | |||||||||
691,000 | Asia Food & Properties Ltd * | 199,017 | |||||||||
329,000 | CapitaMall Trust | 471,327 | |||||||||
1,986,000 | Cosco Corp | 1,448,158 | |||||||||
2,623,000 | GES International Ltd | 1,585,601 | |||||||||
740,000 | Hyflux Ltd | 1,320,689 | |||||||||
423,000 | Jurong Technologies Industrial Corp Ltd | 466,538 | |||||||||
1,825,000 | Keppel Land Ltd | 4,940,941 | |||||||||
258,000 | Marco Polo Developments Ltd | 225,068 | |||||||||
1,454,350 | MobileOne Ltd | 1,970,835 | |||||||||
458,000 | Noble Group Ltd | 343,422 | |||||||||
11,646,100 | Pacific Century Region Developments Ltd * | 2,095,939 | |||||||||
1,279,000 | Parkway Holdings Ltd | 1,925,713 | |||||||||
652,000 | Singapore Exchange Ltd | 1,526,464 | |||||||||
444,000 | Singapore Petroleum Co | 1,378,220 | |||||||||
753,000 | SMRT Corp Ltd | 509,580 | |||||||||
2,477,000 | Want Want Holdings Ltd | 3,108,883 | |||||||||
24,182,594 | |||||||||||
South Africa — 0.8% | |||||||||||
40,840 | ABSA Group Ltd | 758,611 | |||||||||
27,600 | Bidvest Group Ltd | 464,139 | |||||||||
193,700 | FirstRand Ltd | 583,935 | |||||||||
9,490 | Impala Platinum Holdings Ltd | 1,611,303 | |||||||||
57,700 | MTN Group Ltd | 558,486 | |||||||||
21,200 | Nedcor Ltd | 409,204 | |||||||||
43,200 | Remgro Ltd | 906,066 | |||||||||
260,550 | Sanlam Ltd | 674,486 | |||||||||
46,800 | Telkom SA Ltd | 1,231,325 | |||||||||
20,104 | Tiger Brands Ltd | 498,345 | |||||||||
7,695,900 |
See accompanying notes to the financial statements.
16
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
South Korea — 2.2% | |||||||||||
34,400 | Daewoo Engineering & Construction Co Ltd | 444,500 | |||||||||
33,734 | Hana Financial Group Inc | 1,441,772 | |||||||||
16,300 | Hanjin Shipping | 381,555 | |||||||||
45,200 | Hynix Semiconductor Inc * | 1,524,724 | |||||||||
14,780 | Hyundai Development Co | 670,757 | |||||||||
7,100 | Hyundai Engineering & Construction * | 341,690 | |||||||||
6,400 | Hyundai Heavy Industries | 506,066 | |||||||||
13,400 | Hyundai Mobis | 1,126,630 | |||||||||
34,700 | KIA Motors Corp | 744,960 | |||||||||
3,500 | Korea Express Co Ltd * | 290,584 | |||||||||
46,400 | KT Corp ADR | 947,488 | |||||||||
19,300 | KT Freetel Co Ltd | 513,450 | |||||||||
25,600 | KT&G Corp | 1,517,585 | |||||||||
5,700 | LG Cable & Machinery Ltd | 191,777 | |||||||||
9,600 | LG Chemicals Ltd | 481,686 | |||||||||
72,300 | LG Corp | 2,511,573 | |||||||||
14,200 | LG Electronics Inc | 1,166,053 | |||||||||
2,419 | LG Home Shopping Inc | 245,629 | |||||||||
7,700 | Samsung SDI Co Ltd | 680,373 | |||||||||
43,300 | Shinhan Financial Group Co Ltd | 1,691,656 | |||||||||
2,400 | Shinsegae Co Ltd | 1,137,382 | |||||||||
26,100 | SK Corp | 1,608,232 | |||||||||
1,500 | SK Telecom Co Ltd | 311,711 | |||||||||
32,800 | SK Telecom Co Ltd ADR | 792,120 | |||||||||
39,000 | Woori Finance Holdings Co Ltd | 766,094 | |||||||||
22,036,047 | |||||||||||
Spain — 1.6% | |||||||||||
12,071 | Acciona SA | 1,682,756 | |||||||||
106,647 | Aguas de Barcelona SA Class A | 2,949,926 | |||||||||
48,556 | Corp Financiera Alba | 2,473,697 | |||||||||
29,949 | Fomento de Construcciones y Contratas SA | 2,036,179 | |||||||||
8,419 | Inmobiliaria Colonia SA | 540,462 | |||||||||
535,633 | Jazztel Plc * | 485,218 |
See accompanying notes to the financial statements.
17
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Spain — continued | |||||||||||
22,013 | Metrovacesa SA | 1,638,826 | |||||||||
32,055 | Red Electrica de Espana | 1,072,052 | |||||||||
91,638 | Sacyr Vallehermoso SA | 2,576,465 | |||||||||
15,455,581 | |||||||||||
Sweden — 2.4% | |||||||||||
62,500 | Alfa Laval AB | 1,579,201 | |||||||||
152,400 | Boliden AB * | 1,889,232 | |||||||||
37,800 | Elekta AB B Shares | 558,626 | |||||||||
95,855 | Getinge AB | 1,385,775 | |||||||||
69,838 | Holmen AB Class B (a) | 2,709,261 | |||||||||
323,917 | Kinnevik Investment AB (a) | 3,866,466 | |||||||||
23,900 | Kungsleden AB | 836,296 | |||||||||
44,019 | Lundbergforetagen AB Class B | 2,121,521 | |||||||||
67,000 | Lundin Petroleum AB * (a) | 739,356 | |||||||||
30,950 | Modern Times Group AB * | 1,433,821 | |||||||||
29,800 | NCC Class B | 677,307 | |||||||||
88,220 | SSAB Swedish Steel Class A | 3,963,796 | |||||||||
203,600 | Tele2 AB Class B (a) | 2,197,465 | |||||||||
23,958,123 | |||||||||||
Switzerland — 1.4% | |||||||||||
23,425 | Baloise Holding Ltd | 1,484,029 | |||||||||
9,455 | Charles Voegele Holding AG | 864,598 | |||||||||
180,623 | Converium Holding AG * | 1,989,999 | |||||||||
2,652 | Fischer (George) AG (Registered) * | 1,073,442 | |||||||||
3,446 | Forbo Holdings AG (Registered) * | 870,776 | |||||||||
4,820 | Helvetia Patria Holding (Registered) | 1,084,472 | |||||||||
338 | Jelmoli Holding AG (Bearer) | 546,159 | |||||||||
190 | Jelmoli Holding AG (Registered) | 61,650 | |||||||||
31,397 | Logitech International SA * | 1,264,780 | |||||||||
36 | Motor-Columbus (Bearer) | 191,936 | |||||||||
886 | Movenpick Holdings (Bearer) * | 219,502 | |||||||||
32,864 | Phonak Holding AG (Registered) | 1,586,214 | |||||||||
13,951 | Valora Holding AG * | 2,834,925 | |||||||||
14,072,482 |
See accompanying notes to the financial statements.
18
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Taiwan — 1.9% | |||||||||||
322,857 | Acer Inc | 714,388 | |||||||||
445,770 | Asustek Computer Inc | 1,256,298 | |||||||||
960,630 | AU Optronics Corp | 1,534,820 | |||||||||
457,000 | Cathay Financial Holding Co Ltd | 878,495 | |||||||||
619,000 | Chi Mei Optoelectronics Corp | 936,179 | |||||||||
5,000 | China Bills Finance Corp | 1,630 | |||||||||
1,264,000 | China Development Financial Holding Corp * | 483,978 | |||||||||
1,177,000 | Chunghwa Picture Tubes Ltd | 305,656 | |||||||||
238,000 | Chunghwa Telecom Co Ltd | 433,291 | |||||||||
635,818 | Compal Electronics Inc | 591,411 | |||||||||
233,546 | Delta Electronics Inc | 555,948 | |||||||||
564,130 | Far Eastern Textile Co Ltd | 415,205 | |||||||||
288,000 | Far Eastone Telecommunications Co Ltd | 352,402 | |||||||||
566,316 | Formosa Chemicals & Fibre Co | 890,314 | |||||||||
853,941 | Formosa Plastics Corp | 1,351,280 | |||||||||
720,000 | Fubon Financial Holding Co Ltd | 643,182 | |||||||||
2,451 | Gigabyte Technology Co Ltd | 2,065 | |||||||||
74,920 | High Tech Computer Corp | 1,604,824 | |||||||||
493,884 | Inventec Co Ltd | 301,082 | |||||||||
594,640 | Lite-On Technology Corp | 801,374 | |||||||||
1,710,000 | Mega Financial Holdings Co Ltd | 1,297,077 | |||||||||
876,000 | Powerchip Semiconductor Corp | 532,605 | |||||||||
443,550 | Quanta Computer Inc | 675,651 | |||||||||
187,150 | Realtek Semiconductor Corp | 205,210 | |||||||||
369,000 | Siliconware Precision Industries Co | 467,704 | |||||||||
996,144 | Taishin Financial Holdings Co Ltd | 605,201 | |||||||||
583,000 | Taiwan Cellular Corp | 537,985 | |||||||||
18,375,255 | |||||||||||
Thailand — 0.1% | |||||||||||
168,000 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (c) | 101,519 | |||||||||
216,000 | Kasikornbank Pcl NVDR (c) | 367,850 | |||||||||
32,000 | PTT Exploration & Production Pcl (Foreign Registered) (c) | 425,779 | |||||||||
895,148 |
See accompanying notes to the financial statements.
19
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Turkey — 0.2% | |||||||||||
104,598 | Akbank TAS | 1,058,832 | |||||||||
61,700 | Haci Omer Sabanci Holding | 482,974 | |||||||||
21,311 | Tupras-Turkiye Petrol Rafineriler AS | 406,335 | |||||||||
1,948,141 | |||||||||||
United Kingdom — 19.8% | |||||||||||
76,090 | Admiral Group Plc | 753,782 | |||||||||
531,876 | Aggreko Plc | 2,768,850 | |||||||||
877,008 | AMEC | 6,097,904 | |||||||||
239,547 | Amlin | 1,087,114 | |||||||||
357,151 | Arriva Plc | 3,773,907 | |||||||||
152,371 | Autonomy Corp Plc * | 1,282,327 | |||||||||
87,406 | AWG Plc | 1,696,458 | |||||||||
136,618 | Balfour Beatty Plc | 895,996 | |||||||||
809,905 | Barratt Developments Plc | 14,672,092 | |||||||||
642,724 | BBA Group Plc | 3,017,830 | |||||||||
65,198 | Bellway Plc | 1,339,486 | |||||||||
415,429 | Berkeley Group Holdings Plc * | 8,115,504 | |||||||||
313,657 | Bradford & Bingley Plc | 2,572,779 | |||||||||
637,056 | Brit Insurance Holdings Plc | 1,195,459 | |||||||||
128,113 | British Energy Group Plc * | 1,385,799 | |||||||||
265,776 | Bunzl Plc | 2,978,257 | |||||||||
59,207 | Burren Energy Plc | 1,031,301 | |||||||||
746,092 | Cable & Wireless Plc | 1,393,787 | |||||||||
77,717 | Charter Plc * | 904,560 | |||||||||
1,865,353 | Cobham Group Plc | 5,556,210 | |||||||||
146,493 | Collins Stewart Tullett Plc | 1,782,683 | |||||||||
262,909 | Computacenter Plc | 1,307,782 | |||||||||
153,406 | Countrywide Plc | 1,345,474 | |||||||||
88,398 | Crest Nicholson Plc | 731,382 | |||||||||
168,782 | Croda International Plc | 1,455,818 | |||||||||
160,708 | CSR Plc * | 2,550,330 | |||||||||
81,267 | Dana Petroleum (Ordinary Shares) * | 1,356,139 | |||||||||
160,706 | De la Rue (Ordinary Shares) | 1,567,023 |
See accompanying notes to the financial statements.
20
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,218,469 | DSG International Plc | 3,674,261 | |||||||||
534,000 | First Choice Holidays Plc | 2,113,265 | |||||||||
148,936 | Firstgroup Plc | 1,095,337 | |||||||||
509,524 | GKN Plc | 3,035,553 | |||||||||
21,077 | Go-Ahead Group Plc | 649,033 | |||||||||
187,243 | Gyrus Group Plc * | 1,331,376 | |||||||||
171,821 | Helphire Group Plc | 1,144,774 | |||||||||
175,819 | Hiscox Plc | 770,671 | |||||||||
296,886 | HMV Group Plc | 963,316 | |||||||||
52,449 | Homeserve Plc | 1,441,616 | |||||||||
370,153 | ICAP Plc | 2,883,931 | |||||||||
454,409 | IMI Plc | 4,165,773 | |||||||||
82,443 | Inchcape Plc | 3,480,552 | |||||||||
3,870,819 | Invensys Plc * | 1,425,859 | |||||||||
21,513 | Investec Plc | 1,102,954 | |||||||||
102,577 | Johnson Matthey Plc | 2,571,186 | |||||||||
67,733 | Kelda Group Plc | 945,898 | |||||||||
118,454 | London Stock Exchange | 1,775,045 | |||||||||
68,283 | Lonmin Plc | 2,716,202 | |||||||||
111,619 | Luminar Plc | 952,875 | |||||||||
278,146 | Michael Page International Plc | 1,517,112 | |||||||||
295,269 | Mitchells & Butlers Plc | 2,049,869 | |||||||||
35,490 | Morgan Sindall Plc | 731,678 | |||||||||
96,082 | National Express Group Plc | 1,496,427 | |||||||||
1,619,767 | Northern Foods Plc | 3,911,526 | |||||||||
381,867 | Northgate Info Solutions Plc * | 556,162 | |||||||||
432,613 | Paragon Group Cos Plc | 5,186,791 | |||||||||
17,269 | Persimmon Plc | 422,752 | |||||||||
371,548 | Rank Group Plc | 1,695,547 | |||||||||
84,604 | Rotork Plc | 1,083,304 | |||||||||
1,717,986 | Royal & Sun Alliance Insurance Group | 3,917,274 | |||||||||
59,124 | Schroders Plc | 1,192,077 | |||||||||
46,286 | Schroders Plc (New shares) (Non Voting) | 870,189 | |||||||||
875,994 | Signet Group Plc | 1,583,908 |
See accompanying notes to the financial statements.
21
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
656,115 | Smith WH Plc | 4,694,716 | |||||||||
108,200 | Tate & Lyle Plc | 1,134,567 | |||||||||
1,943,087 | Taylor Woodrow Plc | 14,161,773 | |||||||||
235,124 | TDG Plc | 923,309 | |||||||||
1,567,248 | THUS Group Plc * | 425,837 | |||||||||
550,197 | Tomkins Plc | 3,212,048 | |||||||||
164,765 | Travis Perkins Plc | 4,287,498 | |||||||||
599,042 | Tullow Oil Plc | 3,132,059 | |||||||||
69,704 | Vedanta Resources Plc | 1,202,797 | |||||||||
193,893 | Venture Production (Ordinary Shares) * | 2,035,647 | |||||||||
113,349 | Victrex Plc | 1,435,898 | |||||||||
173,253 | Wilson Bowden Plc | 4,531,499 | |||||||||
1,355,403 | Wimpey (George) Plc | 13,140,987 | |||||||||
104,934 | Wolfson Microelectronics Plc * | 664,198 | |||||||||
282,429 | Wood Group (John) Plc | 1,175,654 | |||||||||
195,228,613 | |||||||||||
TOTAL COMMON STOCKS (COST $699,271,092) | 942,106,996 | ||||||||||
PREFERRED STOCKS — 2.8% | |||||||||||
Brazil — 0.8% | |||||||||||
61,260 | Banco Itau Holding Financeira SA 2.79% | 1,981,899 | |||||||||
2,274,000 | Companhia de Bebidas das Americas 3.03% | 964,857 | |||||||||
19,643,200 | Companhia Energetica de Minas Gerais 4.11% | 1,008,292 | |||||||||
23,956,000 | Electrobras (Centro) SA Class B 8.09% | 526,276 | |||||||||
14,200 | Empresa Brasileira de Aeronautica SA ADR 2.72% | 564,450 | |||||||||
19,100 | Gerdau Metalurgica SA 4.62 | 534,908 | |||||||||
305,803 | Investimentos Itau SA 4.28% | 1,332,083 | |||||||||
32,800 | Tele Norte Leste Participacs SA 7.11% | 625,571 | |||||||||
7,538,336 |
See accompanying notes to the financial statements.
22
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — 1.5% | |||||||||||
52,578 | Fresenius Medical Care AG (Non Voting) 0.92% | 8,437,161 | |||||||||
153,847 | Hugo Boss AG 2.89% (a) | 6,098,322 | |||||||||
14,535,483 | |||||||||||
Italy — 0.5% | |||||||||||
46,119 | Compagnia Assicuratrice Unipol 5.02% | 120,755 | |||||||||
242,278 | IFI Istituto Finanziario Industries * | 4,547,060 | |||||||||
4,667,815 | |||||||||||
Russia — 0.0% | |||||||||||
250 | Transneft 0.48% | 618,750 | |||||||||
South Korea — 0.0% | |||||||||||
6,100 | Hyundai Motor Co 2.48% | 327,552 | |||||||||
3,960 | LG Electronics Inc 2.84% | 202,099 | |||||||||
529,651 | |||||||||||
TOTAL PREFERRED STOCKS (COST $13,365,244) | 27,890,035 | ||||||||||
MUTUAL FUNDS — 0.2% | |||||||||||
Canada — 0.2% | |||||||||||
24,000 | Energy Savings Income Fund | 400,194 | |||||||||
56,900 | Keyera Facilities Income Fund | 1,185,615 | |||||||||
22,500 | Petrofund Energy Trust | 456,157 | |||||||||
2,041,966 | |||||||||||
TOTAL MUTUAL FUNDS (COST $1,772,808) | 2,041,966 |
See accompanying notes to the financial statements.
23
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Hong Kong — 0.0% | |||||||||||
307,764 | Global Bio-Chem Technology Group Ltd Warrants, Expire 5/31/07 * | 2,380 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 2,380 | ||||||||||
SHORT-TERM INVESTMENT(S) — 14.6% | |||||||||||
133,661,574 | The Boston Global Investment Trust (d) | 133,661,574 | |||||||||
6,600,000 | Branch Bank & Trust Time Deposit, 4.52%, due 03/01/06 | 6,600,000 | |||||||||
4,000,000 | U.S. Treasury Bill, 4.64%, due 08/24/06 (e) (f) | 3,912,048 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $144,173,183) | 144,173,622 | ||||||||||
TOTAL INVESTMENTS — 113.1% (Cost $858,582,327) | 1,116,214,999 |
Other Assets and Liabilities (net) — (13.1%) | (129,613,033 | ) | |||||
TOTAL NET ASSETS — 100.0% | $ | 986,601,966 |
See accompanying notes to the financial statements.
24
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments – (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
5/26/06 | CAD | 49,662,041 | $ | 43,800,202 | $ | 625,421 | |||||||||||||
5/26/06 | CHF | 88,125,525 | 67,763,280 | (17,783 | ) | ||||||||||||||
5/26/06 | EUR | 5,019,001 | 6,013,926 | 13,926 | |||||||||||||||
5/26/06 | JPY | 5,730,880,918 | 50,071,879 | 1,084,734 | |||||||||||||||
5/26/06 | NOK | 252,809,005 | 37,668,828 | 95,839 | |||||||||||||||
5/26/06 | NZD | 1,568,756 | 1,032,469 | (5,067 | ) | ||||||||||||||
5/26/06 | SEK | 233,960,957 | 29,759,525 | (156,078 | ) | ||||||||||||||
5/26/06 | SGD | 10,201,092 | 6,306,736 | 42,641 | |||||||||||||||
$ | 1,683,633 | ||||||||||||||||||
Sales | |||||||||||||||||||
5/26/06 | AUD | 34,452,957 | $ | 25,536,704 | $ | (187,276 | ) | ||||||||||||
5/26/06 | CAD | 3,876,240 | 3,418,709 | (35,173 | ) | ||||||||||||||
5/26/06 | CHF | 4,267,069 | 3,281,122 | 47,042 | |||||||||||||||
5/26/06 | DKK | 9,084,600 | 1,458,528 | 1,713 | |||||||||||||||
5/26/06 | EUR | 65,504,056 | 78,489,034 | (80,117 | ) | ||||||||||||||
5/26/06 | GBP | 42,772,535 | 75,085,938 | (622,930 | ) | ||||||||||||||
5/26/06 | HKD | 72,097,590 | 9,305,817 | (196 | ) | ||||||||||||||
5/26/06 | JPY | 3,150,371,850 | 27,525,443 | (569,992 | ) | ||||||||||||||
5/26/06 | SEK | 25,379,460 | 3,228,234 | 81,943 | |||||||||||||||
$ | (1,364,986 | ) |
See accompanying notes to the financial statements.
25
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments – (Continued)
February 28, 2006
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
75 | CAC 40 | March 2006 | $ | 4,473,504 | $ | 36,456 | |||||||||||||
85 | DAX | March 2006 | 14,702,765 | 771,492 | |||||||||||||||
66 | S&P/MIB | March 2006 | 14,836,030 | 1,040,483 | |||||||||||||||
61 | TOPIX | March 2006 | 8,737,247 | 89,586 | |||||||||||||||
$ | 1,938,017 | ||||||||||||||||||
Sales | |||||||||||||||||||
252 | FTSE 100 | March 2006 | $ | 25,481,004 | $ | (121,615 | ) | ||||||||||||
115 | SPI 200 | March 2006 | 10,511,201 | (298,271 | ) | ||||||||||||||
$ | (419,886 | ) |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ADR - American Depositary Receipt | |||
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. | |||
GDR - Global Depository Receipt | |||
NVDR - Non-Voting Depository Receipt | |||
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) Bankrupt issuer.
(c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(d) All or a portion of this security represents investment of security lending collateral (Note 2).
(e) Rate shown represents yield-to-maturity.
(f) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
As of February 28, 2006, 90.8% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor.
See accompanying notes to the financial statements.
26
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments – (Continued)
February 28, 2006
Currency Abbreviations:
AUD - Australian Dollar | HKD - Hong Kong Dollar | ||||||
CAD - Canadian Dollar | JPY - Japanese Yen | ||||||
CHF - Swiss Franc | NOK - Norwegian Krone | ||||||
DKK - Danish Krone | NZD - New Zealand Dollar | ||||||
EUR | - | Euro | SEK - Swedish Krona | ||||
GBP - British Pound | SGD - Singapore Dollar | ||||||
See accompanying notes to the financial statements.
27
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $122,109,730 (cost $858,582,327) (Note 2) | $ | 1,116,214,999 | |||||
Cash | 32,208 | ||||||
Foreign currency, at value (cost $3,138,623) (Note 2) | 3,166,585 | ||||||
Receivable for investments sold | 17,077 | ||||||
Receivable for Fund shares sold | 163,996 | ||||||
Dividends and interest receivable | 1,346,824 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 1,993,259 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 92,007 | ||||||
Total assets | 1,123,026,955 | ||||||
Liabilities: | |||||||
Collateral on securities loaned (Note 2) | 133,661,574 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 466,754 | ||||||
Shareholder service fee | 116,688 | ||||||
Trustees and Chief Compliance Officer fees | 1,372 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 1,674,612 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 156,442 | ||||||
Accrued expenses | 347,547 | ||||||
Total liabilities | 136,424,989 | ||||||
Net assets | $ | 986,601,966 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 611,944,791 | |||||
Distributions in excess of net investment income | (4,700,433 | ) | |||||
Accumulated net realized gain | 119,851,285 | ||||||
Net unrealized appreciation | 259,506,323 | ||||||
$ | 986,601,966 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 986,601,966 | |||||
Shares outstanding: | |||||||
Class III | 66,073,631 | ||||||
Net asset value per share: | |||||||
Class III | $ | 14.93 |
See accompanying notes to the financial statements.
28
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $2,667,160) | $ | 28,595,640 | |||||
Interest (including securities lending income of $1,939,995) | 3,122,596 | ||||||
Total investment income | 31,718,236 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 6,890,335 | ||||||
Shareholder service fee – Class III (Note 3) | 1,722,584 | ||||||
Custodian and fund accounting agent fees | 1,131,659 | ||||||
Transfer agent fees | 29,839 | ||||||
Audit and tax fees | 77,082 | ||||||
Legal fees | 20,859 | ||||||
Trustees fees and related expenses (Note 3) | 23,811 | ||||||
Registration fees | 2,730 | ||||||
Miscellaneous | 30,450 | ||||||
Total expenses | 9,929,349 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (1,272,556 | ) | |||||
Net expenses | 8,656,793 | ||||||
Net investment income (loss) | 23,061,443 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of CPMF tax of $11,701) (Note 2) | 399,552,612 | ||||||
Closed futures contracts | 6,800,699 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (5,110,017 | ) | |||||
Net realized gain (loss) | 401,243,294 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (182,228,215 | ) | |||||
Open futures contracts | (474,064 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (997,100 | ) | |||||
Net unrealized gain (loss) | (183,699,379 | ) | |||||
Net realized and unrealized gain (loss) | 217,543,915 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 240,605,358 |
See accompanying notes to the financial statements.
29
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 23,061,443 | $ | 28,790,114 | |||||||
Net realized gain (loss) | 401,243,294 | 265,953,227 | |||||||||
Change in net unrealized appreciation (depreciation) | (183,699,379 | ) | 30,605,592 | ||||||||
Net increase (decrease) in net assets from operations | 240,605,358 | 325,348,933 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (24,571,287 | ) | (44,309,416 | ) | |||||||
Net realized gains | |||||||||||
Class III | (364,443,342 | ) | (219,556,744 | ) | |||||||
(389,014,629 | ) | (263,866,160 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (386,907,384 | ) | (144,200,631 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 4,695,237 | 7,477,157 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (382,212,147 | ) | (136,723,474 | ) | |||||||
Total increase (decrease) in net assets | (530,621,418 | ) | (75,240,701 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 1,517,223,384 | 1,592,464,085 | |||||||||
End of period (including distributions in excess of net investment income of $4,700,433 and $12,831,294, respectively) | $ | 986,601,966 | $ | 1,517,223,384 |
See accompanying notes to the financial statements.
30
GMO International Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 17.84 | $ | 17.09 | $ | 9.50 | $ | 10.44 | $ | 11.68 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.34 | † | 0.30 | † | 0.20 | 0.15 | 0.22 | ||||||||||||||||
Net realized and unrealized gain (loss) | 3.44 | 3.56 | 7.94 | (0.80 | ) | (1.11 | ) | ||||||||||||||||
Total from investment operations | 3.78 | 3.86 | 8.14 | (0.65 | ) | (0.89 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.44 | ) | (0.54 | ) | (0.20 | ) | (0.29 | ) | (0.35 | ) | |||||||||||||
From net realized gains | (6.25 | ) | (2.57 | ) | (0.35 | ) | — | (0.00 | )(a) | ||||||||||||||
Total distributions | (6.69 | ) | (3.11 | ) | (0.55 | ) | (0.29 | ) | (0.35 | ) | |||||||||||||
Net asset value, end of period | $ | 14.93 | $ | 17.84 | $ | 17.09 | $ | 9.50 | $ | 10.44 | |||||||||||||
Total Return(b) | 25.77 | % | 24.45 | % | 86.62 | % | (6.30 | )% | (7.57 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 986,602 | $ | 1,517,223 | $ | 1,592,464 | $ | 536,648 | $ | 253,612 | |||||||||||||
Net expenses to average daily net assets | 0.75 | % | 0.75 | % | 0.75 | % | 0.75 | % | 0.75 | % | |||||||||||||
Net investment income to average daily net assets | 2.01 | % | 1.75 | % | 1.60 | % | 1.65 | % | 2.02 | % | |||||||||||||
Portfolio turnover rate | 49 | % | 53 | % | 46 | % | 44 | % | 34 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | % | 0.11 | % | 0.13 | % | 0.17 | % | 0.22 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.07 | $ | 0.08 | $ | 0.04 | $ | 0.06 | $ | 0.05 |
(a) The distribution from net realized gains was less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
31
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the S&P/Citigroup Extended Market Index ("EMI") World ex-U.S. Index.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after the close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
32
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the
33
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
34
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail
35
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, the Fund had loaned securities having a market value of $122,109,730, collateralized by cash in the amount of $133,661,574, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to/from the Brazilian market. The CPMF tax has been included in the net realized gain (loss) on investments throughout the period. During the year ended February 28, 2006, the Fund incurred $11,701 in CPMF tax which is included in net realized gain (loss) in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $60,424,505 and $105,921,114, respectively and long-term capital gains – $328,590,124 and $157,945,046, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $31,984,898 and $91,719,713 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions.
36
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 866,739,100 | $ | 270,593,847 | $ | (21,117,948 | ) | $ | 249,475,899 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to passive foreign investment company transactions and redemption in-kind transactions. Net gains resulting from in-kind transactions were $6,787,837. The financial highlights exclude these adjustments.
Distributions In Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 9,640,705 | $ | (16,254,618 | ) | $ | 6,613,913 |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.60% of the amount invested or redeemed. If the Manager determines that any portion of a cash
37
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $140,159 and $2,413,955 in purchase premiums and $4,555,078 and $5,063,202 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.60% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $12,711 and $7,029, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $546,070,996 and $1,247,188,184, respectively.
38
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related parties
As of February 28, 2006, 14.1% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
As of February 28, 2006, 1.7% of the Fund's shares were held by fourteen related parties comprised of certain GMO employee accounts, and 18.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,353,389 | $ | 39,930,302 | 35,119,471 | $ | 600,052,388 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 26,493,616 | 380,866,673 | 14,064,629 | 234,243,805 | |||||||||||||||
Shares repurchased | (47,804,290 | ) | (807,704,359 | ) | (57,321,117 | ) | (978,496,824 | ) | |||||||||||
Purchase premiums and redemption fees | — | 4,695,237 | — | 7,477,157 | |||||||||||||||
Net increase (decrease) | (18,957,285 | ) | $ | (382,212,147 | ) | (8,137,017 | ) | $ | (136,723,474 | ) |
39
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO International Small Companies Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Small Companies Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
40
GMO International Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.75 | % | $ | 1,000.00 | $ | 1,187.80 | $ | 4.07 | ||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.08 | $ | 3.76 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
41
GMO International Small Companies Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $2,667,160 and recognized foreign source income of $31,262,781.
The Fund's distributions to shareholders include $328,590,124 from long-term capital gains.
For taxable, non-corporate shareholders, 39.52% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, of $1,432,506 and $29,033,658, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
42
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
43
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
44
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
45
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
46
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO World Opportunity Overlay Fund returned +0.2% for the fiscal year ended February 28, 2006, as compared to +3.7% for the JPMorgan U.S. 3-Month Cash Index.
The Fund underperformed the benchmark during the fiscal year by 3.5%. The Fund is comprised of overlay strategies involving investments in derivative instruments (largely interest-rate swaps and exchange-traded futures). These derivative instruments are backed by a collateral pool consisting of investment-grade, short-duration fixed income instruments and mostly asset-backed securities. During the time period, the overlay strategies detracted 3.3%. In total, cash management detracted 0.2%.
The Fund's duration at fiscal year-end was 0.1 years.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligation(s) | 97.7 | % | |||||
Short-Term Investment(s) | 2.0 | ||||||
Mutual Funds | 1.8 | ||||||
Written Options | 0.2 | ||||||
Put Options Purchased | 0.0 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | (0.2 | ) | |||||
Swaps | (0.5 | ) | |||||
Other | (1.0 | ) | |||||
100.0 | % |
1
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 97.7% | |||||||||||
Asset-Backed Securities — 92.3% | |||||||||||
Auto Financing — 9.9% | |||||||||||
7,000,000 | ARG Funding Corp., Series 05-2A, Class A3, 144A, Variable Rate, 1 mo. LIBOR + .14%, 4.71%, due 05/20/10 | 7,024,066 | |||||||||
4,000,000 | Daimler Chrysler Auto Trust, Series 06-A, Class A1, 144A, 4.79%, due 03/08/07 | 4,000,000 | |||||||||
7,000,000 | Daimler Chrysler Master Owner Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 4.60%, due 01/15/09 | 6,994,400 | |||||||||
5,750,000 | Daimler Chrysler Master Owner Trust, Series 04-B, Class A, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 08/17/09 | 5,753,594 | |||||||||
6,300,000 | Ford Credit Auto Owner Trust, Series 06-A, Class A2B, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 09/15/08 | 6,278,344 | |||||||||
10,000,000 | Ford Credit Floorplan Master Owner Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .15%, 4.72%, due 05/15/10 | 9,989,402 | |||||||||
3,482,950 | Franklin Auto Trust, Series 05-1, Class A1, 4.50%, due 12/20/06 | 3,480,512 | |||||||||
4,000,000 | GE Dealer Floorplan Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 04/20/10 | 4,000,640 | |||||||||
101,832 | Honda Auto Receivables Owner Trust, Series 05-3, Class A1, 3.42%, due 06/19/06 | 101,679 | |||||||||
1,506,219 | Honda Auto Receivables Owner Trust, Series 05-6, Class A1, 4.51%, due 12/18/06 | 1,505,089 | |||||||||
7,000,000 | Nissan Master Owner Trust Receivables, Series 03-A, Class A1, Variable Rate, 1 mo. LIBOR + .06%, 4.63%, due 09/15/08 | 6,995,800 | |||||||||
8,000,000 | Nissan Master Owner Trust Receivables, Series 05-A, Class A, Variable Rate, 1 mo. LIBOR + .03%, 4.60%, due 07/15/10 | 8,000,000 | |||||||||
10,000,000 | Superior Wholesale Inventory Financing Trust, Series 04-A10, Class A, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 09/15/11 | 9,931,000 | |||||||||
8,000,000 | Superior Wholesale Inventory Financing Trust, Series 05, Class A, Variable Rate, 1 mo. LIBOR +.18%, 4.75%, due 06/15/10 | 7,979,200 | |||||||||
8,000,000 | Truck Retail Installment Paper Corp., Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR +.27%, 4.84%, due 12/15/16 | 7,993,760 | |||||||||
5,000,000 | Wheels SPV, Llc, Series 05-B, Class A1, Variable Rate, 1 mo. LIBOR + .08%, 4.65%, due 06/10/10 | 4,998,700 | |||||||||
73,785 | World Omni Auto Receivables Trust, Series 05-B, Class A1, 3.83%, due 08/21/06 | 773,477 |
See accompanying notes to the financial statements.
2
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Auto Financing — continued | |||||||||||
4,000,000 | World Omni Auto Receivables Trust, Series 06-A, Class A1, 4.85%, due 03/15/07 | 4,000,000 | |||||||||
99,799,663 | |||||||||||
Business Loans — 6.7% | |||||||||||
4,387,845 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .37%, 4.95%, due 01/25/35 | 4,389,601 | |||||||||
5,961,696 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, Variable Rate, 1 mo. LIBOR + .39%, 4.97%, due 01/25/36 | 5,958,118 | |||||||||
1,550,751 | Capitalsource Commercial Loan Trust, Series 05-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .09%, 4.66%, due 03/22/10 | 1,549,511 | |||||||||
9,000,000 | CNH Wholesale Master Note Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 06/15/11 | 9,000,000 | |||||||||
7,464,270 | GE Business Loan Trust, Series 05-1A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .07%, 4.64%, due 06/15/14 | 7,459,773 | |||||||||
2,984,036 | GE Business Loan Trust, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .24%, 4.81%, due 11/15/33 | 2,987,766 | |||||||||
77,112 | GE Commercial Equipment Financing Llc, Series 05-1, Class A1, 3.42%, due 06/20/06 | 77,227 | |||||||||
6,000,000 | GE Commercial Equipment Financing Llc, Series 05-1, Class A3B, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 03/20/09 | 6,000,720 | |||||||||
5,070,241 | Lehman Brothers Small Balance Commercial, Series 05-1, Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 02/25/30 | 5,070,241 | |||||||||
3,432,121 | Lehman Brothers Small Balance Commercial, Series 05-2, Class 1A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 09/25/30 | 3,433,193 | |||||||||
3,069,223 | Marlin Leasing Receivables Llc, Series 05-1A, Class A1, 144A, 4.05%, due 08/15/06 | 3,065,632 | |||||||||
5,000,000 | Navistar Financial Dealer Note Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 02/25/13 | 4,996,000 | |||||||||
14,000,000 | Textron Financial Floorplan Master Note, Series 05-1A, Class A, 144A, Variable Rate, 1 mo. LIBOR +.12%, 4.69%, due 05/13/10 | 14,000,000 | |||||||||
67,987,782 | |||||||||||
CMBS — 2.4% | |||||||||||
5,898,283 | Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PW10, Class A1, 5.09%, due 12/11/40 | 5,885,380 |
See accompanying notes to the financial statements.
3
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
CMBS — continued | |||||||||||
7,000,000 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 07/15/44 | 6,994,400 | |||||||||
7,000,000 | GE Capital Commercial Mortgage Corp, Series 05-C4, Class A2, 5.31%, due 11/10/45 | 7,005,469 | |||||||||
4,123,638 | Greenwich Capital Commercial Funding Corp., Series 05-FL3A, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .20%, 4.86%, due 10/05/20 | 4,124,926 | |||||||||
24,010,175 | |||||||||||
CMBS Collateralized Debt Obligations — 0.7% | |||||||||||
7,000,000 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, Variable Rate, 1 mo. LIBOR + .32%, 4.90%, due 08/26/30 | 7,000,000 | |||||||||
Credit Cards — 18.4% | |||||||||||
10,000,000 | Advanta Business Card Master Trust, Series 03-B, Class A, Variable Rate, 1 mo. LIBOR + .35%,, 4.92%, due 12/22/08 | 10,010,500 | |||||||||
6,500,000 | Advanta Business Card Master Trust, Series 05-A1, Class A1, Variable Rate, 1 mo. LIBOR + .07%, 4.64%, due 04/20/11 | 6,502,080 | |||||||||
2,000,000 | Advanta Business Card Master Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR + .06%, 4.63%, due 04/20/12 | 1,999,400 | |||||||||
7,000,000 | American Express Credit Account Master Trust, Series 01-7, Class A, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 02/16/09 | 7,003,641 | |||||||||
5,000,000 | American Express Credit Account Master Trust, Series 05-3, Class A, Variable Rate, 1 mo. LIBOR, 4.57%, due 06/16/08 | 4,995,500 | |||||||||
10,000,000 | American Express Credit Account Master Trust, Series 05-5, Class A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 02/15/13 | 10,001,600 | |||||||||
6,000,000 | Arran, Series 2005-A, Class A, Variable Rate, 1 mo. LIBOR + .02%, 4.59%, due 12/15/10 | 5,999,400 | |||||||||
5,760,000 | Bank One Issuance Trust Series, Series 03-A6, Class A6, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 02/15/11 | 5,775,972 | |||||||||
1,000,000 | Bank One Issuance Trust, Series 03-A10, Class A10, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 06/15/11 | 1,001,400 | |||||||||
3,000,000 | Bank One Issuance Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 12/15/10 | 3,004,200 | |||||||||
5,530,000 | Capital One Mulit-Asset Execution Trust, Series 03-A3, Class A3, Variable Rate, 1 mo. LIBOR + .25%, 4.82%, due 05/16/11 | 5,560,242 |
See accompanying notes to the financial statements.
4
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Credit Cards — continued | |||||||||||
5,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, Variable Rate, 3 mo. LIBOR + .15%, 4.90%, due 06/16/14 | 5,022,650 | |||||||||
7,875,000 | Chase Credit Card Master Trust, Series 03-3, Class A, Variable Rate, 1 mo. LIBOR +.11%, 4.68%, due 10/15/10 | 7,892,167 | |||||||||
4,000,000 | Citibank Credit Card Issuance Trust, Series 01-A1, Class A1, Variable Rate, 3 mo. LIBOR + .17%, 4.88%, due 02/07/10 | 4,010,975 | |||||||||
7,400,000 | Citibank Credit Card Issuance Trust, Series 03-A4, Class A4, Variable Rate, 3 mo. LIBOR + .07%, 4.57%, due 03/20/09 | 7,406,359 | |||||||||
9,750,000 | Discover Card Master Trust I, Series 03-2, Class A, Variable Rate, 1 mo. LIBOR + .13%, 4.70%, due 08/15/10 | 9,774,375 | |||||||||
10,000,000 | Discover Card Master Trust I, Series 04-2, Class A2, Variable Rate, 1 mo. LIBOR + .07%, 4.64%, due 05/15/12 | 10,011,300 | |||||||||
4,000,000 | Discover Card Master Trust I, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 09/16/10 | 4,001,094 | |||||||||
7,500,000 | First USA Credit Card Master Trust, Series 97-8, Class A, Variable Rate, 1 mo. LIBOR + .15%, 4.72%, due 05/17/10 | 7,516,992 | |||||||||
7,000,000 | GE Capital Credit Card Master Note Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 03/15/13 | 7,004,375 | |||||||||
7,000,000 | Gracechurch Card Funding Plc, Series 3, Class A, Variable Rate, 1 mo. LIBOR + .11%, 4.68%, due 03/15/10 | 7,013,160 | |||||||||
5,000,000 | Gracechurch Card Funding Plc, Series 4, Class A, Variable Rate, 1 mo. LIBOR + .05%, 4.62%, due 06/15/08 | 5,000,700 | |||||||||
7,000,000 | Gracechurch Card Funding Plc, Series 8, Class A, Variable Rate, 1 mo. LIBOR + .01%, 4.58%, due 06/15/10 | 6,999,978 | |||||||||
5,500,000 | Household Private Label Credit Card Master Note Trust I, Series 02-2, Class A, Variable Rate, 1 mo. LIBOR + .17%, 4.74%, due 01/18/11 | 5,504,950 | |||||||||
5,000,000 | MBNA Credit Card Master Note Trust, Series 05-A5, Class A5, Variable Rate, 1 mo. LIBOR, 4.57%, due 12/15/10 | 5,000,000 | |||||||||
7,500,000 | MBNA Master Credit Card Trust, Series 04-A8, Class A8, Variable Rate, 1 mo. LIBOR + .15%, 4.72%, due 01/15/14 | 7,529,144 | |||||||||
7,000,000 | Pillar Funding Plc, Series 04-2, Class A, 144A, Variable Rate, 3 mo. LIBOR + .14%, 4.63%, due 09/15/11 | 7,010,565 | |||||||||
4,400,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 03/15/13 | 4,409,238 | |||||||||
7,000,000 | World Financial Network Credit Card Master Trust, Series 04-A, Class B, Variable Rate, 1 mo. LIBOR + .10%, 4.67%, due 07/15/10 | 6,998,460 | |||||||||
6,640,000 | World Financial Network Credit Card Master Trust, Series 2003-A, Class A2, Variable Rate, 1 mo. LIBOR + .37%, 4.94%, due 05/15/12 | 6,684,612 | |||||||||
186,645,029 |
See accompanying notes to the financial statements.
5
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Emerging Markets Collateralized Debt Obligations — 0.4% | |||||||||||
4,000,000 | Santiago CDO Ltd., Series 05-1A, Class A, 144A, Variable Rate, 6 mo. LIBOR + .40%, 4.75%, due 04/18/17 | 4,006,400 | |||||||||
Equipment Leases — 0.9% | |||||||||||
7,000,000 | CNH Equipment Trust, Series 05-A, Class A4A, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 06/15/12 | 7,001,050 | |||||||||
1,851,867 | GE Equipment Small Ticket Llc, Series 05-2A, Class A1, 144A, 4.56%, due 12/22/06 | 1,850,571 | |||||||||
8,851,621 | |||||||||||
Insurance Premiums — 1.0% | |||||||||||
7,000,000 | AICCO Premium Finance Master Trust, Series 04-1A, Class A, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 11/17/08 | 7,009,023 | |||||||||
3,000,000 | AICCO Premium Finance Master Trust, Series 05-1, Class A, Variable Rate, 1 mo. LIBOR + .08%, 4.65%, due 04/15/10 | 2,998,200 | |||||||||
10,007,223 | |||||||||||
Insured Auto Financing — 3.4% | |||||||||||
5,000,000 | Aesop Funding II Llc, Series 05-1A, Class A3, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 04/20/10 | 4,967,500 | |||||||||
7,000,000 | Aesop Funding II Llc, Series 06-1, Class A1, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .22%, 4.75%, due 03/20/12 | 6,997,550 | |||||||||
6,000,000 | AmeriCredit Automobile Receivables Trust, Series 05-BM, Class A4, MBIA, Variable Rate, 1 mo. LIBOR +.08%, 4.65%, due 05/06/12 | 6,004,687 | |||||||||
260,878 | AmeriCredit Automobile Receivables Trust, Series 05-CF, Class A1, FSA, 3.84%, due 09/06/06 | 260,860 | |||||||||
7,000,000 | Capital One Auto Finance Trust, Series 05-A, Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .05%, 4.62%, due 12/15/11 | 6,995,310 | |||||||||
2,000,000 | Hertz Vehicle Financing Llc, Series 05-2A, Class A5, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 11/25/11 | 2,001,641 | |||||||||
7,000,000 | Rental Car Finance Corp., Series 04-1A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 06/25/09 | 7,011,340 | |||||||||
34,238,888 |
See accompanying notes to the financial statements.
6
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Insured Credit Cards — 0.7% | |||||||||||
7,000,000 | Cabela's Master Credit Card Trust, Series 04-2A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .12%, 4.69%, due 03/15/11 | 7,014,210 | |||||||||
Insured Residential Mortgage-Backed Securities (United States) — 1.1% | |||||||||||
8,000,000 | GMAC Mortgage Corp. Loan Trust, Series 05-HE3, Class A1, AMBAC, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 02/25/36 | 8,001,250 | |||||||||
3,595,814 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, Variable Rate, 1 mo. LIBOR + .19%, 4.77%, due 11/25/35 | 3,595,814 | |||||||||
11,597,064 | |||||||||||
Insured Time Share — 0.5% | |||||||||||
5,185,991 | Cendant Timeshare Receivables Funding Llc, Series 05-1A, Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .18%, 4.75%, due 05/20/17 | 5,185,991 | |||||||||
Investment Grade Corporate Collateralized Debt Obligations — 3.5% | |||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 04-12, Class A, 144A, Variable Rate, 3 mo. LIBOR + .60%, 5.31%, due 08/05/09 | 2,003,825 | |||||||||
5,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class II, 144A, Variable Rate, 3 mo. LIBOR + .65%, 5.15%, due 12/20/09 | 5,009,668 | |||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class III, 144A, Variable Rate, 3 mo. LIBOR + .75%, 5.25%, due 12/20/09 | 2,993,400 | |||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 04-16, Class I, 144A, Variable Rate, 3 mo. LIBOR + .40%, 5.11%, due 08/05/09 | 6,007,500 | |||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 05-10, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .52%, 5.02%, due 03/20/10 | 3,000,000 | |||||||||
6,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, Variable Rate, 3 mo. LIBOR + .40%, 4.90%, due 12/20/10 | 6,007,500 | |||||||||
3,000,000 | Morgan Stanley ACES SPC, Series 05-2A, Class A, 144A, Variable Rate, 3 mo. LIBOR + .45%, 4.95%, due 03/20/10 | 3,000,000 | |||||||||
7,000,000 | Salisbury International Investments Ltd., Series E, MTN, Variable Rate, 3 mo. LIBOR + .42%, 4.92%, due 06/22/10 | 6,968,500 | |||||||||
34,990,393 |
See accompanying notes to the financial statements.
7
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Other — 0.8% | |||||||||||
2,000,000 | Ensec Home Finance Pool Ltd., Series 05-R1A, 144A, Variable Rate, 1 mo. LIBOR + .20%, 4.77%, due 05/15/14 | 2,001,502 | |||||||||
6,500,000 | TIB Card Receivables Fund, 144A, FGIC, Variable Rate, 4 mo. LIBOR + .25%, 4.79%, due 01/05/14 | 6,496,100 | |||||||||
8,497,602 | |||||||||||
Rate Reduction Bonds — 1.7% | |||||||||||
5,000,000 | Massachusetts RRB Special Purpose Trust, Series 05-1, Class A3, 4.13%, due 09/15/13 | 4,835,320 | |||||||||
5,000,000 | PG&E Energy Recovery Funding Llc, Series 05-1, Class A4, 4.37%, due 06/25/14 | 4,828,870 | |||||||||
8,000,000 | PSE&G Transition Funding Llc, Series 01-1, Class A4, Variable Rate, 3 mo. LIBOR + .30%, 4.79%, due 06/15/11 | 8,038,692 | |||||||||
17,702,882 | |||||||||||
Residential Asset-Backed Securities (United States) — 23.8% | |||||||||||
3,688,975 | ACE Securities Corp, Series 05-SDI, Class A1, Variable Rate, 1 mo. LIBOR + .40%, 4.98%, due 11/25/50 | 3,693,328 | |||||||||
7,000,000 | ACE Securities Corp., Series 05-AG1, Class A2B, Variable Rate, 1 mo. LIBOR + .21%, 4.79%, due 08/25/35 | 7,001,050 | |||||||||
1,534,000 | ACE Securities Corp., Series 05-ASP1, Class A2C, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 09/25/35 | 1,535,473 | |||||||||
7,593,438 | ACE Securities Corp., Series 06-SL1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 09/25/35 | 7,594,653 | |||||||||
7,000,000 | Aegis Asset Backed Securities Trust, Series 04-6, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 03/25/25 | 7,008,750 | |||||||||
4,590,897 | Aegis Asset Backed Securities Trust, Series 05-3, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 08/25/35 | 4,591,077 | |||||||||
3,000,000 | Aegis Asset Backed Securities Trust, Series 05-5 , Class 1A2, Variable Rate, 1 mo. LIBOR + .18%, 4.76%, due 12/25/35 | 3,004,230 | |||||||||
7,000,000 | Argent Securities, Inc., Series 06-W2, Class A2B, Variable Rate, 1 mo. LIBOR + .19%, 4.77%, due 03/25/36 | 7,000,000 | |||||||||
6,500,000 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 5.11%, due 02/28/40 | 6,513,203 | |||||||||
933,303 | Bear Stearns Asset Backed Securities Inc, Series 04-HE4, Class A1, Variable Rate, 1 mo. LIBOR + .18%, 4.76%, due 06/25/31 | 933,359 |
See accompanying notes to the financial statements.
8
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
1,000,000 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1B, Variable Rate, 1 mo. LIBOR + .15%, 4.73%, due 05/25/35 | 999,200 | |||||||||
6,000,000 | Carrington Mortgage Loan Trust, Series 05-OPT2, Class A1C, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 05/25/35 | 5,995,200 | |||||||||
56,643 | Centex Home Equity, Series 04-C, Class AV3, Variable Rate, 1 mo. LIBOR + .13%, 4.71%, due 11/25/28 | 56,644 | |||||||||
1,600,000 | Centex Home Equity, Series 05-A, Class AV2, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 07/25/34 | 1,600,000 | |||||||||
1,200,000 | Centex Home Equity, Series 05-A, Class AV3, Variable Rate, 1 mo. LIBOR + .34%, 4.92%, due 01/25/35 | 1,201,500 | |||||||||
8,000,000 | Centex Home Equity, Series 05-C, Class AV3, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 06/25/35 | 8,010,000 | |||||||||
1,120,735 | Citifinancial Mortgage Securities, Inc., Series 04-1, Class AF1, Variable Rate, 1 mo. LIBOR + .09%, 4.67%, due 04/25/34 | 1,120,063 | |||||||||
1,830,405 | Citigroup Mortgage Loan Trust, Inc, Series 05-HE1, Class A3A, Variable Rate, 1 mo. LIBOR + .09%, 4.67%, due 05/25/35 | 1,829,307 | |||||||||
4,737,621 | Countrywide Asset-Backed Certificates, Series 04-14, Class A2, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 06/25/35 | 4,740,599 | |||||||||
1,401,030 | Countrywide Asset-Backed Certificates, Series 05-4, Class AF1, Variable Rate, 1 mo. LIBOR + .13%, 4.71%, due 10/25/35 | 1,401,043 | |||||||||
550,988 | Finance America Mortgage Loan Trust, Series 04-1, Class 2A1, Variable Rate, 1 mo. LIBOR + .17%, 4.75%, due 06/25/34 | 551,005 | |||||||||
9,000,000 | First Franklin Mortgage Loan Asset Backed Certificates, Series 05-FFH2, Class A2, 144A, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 04/25/35 | 9,005,625 | |||||||||
6,000,000 | Fremont Home Loan Trust, Series 05-B, Class 2A2, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 04/25/35 | 5,997,123 | |||||||||
9,000,000 | Fremont Home Loan Trust, Series 05-C, Class 2A2, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 07/25/35 | 9,002,812 | |||||||||
7,000,000 | GE-WMC Mortgage Securities, Series 05-2, Class A2B, Variable Rate, 1 mo. LIBOR + .17%, 4.75%, due 12/25/35 | 7,005,469 | |||||||||
7,000,000 | Greenpoint Mortgage Funding Trust, Series 05-HE1, Class A2, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 09/25/34 | 7,000,000 | |||||||||
3,000,000 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 07/25/30 | 3,002,813 | |||||||||
10,500,000 | GSAMP Trust, Series 05-HE3, Class A2B, Variable Rate, 1 mo. LIBOR + 0.22%, 4.80%, due 06/25/35 | 10,495,342 | |||||||||
3,624,781 | Household Home Equity Loan Trust, Series 05-2, Class A2, Variable Rate, 1 mo. LIBOR + .31%, 4.88%, due 01/20/35 | 3,631,577 |
See accompanying notes to the financial statements.
9
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
2,533,301 | Household Home Equity Loan Trust, Series 05-3, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 4.86%, due 01/20/35 | 2,536,764 | |||||||||
302,643 | Indy Mac Home Equity Loan Asset-Backed Trust, Series 04-C, Class 2A1, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 03/25/35 | 302,646 | |||||||||
2,100,000 | Master Asset Backed Securities Trust, Series 05-FRE1, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 10/25/35 | 2,099,790 | |||||||||
2,064,362 | Master Asset Backed Securities Trust, Series 05-HE1, Class A1, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 05/25/35 | 2,064,156 | |||||||||
4,000,000 | Master Asset Backed Securities Trust, Series 06-HE1, Class A1, Variable Rate, 1 mo. LIBOR + .08%, 4.66%, due 01/25/36 | 4,000,000 | |||||||||
7,500,000 | Master Second Lien Trust, Series 06-1, Class A, Variable Rate, 1 mo. LIBOR + .16%, 4.73%, due 03/25/36 | 7,494,000 | |||||||||
4,678,898 | New Century Home Equity Loan Trust, Series 05-3, Class A2A, Variable Rate, 1 mo. LIBOR + .09%, 4.67%, due 07/25/35 | 4,680,541 | |||||||||
4,500,000 | Nomura Home Equity Loan, Inc., Series 05-FM1, Class 2A2, Variable Rate, 1 mo. LIBOR + .22%, 4.80%, due 05/25/35 | 4,500,000 | |||||||||
8,000,000 | Option One Mortgage Loan Trust, Series 05-3, Class A4, Variable Rate, 1 mo. LIBOR + .25%, 4.83%, due 08/25/35 | 8,000,000 | |||||||||
2,143,487 | Ownit Mortgage Loan Asset Backed Certificates, Series 05-2, Class A2A, Variable Rate, 1 mo. LIBOR + .11%, 4.69%, due 03/25/36 | 2,143,487 | |||||||||
9,000,000 | Park Place Securities, Inc, Series 05-WCW2, Class A2B, Variable Rate, 1 mo. LIBOR + .15%, 4.73%, due 07/25/07 | 8,991,000 | |||||||||
8,000,000 | Park Place Securities, Inc, Series 05-WCWI, Class A3B, Variable Rate, 1 mo. LIBOR + .16%, 4.74%, due 09/25/35 | 7,997,500 | |||||||||
8,000,000 | People's Choice Home Loan Securities Trust, Series 05-3, Class 1A2, Variable Rate, 1 mo. LIBOR + .27%, 4.85%, due 08/25/35 | 8,010,000 | |||||||||
7,000,000 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, Variable Rate, 1 mo. LIBOR + .26%, 4.84%, due 12/25/35 | 7,012,040 | |||||||||
688,301 | Quest Trust, Series 05-X1, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .18%, 4.76%, due 03/25/35 | 687,957 | |||||||||
3,500,298 | RAAC, Series 05-RP3, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 05/29/39 | 3,499,003 | |||||||||
693,515 | Residential Asset Mortgage Products, Inc, Series 04-RZ3, Class AII1, Variable Rate, 1 mo. LIBOR + .17%, 4.75%, due 06/25/24 | 693,515 | |||||||||
4,000,000 | Residential Asset Mortgage Products, Inc., Series 05-RS4, Class A3, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 04/25/35 | 4,003,125 | |||||||||
7,000,000 | Residential Asset Securities Corp, Series 04-KS12, Class AI2, Variable Rate, 1 mo. LIBOR + .23%, 4.81%, due 01/25/35 | 7,000,000 |
See accompanying notes to the financial statements.
10
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
1,927,042 | Security National Mortgage Loan Trust, Series 05-2A, Class A1, 144A, Variable Rate, 1 mo. LIBOR + .29%, 4.87%, due 02/25/36 | 1,928,247 | |||||||||
3,500,000 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, Variable Rate, 1 mo. LIBOR + .26%, 4.84%, due 10/25/35 | 3,506,020 | |||||||||
1,138,619 | Specialty Underwriting & Residential Finance, Series 05-BC2, Class A2A, Variable Rate, 1 mo. LIBOR + .10%, 4.68%, due 12/25/35 | 1,138,441 | |||||||||
3,000,000 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 01/25/36 | 3,000,469 | |||||||||
7,000,000 | Structured Asset Securities Corp, Series 05-WF1, Class A2, Variable Rate, 1 mo. LIBOR + .20%, 4.78%, due 02/25/35 | 7,006,566 | |||||||||
7,000,000 | Structured Asset Securities Corp., Series 05-S6, Class A2, Variable Rate, 1 mo. LIBOR + .29%, 4.87%, due 11/25/35 | 7,010,941 | |||||||||
240,826,653 | |||||||||||
Residential Mortgage-Backed Securities (Australian) — 3.6% | |||||||||||
4,530,441 | Australian Mortgage Securities II, G3 A1A, Variable Rate, 3 mo. LIBOR + .21%, 4.76%, due 01/10/35 | 4,540,318 | |||||||||
5,354,610 | Crusade Global Trust, Series 04-2, Class A1, Variable Rate, 3 mo. LIBOR + .13%, 4.90%, due 11/19/37 | 5,361,402 | |||||||||
7,000,000 | Crusade Global Trust, Series 06-1, Class A1, 144A, Variable Rate, 3 mo. LIBOR + .06%, 4.74%, due 07/20/38 | 7,000,000 | |||||||||
6,560,972 | Interstar Millennium Trust, Series 05-1G, Class A, Variable Rate, 3 mo. LIBOR + .12%, 4.58%, due 12/08/36 | 6,557,560 | |||||||||
5,041,347 | Medallion Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .08%, 4.80%, due 05/10/36 | 5,040,238 | |||||||||
4,446,599 | National RMBS Trust, Series 04-1, Class A1, Variable Rate, 3 mo. LIBOR + .11%, 4.61%, due 03/20/34 | 4,449,934 | |||||||||
3,570,618 | Westpac Securitization Trust, Series 05-1G, Class A1, Variable Rate, 3 mo. LIBOR + .07%, 4.57%, due 03/23/36 | 3,568,797 | |||||||||
36,518,249 | |||||||||||
Residential Mortgage-Backed Securities (European) — 5.6% | |||||||||||
4,000,000 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 4.60%, due 10/11/41 | 3,998,687 | |||||||||
3,428,570 | Granite Master Issuer Plc, Series 05-1, Class A1, Variable Rate, 1 mo. LIBOR + .04%, 4.61%, due 12/20/19 | 3,428,560 | |||||||||
5,000,000 | Granite Master Issuer Plc, Series 05-2, Class A4, Variable Rate, 3 mo. LIBOR + .08%, 4.85%, due 12/20/54 | 5,002,344 |
See accompanying notes to the financial statements.
11
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||
6,191,710 | Leek Finance Plc, Series 15A, Class AB, 144A, Variable Rate, 3 mo. LIBOR + .14%, 4.64%, due 03/21/37 | 6,188,614 | |||||||||
10,000,000 | Leek Finance Plc, Series 16A, Class A2B, 144A, Variable Rate, 3 mo. LIBOR + .16%, 4.46%, due 09/21/37 | 10,006,700 | |||||||||
7,000,000 | Paragon Mortgages Plc, Series 6A, Class A2A, 144A, Variable Rate, 3 mo. LIBOR + .35%, 4.84%, due 03/15/30 | 7,006,895 | |||||||||
3,550,000 | Permanent Financing Plc, Series 6, Class 2A, Variable Rate, 3 mo. LIBOR + .09%, 4.57%, due 12/10/11 | 3,546,095 | |||||||||
5,000,000 | Permanent Financing Plc, Series 7, Class 2A, Variable Rate, 3 mo. LIBOR + .04%, 4.52%, due 09/10/14 | 5,000,000 | |||||||||
6,000,000 | Permanent Financing Plc, Series 8, Class 2A, Variable Rate, 3 mo. LIBOR + .07%, 4.55%, due 06/10/14 | 5,995,200 | |||||||||
6,124,440 | Residential Mortgage Securities, Series 20A, Class A1B, 144A, Variable Rate, 3 mo. LIBOR + .07%, 4.79%, due 08/10/30 | 6,120,612 | |||||||||
56,293,707 | |||||||||||
Student Loans — 7.2% | |||||||||||
5,000,000 | College Loan Corp. Trust, Series 04-1, Class A2, Variable Rate, 3 mo. LIBOR + .11%, 4.73%, due 04/25/16 | 5,006,500 | |||||||||
2,000,000 | College Loan Corp. Trust, Series 05-1, Class A1, Variable Rate, 3 mo. LIBOR + .03%, 4.65%, due 01/25/14 | 1,999,400 | |||||||||
3,529,659 | Collegiate Funding Services Education Loan Trust I, Series 05-A, Class A1, Variable Rate, 3 mo. LIBOR + .02%, 4.54%, due 09/29/14 | 3,529,521 | |||||||||
4,500,000 | Keycorp Student Loan Trust, Series 05-A, Class 2A1, Variable Rate, 3 mo. LIBOR + .05%, 4.24%, due 09/27/21 | 4,497,930 | |||||||||
4,365,881 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, Variable Rate, 3 mo. LIBOR +.04%, 4.54%, due 06/20/15 | 4,363,261 | |||||||||
8,000,000 | National Collegiate Student Loan Trust, Series 05-2, Class A2, Variable Rate, 1 mo. LIBOR + .15%, 4.73%, due 02/25/26 | 7,985,200 | |||||||||
7,000,000 | Nelnet Educational Loan Funding Corp., Series 04-2A, Class A3, Variable Rate, 3 mo. LIBOR + .10%, 4.90%, due 11/25/15 | 7,004,060 | |||||||||
9,000,000 | Nelnet Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .05%, 4.55%, due 06/22/17 | 9,000,000 | |||||||||
5,000,000 | SLM Student Loan Trust, Series 05-3, Class A3, Variable Rate, 3 mo. LIBOR + .03%, 4.65%, due 07/25/16 | 4,992,861 | |||||||||
5,998,593 | SLM Student Loan Trust, Series 05-4, Class A1, Variable Rate, 3 mo. LIBOR +.01%, 4.63%, due 10/26/15 | 5,994,393 |
See accompanying notes to the financial statements.
12
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) | Description | Value ($) | |||||||||
Student Loans — continued | |||||||||||
9,000,000 | SLM Student Loan Trust, Series 05-6, Class A2, Variable Rate, 3 mo. LIBOR, 4.62%, due 07/25/16 | 8,997,188 | |||||||||
4,741,626 | SLM Student Loan Trust, Series 05-7, Class A1, Variable Rate, 3 mo. LIBOR, 4.62%, due 01/25/18 | 4,675,954 | |||||||||
5,000,000 | SLM Student Loan Trust, Series 06-1, Class A1, Variable Rate, 3 mo. LIBOR - .02%, 4.61%, due 01/25/12 | 5,000,000 | |||||||||
73,046,268 | |||||||||||
Total Asset-Backed Securities | 934,219,800 | ||||||||||
Corporate Debt — 0.5% | |||||||||||
5,000,000 | TIAA Global Markets, 144A, Variable Rate, 3 mo. LIBOR + .10%, 4.67%, due 01/12/11 | 5,002,500 | |||||||||
U.S. Government — 4.9% | |||||||||||
24,366,800 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (a)(b) | 25,227,253 | |||||||||
25,000,000 | U.S. Treasury Note, 2.50%, due 10/31/06 (b) | 24,632,813 | |||||||||
49,860,066 | |||||||||||
TOTAL DEBT OBLIGATION(S) (COST $990,578,389) | 989,082,366 | ||||||||||
Principal Amount | Description | Value ($) | |||||||||
CALL OPTIONS PURCHASED — 0.0% | |||||||||||
Options on Interest Rate Swaps — 0.0% | |||||||||||
USD | 71,000,000 | Interest Rate Swaption, Expires 03/22/06, Strike 5.08% | 386,472 | ||||||||
TOTAL CALL OPTIONS PURCHASED (COST $415,350) | 386,472 | ||||||||||
PUT OPTIONS PURCHASED — 0.0% | |||||||||||
Options on Interest Rate Swaps — 0.0% | |||||||||||
USD | 71,000,000 | Interest Rate Swaption, Expires 03/22/06, Strike 5.08% | 358,422 | ||||||||
TOTAL PUT OPTIONS PURCHASED (COST $415,350) | 358,422 |
See accompanying notes to the financial statements.
13
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($)/ Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 1.8% | |||||||||||
17,954,476 | Merrimac Cash Series, Premium Class | 17,954,476 | |||||||||
TOTAL MUTUAL FUNDS (COST $17,954,476) | 17,954,476 | ||||||||||
SHORT-TERM INVESTMENT(S) — 2.0% | |||||||||||
20,000,000 | Federal Farm Credit Bank, 0.00% due 03/01/06 (c) | 20,000,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $20,000,000) | 20,000,000 | ||||||||||
TOTAL INVESTMENTS — 101.5% (Cost $1,029,363,565) | 1,027,781,736 | ||||||||||
Other Assets and Liabilities (net) — (1.5%) | (15,504,346 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,012,277,390 |
See accompanying notes to the financial statements.
14
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3/02/06 | SEK | 187,900 | $ | 23,746 | $ | 107 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3,350 | Eurodollar 90 Day | March 2007 | $ | 795,625,000 | $ | (1,710,005 | ) | ||||||||||||
Sales | |||||||||||||||||||
99 | U.S. Treasury Note 10 Yr. | June 2006 | $ | 10,682,719 | $ | 14,349 |
At February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Written Options
A summary of open written option contracts for the Fund at February 28, 2006, is as follows:
Notional Amount | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Call | $ | 70,000,000 | 3/01/2006 | USD | Interest Rate Swaption, Strike 5.09% | $ | 476,000 | $ | (135,915 | ) | |||||||||||||||||
Call | 71,000,000 | 3/15/2006 | USD | Interest Rate Swaption, Strike 5.13% | 450,850 | (486,935 | ) | ||||||||||||||||||||
Put | 70,000,000 | 3/01/2006 | USD | Interest Rate Swaption, Strike 5.09% | 476,000 | (39,597 | ) | ||||||||||||||||||||
Put | 71,000,000 | 3/15/2006 | USD | Interest Rate Swaption, Strike 5.13% | 450,850 | (179,475 | ) | ||||||||||||||||||||
Call | 71,000,000 | 3/08/2006 | USD | Interest Rate Swaption, Strike 5.10% | 447,300 | (306,601 | ) | ||||||||||||||||||||
Put | 71,000,000 | 3/08/2006 | USD | Interest Rate Swaption, Strike 5.10% | 447,300 | (159,308 | ) | ||||||||||||||||||||
$ | 2,748,300 | $ | (1,307,831 | ) |
See accompanying notes to the financial statements.
15
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements
Credit Default Swaps | |||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
13,000,000 USD | 9/20/2010 | Morgan Stanley | Receive | 0.40 | % | Credit Swap | $ | 20,404 | |||||||||||||||||||
Capital Services Inc. | Eagle Creek CDO | ||||||||||||||||||||||||||
7,000,000 USD | 3/20/2013 | Morgan Stanley Capital Services Inc. | Receive | 0.25 | % | MS Synthetic 2006-1 | (41,707 | ) | |||||||||||||||||||
5,000,000 USD | 3/20/2015 | Lehman Brothers | Receive | 0.88 | % | Credit Swap AAA CDO | (79,053 | ) | |||||||||||||||||||
$ | (100,356 | ) | |||||||||||||||||||||||||
Interest Rate Swaps | |||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
51,000,000 USD | 1/21/2008 | Deutsche Bank AG | (Pay) | 3.81 | % | 3 month LIBOR | $ | 1,185,204 | |||||||||||||||||||
391,000,000 CAD | 4/4/2008 | Deutsche Bank AG | Receive | 4.11 | % | 3 month Floating Canadian Dollar Offering Rate | (745,358 | ) | |||||||||||||||||||
339,600,000 USD | 4/6/2008 | JP Morgan Chase Bank | (Pay) | 4.81 | % | 3 month LIBOR | 1,896,595 | ||||||||||||||||||||
340,100,000 USD | 5/3/2008 | JP Morgan Chase Bank | (Pay) | 4.99 | % | 3 month LIBOR | 763,060 | ||||||||||||||||||||
281,100,000 EUR | 5/3/2008 | Deutsche Bank AG | Receive | 3.25 | % | 6 month EUR LIBOR | (200,753 | ) | |||||||||||||||||||
32,500,000 CAD | 5/28/2008 | JP Morgan Chase Bank | (Pay) | 4.31 | % | 3 month Floating Canadian Dollar Offering Rate | (33,444 | ) | |||||||||||||||||||
360,000,000 CAD | 5/28/2008 | Merrill Lynch Capital Services Inc. | (Pay) | 4.31 | % | 3 month Floating Canadian Dollar Offering Rate | (370,453 | ) | |||||||||||||||||||
291,500,000 EUR | 6/2/2008 | Deutsche Bank AG | Receive | 3.32 | % | 6 month EUR LIBOR | 47,420 | ||||||||||||||||||||
1,832,500,000 AUD | 6/21/2008 | Deutsche Bank AG | Receive | 5.60 | % | 3 month AUD BBSW | (857,485 | ) | |||||||||||||||||||
541,000,000 AUD | 6/21/2008 | JP Morgan Chase Bank | Receive | 5.60 | % | 3 month AUD BBSW | (354,198 | ) | |||||||||||||||||||
585,000,000 USD | 6/21/2008 | JP Morgan Chase Bank | Receive | 4.80 | % | 3 month LIBOR | (3,363,393 | ) | |||||||||||||||||||
1,450,000,000 SEK | 6/21/2008 | Deutsche Bank AG | (Pay) | 3.10 | % | 3 month SEK STIBOR | (296,143 | ) | |||||||||||||||||||
3,217,000,000 SEK | 6/21/2008 | JP Morgan Chase Bank | (Pay) | 3.10 | % | 3 month SEK STIBOR | (816,533 | ) | |||||||||||||||||||
254,000,000 CHF | 6/21/2008 | Citigroup | (Pay) | 2.00 | % | 6 month CHF LIBOR | 356,830 |
See accompanying notes to the financial statements.
16
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
283,000,000 EUR | 6/21/2008 | Deutsche Bank AG | (Pay) | 3.20 | % | 6 month EUR LIBOR | $ | 1,052,646 | |||||||||||||||||||
78,000,000 EUR | 6/21/2008 | JP Morgan Chase Bank | (Pay) | 3.20 | % | 6 month EUR LIBOR | 152,005 | ||||||||||||||||||||
583,000,000 GBP | 6/21/2008 | Deutsche Bank AG | Receive | 4.60 | % | 6 month GBP LIBOR | (2,084,736 | ) | |||||||||||||||||||
16,800,000,000 JPY | 6/21/2008 | Citigroup | (Pay) | 0.55 | % | 6 month JPY LIBOR | 801,217 | ||||||||||||||||||||
49,500,000,000 JPY | 6/21/2008 | JP Morgan Chase Bank | (Pay) | 0.55 | % | 6 month JPY LIBOR | 2,346,252 | ||||||||||||||||||||
200,600,000,000 JPY | 6/21/2008 | Merrill Lynch Capital Services Inc. | (Pay) | 0.55 | % | 6 month JPY LIBOR | 9,657,794 | ||||||||||||||||||||
225,000,000 USD | 1/21/2010 | Deutsche Bank AG | Receive | 4.10 | % | 3 month LIBOR | (7,740,035 | ) | |||||||||||||||||||
5,000,000 USD | 2/7/2012 | Deutsche Bank AG | (Pay) | 4.33 | % | 3 month LIBOR | 188,201 | ||||||||||||||||||||
150,000,000 USD | 1/21/2013 | Deutsche Bank AG | (Pay) | 4.41 | % | 3 month LIBOR | 5,746,846 | ||||||||||||||||||||
15,000,000 USD | 2/8/2015 | JP Morgan Chase Bank | (Pay) | 4.47 | % | 3 month LIBOR | 676,747 | ||||||||||||||||||||
21,000,000 EUR | 2/22/2015 | Deutsche Bank AG | Receive | 3.69 | % | 6 month EUR LIBOR | 145,066 | ||||||||||||||||||||
21,000,000 EUR | 3/21/2015 | UBS AG | Receive | 3.78 | % | 6 month EUR LIBOR | 268,859 | ||||||||||||||||||||
60,000,000 EUR | 3/21/2015 | UBS AG | (Pay) | 4.84 | % | 6 month EUR LIBOR | (2,421,724 | ) | |||||||||||||||||||
21,000,000 EUR | 5/23/2015 | JP Morgan Chase Bank | Receive | 3.44 | % | 6 month EUR LIBOR | (370,718 | ) | |||||||||||||||||||
35,800,000 GBP | 3/15/2016 | Citigroup | (Pay) | 4.62 | % | 6 month GBP LIBOR | (430,310 | ) | |||||||||||||||||||
7,280,000,000 JPY | 3/20/2016 | JP Morgan Chase Bank | Receive | 1.67 | % | 6 month JPY LIBOR | (856,968 | ) | |||||||||||||||||||
37,000,000 GBP | 4/18/2016 | Citigroup | (Pay) | 4.33 | % | 6 month GBP LIBOR | 1,038,748 | ||||||||||||||||||||
7,471,000,000 JPY | 4/19/2016 | JP Morgan Chase Bank | Receive | 1.62 | % | 6 month JPY LIBOR | (1,318,809 | ) | |||||||||||||||||||
38,300,000 GBP | 5/17/2016 | Deutsche Bank AG | (Pay) | 4.47 | % | 6 month GBP LIBOR | 316,602 | ||||||||||||||||||||
7,835,000,000 JPY | 5/21/2016 | JP Morgan Chase Bank | Receive | 1.78 | % | 6 month JPY LIBOR | (464,878 | ) | |||||||||||||||||||
141,000,000 USD | 6/21/2016 | JP Morgan Chase Bank | (Pay) | 4.90 | % | 3 month LIBOR | 1,823,121 | ||||||||||||||||||||
334,000,000 SEK | 6/21/2016 | Deutsche Bank AG | Receive | 3.60 | % | 3 month SEK STIBOR | (420,380 | ) | |||||||||||||||||||
742,000,000 SEK | 6/21/2016 | JP Morgan Chase Bank | Receive | 3.60 | % | 3 month SEK STIBOR | (688,305 | ) | |||||||||||||||||||
457,000,000 AUD | 6/21/2016 | Deutsche Bank AG | (Pay) | 5.70 | % | 6 month AUD BBSW | (13,149 | ) | |||||||||||||||||||
135,000,000 AUD | 6/21/2016 | JP Morgan Chase Bank | (Pay) | 5.70 | % | 6 month AUD BBSW | 308,335 | ||||||||||||||||||||
56,000,000 CHF | 6/21/2016 | Citigroup | Receive | 2.50 | % | 6 month CHF LIBOR | (469,846 | ) | |||||||||||||||||||
65,000,000 EUR | 6/21/2016 | Deutsche Bank AG | Receive | 3.50 | % | 6 month EUR LIBOR | (1,063,240 | ) | |||||||||||||||||||
18,000,000 EUR | 6/21/2016 | JP Morgan Chase Bank | Receive | 3.50 | % | 6 month EUR LIBOR | (44,573 | ) | |||||||||||||||||||
139,000,000 GBP | 6/21/2016 | Deutsche Bank AG | (Pay) | 4.50 | % | 6 month GBP LIBOR | 1,857,376 | ||||||||||||||||||||
3,600,000,000 JPY | 6/21/2016 | Citigroup | Receive | 1.65 | % | 6 month JPY LIBOR | (630,527 | ) | |||||||||||||||||||
10,500,000,000 JPY | 6/21/2016 | JP Morgan Chase Bank | Receive | 1.65 | % | 6 month JPY LIBOR | (1,782,857 | ) | |||||||||||||||||||
42,800,000,000 JPY | 6/21/2016 | Merrill Lynch | Receive | 1.65 | % | 6 month JPY LIBOR | (6,642,334 | ) | |||||||||||||||||||
60,000,000 EUR | 2/22/2025 | Deutsche Bank AG | (Pay) | 4.70 | % | 6 month EUR LIBOR | (1,873,484 | ) | |||||||||||||||||||
60,000,000 EUR | 5/23/2025 | JP Morgan Chase Bank | (Pay) | 4.52 | % | 6 month EUR LIBOR | (1,078,443 | ) | |||||||||||||||||||
$ | (6,804,152 | ) |
See accompanying notes to the financial statements.
17
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
10,000,000 | USD | 3/1/2006 | Citigroup | 1 month | Return on Lehman | $ | (19,775 | ) | |||||||||||||||
LIBOR | Brothers CMBS AAA | ||||||||||||||||||||||
– 0.025 | % | ||||||||||||||||||||||
20,000,000 | USD | 3/31/2006 | Citigroup | 1 month LIBOR + 0.15% | Return on Lehman Brothers CMBS AAA | (42,176 | ) | ||||||||||||||||
$ | (61,951 | ) |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
BBSW - Bank Bill Swap Rate
CDO - Collateralized Debt Obligation
CMBS - Collateralized Mortgage Backed Security
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MTN - Medium Term Note
STIBOR - Stockholm Interbank Offered Rate
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
(c) Rate shown represents yield to maturity.
See accompanying notes to the financial statements.
18
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Currency Abbreviations:
AUD - Australian Dollar | |||
CAD - Canadian Dollar | |||
CHF - Swiss Franc | |||
EUR - Euro | |||
GBP - British Pound | |||
JPY - Japanese Yen | |||
SEK - Swedish Krona | |||
USD - United States Dollar | |||
See accompanying notes to the financial statements.
19
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value (cost $1,029,363,565) (Note 2) | $ | 1,027,781,736 | |||||
Cash | 152,413 | ||||||
Interest receivable | 2,935,496 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 107 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 381,625 | ||||||
Interest receivable for open swap contracts | 1,204,235 | ||||||
Receivable for open swap contracts (Note 2) | 23,531,501 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 30,570 | ||||||
Receivable for option premiums | 690,760 | ||||||
Total assets | 1,056,708,443 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 8,000,000 | ||||||
Written options outstanding, at value (premiums $2,748,300) (Note 2) | 1,307,831 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 1,703 | ||||||
Interest payable for open swap contracts | 83,366 | ||||||
Payable for open swap contracts (Note 2) | 34,945,557 | ||||||
Accrued expenses | 92,596 | ||||||
Total liabilities | 44,431,053 | ||||||
Net assets | $ | 1,012,277,390 | |||||
Net assets consist of: | |||||||
Net capital(1) | $ | 1,021,080,758 | |||||
Net unrealized depreciation | (8,803,368 | ) | |||||
$ | 1,012,277,390 | ||||||
Shares outstanding | 40,125,390 | ||||||
Net asset value per share | $ | 25.23 | |||||
(1) Net capital includes net investment income (loss) and net realized gain (loss) on investments. |
See accompanying notes to the financial statements.
20
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Interest | $ | 32,720,995 | |||||
Total investment income | 32,720,995 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 123,508 | ||||||
Audit and tax fees | 72,649 | ||||||
Legal fees | 12,962 | ||||||
Trustees fees and related expenses (Note 3) | 11,993 | ||||||
Miscellaneous | 16,142 | ||||||
Total expenses | 237,254 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (216,608 | ) | |||||
Net expenses | 20,646 | ||||||
Net investment income (loss) | 32,700,349 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (28,768,060 | ) | |||||
Closed futures contracts | 1,153,548 | ||||||
Closed swap contracts | 7,219,839 | ||||||
Written options | 1,239,297 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 38,345 | ||||||
Net realized gain (loss) | (19,117,031 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (922,521 | ) | |||||
Open futures contracts | (1,742,669 | ) | |||||
Open swap contracts | (8,427,425 | ) | |||||
Written options | 1,440,469 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,442 | ||||||
Net unrealized gain (loss) | (9,650,704 | ) | |||||
Net realized and unrealized gain (loss) | (28,767,735 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 3,932,614 |
See accompanying notes to the financial statements.
21
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Period from November 22, 2004 (commencement of operations) through February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 32,700,349 | $ | 3,173,280 | |||||||
Net realized gain (loss) | (19,117,031 | ) | (351,840 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (9,650,704 | ) | 847,336 | ||||||||
Net increase (decrease) in net assets from operations | 3,932,614 | 3,668,776 | |||||||||
Net share transactions (Note 7): | 426,066,000 | 578,610,000 | |||||||||
Total increase (decrease) in net assets | 429,998,614 | 582,278,776 | |||||||||
Net assets: | |||||||||||
Beginning of period | 582,278,776 | — | |||||||||
End of period | $ | 1,012,277,390 | $ | 582,278,776 |
See accompanying notes to the financial statements.
22
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Year Ended February 28, | |||||||||||
2006 | 2005(a) | ||||||||||
Net asset value, beginning of period | $ | 25.17 | $ | 25.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.96 | 0.15 | |||||||||
Net realized and unrealized gain (loss) | (0.90 | ) | 0.02 | ||||||||
Total from investment operations | 0.06 | 0.17 | |||||||||
Net asset value, end of period | $ | 25.23 | $ | 25.17 | |||||||
Total Return(b) | 0.24 | % | 0.68 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 1,012,277 | $ | 582,279 | |||||||
Net expenses to average daily net assets | 0.00 | %(c) | 0.01 | %* | |||||||
Net investment income to average daily net assets | 3.84 | % | 2.21 | %* | |||||||
Portfolio turnover rate | 31 | % | 8 | %** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | % | 0.06 | %* |
(a) Period from November 22, 2004 (commencement of operations) through February 28, 2005.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses were less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO World Opportunity Overlay Fund (the "Fund"), which commenced operations on November 22, 2004, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return relative to its benchmark. The Fund seeks to achieve its objective of outperforming its benchmark primarily through returns on the Fund's derivatives positions. The Fund's benchmark index is the J.P. Morgan U.S. 3-Month Cash Index.
Shares of the Fund are not publicly offered and are principally available only to other funds of the Trust and certain accredited investors.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value or exchange rate may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing
24
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund. As of February 28, 2006, the total value of these securities represented 31.8% of net assets.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
25
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. See the Schedule of Investments for open written options contracts entered into by the Fund as of February 28, 2006.
26
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Written options
For the year ended February 28, 2006, the Fund's investment activity in written option contracts was as follows:
Puts | Calls | ||||||||||||||||||
Principal Amount of Contracts | Premiums | Principal Amount of Contracts | Premiums | ||||||||||||||||
Outstanding, beginning of period | $ | — | $ | — | $ | — | $ | — | |||||||||||
Options written | 2,214,000,000 | 16,599,250 | 2,214,000,000 | 16,599,250 | |||||||||||||||
Options exercised | (1,262,000,000 | ) | (9,528,800 | ) | (740,000,000 | ) | (5,696,300 | ) | |||||||||||
Options expired | (740,000,000 | ) | (5,696,300 | ) | (1,262,000,000 | ) | (9,528,800 | ) | |||||||||||
Options sold | — | — | — | — | |||||||||||||||
Outstanding, end of period | $ | 212,000,000 | $ | 1,374,150 | $ | 212,000,000 | $ | 1,374,150 |
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Loan agreements
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is
27
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. As of February 28, 2006, the Fund did not enter into any loan agreements.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial
28
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a
29
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended February 28, 2006, the Fund did not participate in securities lending.
Taxes
The Fund elected to be taxed as a partnership for federal income tax purposes. As a partnership, the Fund will not be subject to federal and state income tax. Instead, each shareholder is responsible for the tax liability or benefit related to his/her allocable share of taxable income or loss. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements. A more detailed discussion of the tax consequences of owning an interest in the Fund is included in the Fund's Private Placement Memorandum.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,029,363,565 | $ | 267,301 | $ | (1,849,130 | ) | $ | (1,581,829 | ) |
Distributions
The Fund does not intend to make any distributions to its shareholders but may do so in the sole discretion of the Trustees.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the ident ified cost basis.
30
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
3. Fees and other transactions with affiliates
GMO does not charge the Fund any management or service fees for its services. In addition, effective until at least June 30, 2007, GMO has contractually agreed to reimburse all of the Fund's expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes).
The Fund's portion of the fees paid by the Trust to the CCO and independent Trustees during the year ended February 28, 2006 was $5,990 and $5,837, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | — | |||||||
Investments (non-U.S. Government securities) | 913,265,857 | 231,965,451 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
31
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
6. Principal shareholders
As of February 28, 2006, 73.7% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Both of the shareholders are other funds of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 100% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Period from November 22, 2004 (commencement of operations) through February 28, 2005 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 21,368,341 | $ | 535,516,000 | 23,385,215 | $ | 584,910,000 | |||||||||||||
Shares repurchased | (4,377,470 | ) | (109,450,000 | ) | (250,696 | ) | (6,300,000 | ) | |||||||||||
Net increase (decrease) | 16,990,871 | $ | 426,066,000 | 23,134,519 | $ | 578,610,000 |
32
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO World Opportunity Overlay Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO World Opportunity Overlay Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Acco unting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
33
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 0.00 | % | $ | 1,000.00 | $ | 1,014.10 | $ | 0.00 | ** | ||||||||||
2) Hypothetical | 0.00 | % | $ | 1,000.00 | $ | 1,024.79 | $ | 0.00 | ** |
* Expenses are calculated using the annualized expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
** Net expenses incurred are less than $0.01.
34
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
35
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/03/1941 | Trustee | Since May 1996 | Acting Dean (since 2005) , Senior Associate Dean (1998 – 2005) , and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present) ; Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
36
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
37
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
38
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Currency Hedged International Equity Fund returned +28.4% for the fiscal year ended February 28, 2006, as compared to +31.0% for the MSCI EAFE Index (Hedged) benchmark. Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was substantially exposed to international equity securities through its investment in underlying GMO mutual funds.
The Fund's exposure to international equities comes indirectly through investments in the GMO International Intrinsic Value Fund and the GMO International Growth Equity Fund. The Fund also holds currency hedges in addition to the shares of those funds, which make predominantly unhedged investments.
Currency hedging had a strong positive impact on our international equity investing. The U.S. dollar rose strongly against most foreign currencies, but hedging protected the Fund's return. In U.S. dollar terms the unhedged MSCI EAFE Index returned +17.4% during the period, nearly 14% lower than the hedged benchmark.
The Fund is fairly evenly allocated between the GMO International Intrinsic Value Fund (the Fund was invested in Class IV shares), which returned +18.3%, and the GMO International Growth Equity Fund, which returned +15.6% during the period. Each of the underlying funds underperformed their respective international style benchmarks, hurting the return of the GMO Currency Hedged International Equity Fund, but the currency hedging helped significantly.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 93.6 | % | |||||
Short-Term Investment(s) | 9.1 | ||||||
Preferred Stocks | 0.5 | ||||||
Futures | 0.1 | ||||||
Forward Currency Contracts | (0.8 | ) | |||||
Other | (2.5 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Japan | 27.4 | % | |||||
United Kingdom | 21.8 | ||||||
France | 8.8 | ||||||
Netherlands | 6.2 | ||||||
Germany | 5.9 | ||||||
Canada | 4.1 | ||||||
Italy | 4.0 | ||||||
Switzerland | 3.6 | ||||||
Australia | 3.5 | ||||||
Finland | 3.2 | ||||||
Spain | 2.3 | ||||||
Belgium | 1.8 | ||||||
Norway | 1.4 | ||||||
Hong Kong | 1.2 | ||||||
Sweden | 1.2 | ||||||
Austria | 1.1 | ||||||
Ireland | 0.9 | ||||||
Singapore | 0.8 | ||||||
Denmark | 0.7 | ||||||
Greece | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets.
1
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 98.6% | |||||||||||
United States — 98.6% | |||||||||||
Affiliated Issuer(s) | |||||||||||
11,812,928 | GMO International Growth Equity Fund, Class III | 353,206,539 | |||||||||
11,224,932 | GMO International Intrinsic Value Fund, Class IV | 365,708,285 | |||||||||
718,914,824 | |||||||||||
TOTAL MUTUAL FUNDS (COST $617,098,281) | 718,914,824 | ||||||||||
COMMON STOCKS — 0.0% | |||||||||||
China — 0.0% | |||||||||||
796 | China Digicontent Co Ltd * (a) (b) | 1 | |||||||||
United Kingdom — 0.0% | |||||||||||
19,018 | British Energy Plc (Deferred Shares) * (a) (b) | — | |||||||||
TOTAL COMMON STOCKS (COST $19) | 1 | ||||||||||
SHORT-TERM INVESTMENT(S) — 1.7% | |||||||||||
12,000,000 | Bank of Montreal Time Deposit, 4.64%, due 03/01/06 | 12,000,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $12,000,000) | 12,000,000 | ||||||||||
TOTAL INVESTMENTS — 100.3% (Cost $629,098,300) | 730,914,825 | ||||||||||
Other Assets and Liabilities (net) — (0.3%) | (2,100,436 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 728,814,389 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
5/26/06 | CAD | 2,369,200 | $ | 2,089,552 | $ | 26,028 | |||||||||||||
5/26/06 | NZD | 4,533,220 | 2,983,516 | (23,287 | ) | ||||||||||||||
5/26/06 | SGD | 17,103,580 | 10,574,138 | 67,102 | |||||||||||||||
$ | 69,843 | ||||||||||||||||||
Sales | |||||||||||||||||||
5/26/06 | AUD | 43,842,753 | $ | 32,496,468 | $ | (238,317 | ) | ||||||||||||
5/26/06 | CHF | 29,657,013 | 22,804,477 | 5,984 | |||||||||||||||
5/26/06 | DKK | 231,740,660 | 37,205,849 | (49,116 | ) | ||||||||||||||
5/26/06 | EUR | 164,162,162 | 196,704,301 | (214,772 | ) | ||||||||||||||
5/26/06 | GBP | 85,811,351 | 150,639,324 | (1,343,926 | ) | ||||||||||||||
5/26/06 | HKD | 76,246,301 | 9,841,301 | (912 | ) | ||||||||||||||
5/26/06 | JPY | 22,701,823,030 | 198,350,471 | (4,252,426 | ) | ||||||||||||||
5/26/06 | NOK | 55,909,864 | 8,330,633 | (23,290 | ) | ||||||||||||||
5/26/06 | SEK | 130,010,469 | 16,537,160 | 94,387 | |||||||||||||||
$ | (6,022,388 | ) |
Notes to Schedule of Investments:
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Bankrupt issuer.
As of February 28, 2006, 89.8% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar | HKD - Hong Kong Dollar | ||||||
CAD - Canadian Dollar | JPY - Japanese Yen | ||||||
CHF - Swiss Franc | NOK - Norwegian Krone | ||||||
DKK - Danish Krone | NZD - New Zealand Dollar | ||||||
EUR - Euro | SEK - Swedish Krona | ||||||
GBP - British Pound | SGD - Singapore Dollar | ||||||
See accompanying notes to the financial statements.
3
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $12,000,019) (Note 2) | $ | 12,000,001 | |||||
Investments in affiliated issuers, at value (cost $617,098,281) (Notes 2 and 8) | 718,914,824 | ||||||
Cash | 95,773 | ||||||
Foreign currency, at value (cost $43,018) (Note 2) | 43,218 | ||||||
Receivable for Fund shares sold | 3,804,000 | ||||||
Interest receivable | 1,507 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 193,501 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 368,003 | ||||||
Total assets | 735,420,827 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 299,039 | ||||||
Shareholder service fee | 83,070 | ||||||
Trustees and Chief Compliance Officer fees | 1,025 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 6,146,046 | ||||||
Accrued expenses | 77,258 | ||||||
Total liabilities | 6,606,438 | ||||||
Net assets | $ | 728,814,389 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 600,726,568 | |||||
Accumulated undistributed net investment income | 15,211,254 | ||||||
Accumulated net realized gain | 17,012,387 | ||||||
Net unrealized appreciation | 95,864,180 | ||||||
$ | 728,814,389 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 728,814,389 | |||||
Shares outstanding: | |||||||
Class III | 80,374,716 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.07 |
See accompanying notes to the financial statements.
4
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 5,334,297 | |||||
Interest | 454,265 | ||||||
Total investment income | 5,788,562 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 3,581,769 | ||||||
Shareholder service fee – Class III (Note 3) | 994,936 | ||||||
Custodian and fund accounting agent fees | 86,481 | ||||||
Transfer agent fees | 27,949 | ||||||
Audit and tax fees | 50,514 | ||||||
Legal fees | 10,958 | ||||||
Trustees fees and related expenses (Note 3) | 11,789 | ||||||
Registration fees | 16,673 | ||||||
Miscellaneous | 11,870 | ||||||
Total expenses | 4,792,939 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (197,955 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (3,458,077 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (774,872 | ) | |||||
Net expenses | 362,035 | ||||||
Net investment income (loss) | 5,426,527 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 64,424,363 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 31,367,730 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 57,687,445 | ||||||
Net realized gain (loss) | 153,479,538 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 7,694,199 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 2,733,123 | ||||||
Net unrealized gain (loss) | 10,427,322 | ||||||
Net realized and unrealized gain (loss) | 163,906,860 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 169,333,387 |
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,426,527 | $ | 8,376,827 | |||||||
Net realized gain (loss) | 153,479,538 | (20,210,427 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 10,427,322 | 65,699,602 | |||||||||
Net increase (decrease) in net assets from operations | 169,333,387 | 53,866,002 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (52,100,981 | ) | — | ||||||||
Net realized gains | |||||||||||
Class III | (66,360,906 | ) | — | ||||||||
(118,461,887 | ) | — | |||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 97,037,616 | 366,453,256 | |||||||||
Total increase (decrease) in net assets | 147,909,116 | 420,319,258 | |||||||||
Net assets: | |||||||||||
Beginning of period | 580,905,273 | 160,586,015 | |||||||||
End of period (including accumulated undistributed net investment income of $15,211,254 and accumulated undistributed net investment loss of $9,175,548, repectively) | $ | 728,814,389 | $ | 580,905,273 |
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 8.38 | $ | 7.33 | $ | 5.54 | $ | 7.14 | $ | 9.25 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.07 | 0.21 | 0.20 | 0.22 | 0.46 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 2.17 | 0.84 | 1.59 | (1.55 | ) | (1.00 | ) | ||||||||||||||||
Total from investment operations | 2.24 | 1.05 | 1.79 | (1.33 | ) | (0.54 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.71 | )(d) | — | — | (0.27 | ) | (1.53 | ) | |||||||||||||||
From net realized gains | (0.84 | ) | — | — | — | (0.04 | ) | ||||||||||||||||
Total distributions | (1.55 | ) | — | — | (0.27 | ) | (1.57 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.07 | $ | 8.38 | $ | 7.33 | $ | 5.54 | $ | 7.14 | |||||||||||||
Total Return(b) | 28.42 | % | 14.32 | % | 32.31 | % | (19.53 | )% | (5.38 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 728,814 | $ | 580,905 | $ | 160,586 | $ | 28,923 | $ | 37,581 | |||||||||||||
Net expenses to average daily net assets(c) | 0.05 | % | 0.04 | % | 0.04 | % | 0.06 | % | 0.31 | % | |||||||||||||
Net investment income to average daily net assets(a) | 0.82 | % | 2.64 | % | 2.98 | % | 3.32 | % | 5.33 | % | |||||||||||||
Portfolio turnover rate | 36 | % | 3 | % | 5 | % | 90 | % | 120 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.67 | % | 0.71 | % | 0.87 | % | 1.32 | % | 0.79 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) On July 3, 2001, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its reimbursement policy. Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(d) Distributions from net investment income include amounts (approximately $0.07 per share) from foreign currency transactions which are treated as realized capital gain for book purposes.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Currency Hedged International Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in other fund(s) of the Trust ("underlying fund(s)"), including GMO International Intrinsic Value Fund and GMO International Growth Equity Fund, and through management of the Fund's foreign currency positions. The Fund's benchmark is the MSCI EAFE Index (Europe, Australasia, Far East) (Hedged).
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of underlying fund(s) and other mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A s ecurity's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do
8
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver
9
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss.
10
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The risk associated with purchasing put and call options is limited to the premium paid. As of February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Securities Lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other
11
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended February 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $52,100,981 and $0, respectively and long-term capital gains – $66,360,906 and $0, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $9,241,829 and $18,956,639 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions and capital loss carryforwards.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $261,972 and $1,682,281 expiring in 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
12
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 629,098,300 | $ | 101,816,543 | $ | (18 | ) | $ | 101,816,525 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 71,061,256 | $ | (71,061,256 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
13
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. As described in Note 1, the Fund invests in certain underlying fund(s). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of the underlying fund(s).
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes (collectively, "fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees and fund expenses (as defined above), incurred indirectly by the Fund through its investment in the underlying fund(s), exceed 0.54% of the Fund's average daily net assets. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed 0.54% of the Fun d's average daily net assets, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses (as defined above)) incurred indirectly by the Fund through its investment in the underlying fund(s) may exceed 0.54% of the Fund's average daily net assets.
14
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.525 | % | 0.117 | % | 0.642 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $7,508 and $4,172, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $299,202,024 and $231,399,999, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006, were $293,867,301 and $293,867,301, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related party
As of February 28, 2006, 50.0% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
15
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, less than 0.1% of the Fund's shares were held by one related party comprised of a certain GMO employee account, and 99.9% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 23,875,120 | $ | 209,368,988 | 49,419,111 | $ | 381,261,853 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 13,307,037 | 115,516,716 | — | — | |||||||||||||||
Shares repurchased | (26,162,473 | ) | (227,848,088 | ) | (1,958,952 | ) | (14,808,597 | ) | |||||||||||
Net increase (decrease) | 11,019,684 | $ | 97,037,616 | 47,460,159 | $ | 366,453,256 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO International Growth Fund, Class III | $ | 289,439,426 | $ | 83,177,203 | $ | 392,067,300 | $ | 784,065 | $ | 5,893,138 | $ | — | |||||||||||||||
GMO International Growth Equity Fund, Class III | — | 356,490,350 | 17,500,000 | 411,785 | 9,711,265 | 353,206,539 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 289,554,810 | 153,401,772 | 115,700,000 | 4,138,447 | 15,763,327 | 365,708,285 | |||||||||||||||||||||
Totals | $ | 578,994,236 | $ | 593,069,325 | $ | 525,267,300 | $ | 5,334,297 | $ | 31,367,730 | $ | 718,914,824 |
16
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Equity Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
17
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.70 | % | $ | 1,000.00 | $ | 1,157.00 | $ | 3.74 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.32 | $ | 3.51 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
18
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $66,360,906 from long-term capital gains.
For taxable, non-corporate shareholders, 24.37% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 $5,814,469 or if determined to be different, the qualified interest income of such year.
19
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
20
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee3. | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
21
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
22
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer,October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
23
GMO International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO International Bond Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO International Bond Fund returned -6.8% for the fiscal year ended February 28, 2006, as compared to -6.8% for the JPMorgan Non-U.S. Government Bond Index. The Fund's exposure to various issues is achieved directly and indirectly through its investment in certain underlying GMO mutual funds, primarily in the GMO Emerging Country Debt Fund, the GMO World Opportunity Overlay Fund, and the GMO Short-Duration Collateral Fund.
Interest rate strategy underperformance offset value added from currency selection, emerging debt exposure, and cash management.
Global bond yields fell across the board during the first half of 2005, although they began heading higher in the third quarter of 2005 and carrying into the New Year. Major, sustained bond market positions included overweights in Sweden and Canada and underweights in the U.K. and Switzerland. The Fund had been overweight Australia early in 2005 and moved to an underweight position later in the year. U.S., Canada, Australia, and Euro-area positions were the largest positive contributors. Underweights in the U.K. and Switzerland and a recent overweight in Japan detracted from performance.
The U.S. dollar gained versus most currencies in 2005, began weakening in December, then stabilized in February. For much of 2005 the Fund had been overweight relatively higher yielding currencies like Australian dollars, New Zealand dollars, and British sterling and underweight lower yielding currencies such as Japanese yen and euro. In general, the underweights added value, while the overweights did not.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 95.5 | % | |||||
Short-Term Investment(s) | 3.1 | ||||||
Mutual Fund | 1.2 | ||||||
Call Options Purchased | 0.5 | ||||||
Swaps | 0.5 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Forward Start Options | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | (0.1 | ) | |||||
Forward Currency Contracts | (0.1 | ) | |||||
Futures | (0.3 | ) | |||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
Euro Region*** | 57.4 | % | |||||
Japan | 43.0 | ||||||
Sweden | 19.4 | ||||||
Canada | 18.8 | ||||||
Denmark | 0.4 | ||||||
Switzerland | (7.8 | ) | |||||
United Kingdom | (8.0 | ) | |||||
United States | (10.2 | ) | |||||
Australia | (13.0 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
1
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value / Principal Amount | Description | Value ($) | |||||||||
DEBT OBLIGATION(S) — 5.9% | |||||||||||
Australia — 0.2% | |||||||||||
Asset-Backed Securities | |||||||||||
USD | 814,426 | Medallion Trust, Series 03-1G, Class A, Variable Rate, 3 mo. LIBOR + .19%, 4.69%, due 12/21/33 | 816,161 | ||||||||
Canada — 1.8% | |||||||||||
Foreign Government Obligations | |||||||||||
CAD | 2,000,000 | Government of Canada (Cayman), 7.25%, due 06/01/08 | 1,869,717 | ||||||||
CAD | 2,000,000 | Province of British Columbia, 7.88%, due 11/30/23 | 2,438,330 | ||||||||
GBP | 1,500,000 | Province of Quebec, 8.63%, due 11/04/11 | 3,117,702 | ||||||||
Total Canada | 7,425,749 | ||||||||||
United Kingdom — 0.9% | |||||||||||
Asset-Backed Securities | |||||||||||
GBP | 941,989 | RMAC, Series 03-NS1X Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .45%, 5.09%, due 06/12/35 | 1,658,126 | ||||||||
GBP | 1,282,639 | RMAC, Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .40%, 5.04%, due 09/12/35 | 2,255,051 | ||||||||
Total United Kingdom | 3,913,177 | ||||||||||
United States — 3.0% | |||||||||||
U.S. Government | |||||||||||
USD | 7,310,040 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (b) (c) | 7,568,176 | ||||||||
USD | 5,000,000 | U.S. Treasury Note, 4.00%, due 09/30/07 (a) | 4,944,531 | ||||||||
Total United States | 12,512,707 | ||||||||||
TOTAL DEBT OBLIGATION(S) (COST $22,565,506) | 24,667,794 | ||||||||||
CALL OPTIONS PURCHASED — 0.3% | |||||||||||
Currency Options — 0.3% | |||||||||||
23,100,000 | AUD Call/USD Put, Expires 06/07/06, Strike 0.744 | 268,819 |
See accompanying notes to the financial statements.
2
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Principal Amount / Shares / Par Value ($) | Description | Value ($) | |||||||||
Currency Options — continued | |||||||||||
2,600,000,000 | JPY Call/USD Put, Expires 4/18/06, Strike 118.50 | 700,700 | |||||||||
2,600,000,000 | JPY Call/USD Put, Expires 4/4/06, Strike 116.3 | 354,874 | |||||||||
1,324,393 | |||||||||||
TOTAL CALL OPTIONS PURCHASED (COST $1,289,463) | 1,324,393 | ||||||||||
FORWARD START OPTIONS — 0.0% | |||||||||||
Currency Options — 0.0% | |||||||||||
3,240,000,000 | JPY Put/USD Call, Expires 09/18/06, Strike TBD | 12,506 | |||||||||
TOTAL FORWARD START OPTIONS (COST $0) | 12,506 | ||||||||||
MUTUAL FUNDS — 93.3% | |||||||||||
1,147,488 | GMO Emerging Country Debt Fund, Class III (d) | 12,966,615 | |||||||||
11,541,722 | GMO Short-Duration Collateral Fund (d) | 295,468,092 | |||||||||
37,466 | GMO Special Purpose Holding Fund (d) | 308,345 | |||||||||
3,338,659 | GMO World Opportunity Overlay Fund (d) | 84,234,362 | |||||||||
1,360,202 | Merrimac Cash Series, Premium Class (e) | 1,360,202 | |||||||||
TOTAL MUTUAL FUNDS (COST $390,812,511) | 394,337,616 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.7% | |||||||||||
106,908 | American Beacon Money Market Select Fund (e) | 106,908 | |||||||||
347,450 | BGI Institutional Money Market Fund (e) | 347,450 | |||||||||
160,362 | Fortis Bank Eurodollar Term Fixed Rate Yankee Certificate of Deposit, 4.53%, due 03/23/06 (e) | 160,362 | |||||||||
534,539 | Goldman Sachs Group Inc. Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $534,539 and an effective yield of 4.60%, collateralized by various corporate debt obligations with an aggregate market value of $545,229. (e) | 534,539 |
See accompanying notes to the financial statements.
3
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value ($) / Shares | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENT(S) — continued | |||||||||||
481,085 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $481,085 and an effective yield of 4.55%, collateralized by various U.S. government obligations with an aggregate market value of $493,527. (e) | 481,085 | |||||||||
389,808 | Morgan Stanley & Co. Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $389,808 and an effective yield of 4.55%, collateralized by various U.S. government obligations with an aggregate market value of $397,607. (e) | 389,808 | |||||||||
320,723 | National Australia Bank Eurodollar Overnight Time Deposit, 4.56%, due 03/01/06 (e) | 320,723 | |||||||||
213,815 | Rabobank Nederland Eurodollar Overnight Time Deposit, 4.52%, due 03/01/06 (e) | 213,815 | |||||||||
160,362 | Royal Bank of Scotland Eurodollar Term Fixed Rate Yankee Certificate of Deposit, 4.55%, due 03/31/06 (e) | 160,362 | |||||||||
328,628 | Svenska Handlesbanken Eurodollar Overnight Time Deposit, 4.57%, due 03/01/06 (e) | 328,628 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $3,043,680) | 3,043,680 | ||||||||||
TOTAL INVESTMENTS — 100.2% (Cost $417,711,160) | 423,385,989 | ||||||||||
Other Assets and Liabilities (net) — (0.2%) | (858,117 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 422,527,872 |
See accompanying notes to the financial statements.
4
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
690 | Canadian Government Bond 10 Yr. | June 2006 | $ | 68,468,740 | $ | (93,694 | ) | ||||||||||||
357 | Euro BOBL | March 2006 | 47,720,252 | (281,763 | ) | ||||||||||||||
638 | Euro Bund | March 2006 | 91,563,794 | (348,214 | ) | ||||||||||||||
85 | Japanese Government Bond 10 Yr. (TSE) | March 2006 | 99,858,754 | (816,470 | ) | ||||||||||||||
$ | (1,540,141 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
244 | Australian Government Bond 10 Yr. | March 2006 | $ | 19,098,830 | $ | 104,539 | |||||||||||||
481 | Australian Government Bond 3 Yr. | March 2006 | 36,438,955 | 65,432 | |||||||||||||||
147 | U.S. Long Bond | June 2006 | 16,624,781 | 18,204 | |||||||||||||||
79 | U.S. Treasury Note 10 Yr. | June 2006 | 8,524,594 | 8,614 | |||||||||||||||
448 | U.S. Treasury Note 5 Yr. (CBT) | June 2006 | 47,124,000 | (85,068 | ) | ||||||||||||||
265 | UK Gilt Long Bond | June 2006 | 52,717,107 | 222,327 | |||||||||||||||
$ | 334,048 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
5
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
3/21/06 | AUD | 80,800,000 | $ | 59,966,167 | $ | (250,292 | ) | ||||||||||||
3/28/06 | CAD | 2,000,000 | 1,760,982 | 47,920 | |||||||||||||||
4/18/06 | CHF | 23,900,000 | 18,303,246 | (180,899 | ) | ||||||||||||||
4/25/06 | EUR | 170,600,000 | 203,998,488 | (532,828 | ) | ||||||||||||||
4/11/06 | GBP | 19,800,000 | 34,738,553 | 88,836 | |||||||||||||||
3/07/06 | JPY | 19,670,000,000 | 170,035,579 | (21,917 | ) | ||||||||||||||
5/02/06 | NZD | 35,100,000 | 23,142,132 | 78,088 | |||||||||||||||
$ | (771,092 | ) | |||||||||||||||||
Sales | |||||||||||||||||||
3/21/06 | AUD | 62,900,000 | $ | 46,681,583 | $ | 474,900 | |||||||||||||
3/28/06 | CAD | 13,300,000 | 11,710,531 | (98,534 | ) | ||||||||||||||
4/18/06 | CHF | 32,200,000 | 24,659,603 | 106,739 | |||||||||||||||
4/25/06 | EUR | 33,600,000 | 40,177,897 | (92,229 | ) | ||||||||||||||
3/07/06 | JPY | 10,480,000,000 | 90,593,435 | 1,004,321 | |||||||||||||||
$ | 1,395,197 |
Forward Cross Currency Contracts
Settlement Date | Deliver/ Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
3/14/06 | EUR | 27,000,000 | NOK | 214,253,100 | $ | (433,977 | ) | ||||||||
4/04/06 | EUR | 24,500,000 | SEK | 226,428,020 | (578,133 | ) | |||||||||
4/04/06 | SEK | 280,469,430 | EUR | 30,000,000 | 301,209 | ||||||||||
3/14/06 | NOK | 114,199,645 | EUR | 14,200,000 | 3,057 | ||||||||||
$ | (707,844 | ) |
See accompanying notes to the financial statements.
6
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
87,000,000 | SEK | 3/17/2008 | JP Morgan | ||||||||||||||||||||||||||||
Chase Bank | Receive | 2.90 | % | 3 Month SEK STIBOR | $ | 7,968 | |||||||||||||||||||||||||
87,000,000 | SEK | 3/15/2011 | Citigroup | Receive | 3.40 | % | 3 Month SEK STIBOR | 2,416 | |||||||||||||||||||||||
30,000,000 | SEK | 3/15/2011 | Deutsche Bank AG | Receive | 3.40 | % | 3 Month SEK STIBOR | 833 | |||||||||||||||||||||||
10,000,000 | SEK | 3/15/2011 | JP Morgan Chase Bank | Receive | 3.40 | % | 3 Month SEK STIBOR | 278 | |||||||||||||||||||||||
22,000,000 | CHF | 3/15/2011 | Deutsche Bank AG | (Pay) | 2.25 | % | 6 Month CHF LIBOR | 13,241 | |||||||||||||||||||||||
116,000,000 | SEK | 3/15/2013 | Deutsche Bank AG | Receive | 3.50 | % | 3 Month SEK STIBOR | (32,354 | ) | ||||||||||||||||||||||
25,000,000 | SEK | 3/15/2013 | JP Morgan Chase Bank | Receive | 3.50 | % | 3 Month SEK STIBOR | (6,973 | ) | ||||||||||||||||||||||
10,000,000 | CHF | 3/15/2013 | JP Morgan Chase Bank | (Pay) | 2.40 | % | 6 Month CHF LIBOR | (420 | ) | ||||||||||||||||||||||
82,000,000 | SEK | 3/15/2016 | Deutsche Bank AG | Receive | 3.75 | % | 3 Month SEK STIBOR | 79,579 | |||||||||||||||||||||||
65,000,000 | SEK | 3/15/2016 | JP Morgan Chase Bank | Receive | 3.75 | % | 3 Month SEK STIBOR | 63,081 | |||||||||||||||||||||||
12,900,000 | CHF | 3/15/2016 | Deutsche Bank AG | (Pay) | 2.50 | % | 6 Month CHF LIBOR | 32,103 | |||||||||||||||||||||||
5,000,000 | EUR | 3/21/2030 | UBS Warburg | Receive | 5.90 | % | 3 Month Floating Rate EUR LIBOR | 1,870,341 | |||||||||||||||||||||||
$ | 2,030,093 |
See accompanying notes to the financial statements.
7
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
112,000,000 | USD | 7/21/2006 | JP Morgan Chase | 1 month LIBOR | Return on JP Morgan Non- | ||||||||||||||||||||||
Bank | – 0.01 | % | U.S. Hedged Traded Total | ||||||||||||||||||||||||
Return Government | |||||||||||||||||||||||||||
Bond Index | $ | (304,879 | ) | ||||||||||||||||||||||||
33,000,000 | USD | 7/21/2006 | JP Morgan Chase | 1 month LIBOR | Return on JP Morgan Non- | ||||||||||||||||||||||
Bank | U.S. Hedged Traded | ||||||||||||||||||||||||||
Total Return Government | |||||||||||||||||||||||||||
Bond Index | (89,895 | ) | |||||||||||||||||||||||||
$ | (394,774 | ) |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
LIBOR - London Interbank Offered Rate
STIBOR - Stockholm Interbank Offered Rate
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2).
(b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
(c) All or a portion of this security is out on loan (Note 2).
(d) Affiliated issuer (Note 8).
(e) All or a portion of this security represents investment of security lending collateral (Note 2).
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
8
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value, including securities on loan of $3,035,942 (cost $28,258,851) (Note 2) | $ | 30,408,575 | |||||
Investments in affiliated issuers, at value (cost $389,452,309) (Notes 2 and 8) | 392,977,414 | ||||||
Receivable for Fund shares sold | 35,000 | ||||||
Interest receivable | 363,014 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 2,105,070 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 379,338 | ||||||
Receivable for open swap contracts (Note 2) | 2,069,840 | ||||||
Periodic payments from open swap agreements (Note 2) | 240,111 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 23,759 | ||||||
Total assets | 428,602,121 | ||||||
Liabilities: | |||||||
Foreign cash due to custodian (cost $81,500) | 80,515 | ||||||
Collateral on securities loaned (Note 2) | 3,150,588 | ||||||
Payable for Fund shares repurchased | 4,500 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 82,014 | ||||||
Shareholder service fee | 49,209 | ||||||
Trustees and Chief Compliance Officer fees | 553 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 2,188,809 | ||||||
Payable for open swap contracts (Note 2) | 434,521 | ||||||
Accrued expenses | 83,540 | ||||||
Total liabilities | 6,074,249 | ||||||
Net assets | $ | 422,527,872 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 433,460,827 | |||||
Distributions in excess of net investment income | (5,102,178 | ) | |||||
Accumulated net realized loss | (11,788,263 | ) | |||||
Net unrealized appreciation | 5,957,486 | ||||||
$ | 422,527,872 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 422,527,872 | |||||
Shares outstanding: | |||||||
Class III | 44,162,688 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.57 |
See accompanying notes to the financial statements.
9
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Interest (including securities lending income of $360) | $ | 1,621,961 | |||||
Dividends from affiliated issuers (Note 8) | 9,846,899 | ||||||
Total investment income | 11,468,860 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,139,421 | ||||||
Shareholder service fee – Class III (Note 3) | 683,653 | ||||||
Custodian, fund accounting agent and transfer agent fees | 192,080 | ||||||
Audit and tax fees | 55,233 | ||||||
Legal fees | 9,039 | ||||||
Trustees fees and related expenses (Note 3) | 8,146 | ||||||
Registration fees | 9,071 | ||||||
Miscellaneous | 8,285 | ||||||
Total expenses | 2,104,928 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (267,717 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (58,372 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (21,306 | ) | |||||
Net expenses | 1,757,533 | ||||||
Net investment income (loss) | 9,711,327 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (3,961,895 | ) | |||||
Investments in affiliated issuers | 2,228,944 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 996,811 | ||||||
Closed futures contracts | 6,760,844 | ||||||
Closed swap contracts | 774,271 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (40,301,789 | ) | |||||
Net realized gain (loss) | (33,502,814 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (2,344,491 | ) | |||||
Open futures contracts | (41,945 | ) | |||||
Open swap contracts | (387,589 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (4,834,295 | ) | |||||
Net unrealized gain (loss) | (7,608,320 | ) | |||||
Net realized and unrealized gain (loss) | (41,111,134 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (31,399,807 | ) |
See accompanying notes to the financial statements.
10
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 9,711,327 | $ | 5,508,928 | |||||||
Net realized gain (loss) | (33,502,814 | ) | 31,679,192 | ||||||||
Change in net unrealized appreciation (depreciation) | (7,608,320 | ) | 2,505,047 | ||||||||
Net increase (decrease) in net assets from operations | (31,399,807 | ) | 39,693,167 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (14,894,446 | ) | (31,212,330 | ) | |||||||
Net realized gains | |||||||||||
Class III | (287,353 | ) | (1,835,152 | ) | |||||||
(15,181,799 | ) | (33,047,482 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 30,744,414 | 160,704,821 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 30,744,414 | 160,704,821 | |||||||||
Total increase (decrease) in net assets | (15,837,192 | ) | 167,350,506 | ||||||||
Net assets: | |||||||||||
Beginning of period | 438,365,064 | 271,014,558 | |||||||||
End of period (including distributions in excess of net investment income of $5,102,178 and accumulated undistributed net investment income of $9,101,507, respectively) | $ | 422,527,872 | $ | 438,365,064 |
See accompanying notes to the financial statements.
11
GMO International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 10.61 | $ | 10.38 | $ | 9.94 | $ | 9.05 | $ | 9.44 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.21 | 0.17 | 0.20 | 0.20 | 0.44 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.93 | ) | 1.02 | 1.94 | 2.00 | (0.80 | ) | ||||||||||||||||
Total from investment operations | (0.72 | ) | 1.19 | 2.14 | 2.20 | (0.36 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.31 | ) | (0.91 | ) | (0.71 | ) | (1.31 | ) | (0.03 | ) | |||||||||||||
From net realized gains | (0.01 | ) | (0.05 | ) | (0.99 | ) | — | — | |||||||||||||||
Total distributions | (0.32 | ) | (0.96 | ) | (1.70 | ) | (1.31 | ) | (0.03 | ) | |||||||||||||
Net asset value, end of period | $ | 9.57 | $ | 10.61 | $ | 10.38 | $ | 9.94 | $ | 9.05 | |||||||||||||
Total Return(b) | (6.83 | )% | 11.81 | % | 23.17 | % | 25.17 | % | (3.80 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 422,528 | $ | 438,365 | $ | 271,015 | $ | 122,521 | $ | 135,048 | |||||||||||||
Net expenses to average daily net assets(c) | 0.39 | % | 0.39 | % | 0.39 | % | 0.38 | % | 0.38 | % | |||||||||||||
Net investment income to average daily net assets(a) | 2.13 | % | 1.65 | % | 1.98 | % | 1.96 | % | 4.73 | % | |||||||||||||
Portfolio turnover rate | 36 | % | 51 | % | 26 | % | 40 | % | 36 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | % | 0.09 | % | 0.12 | % | 0.11 | % | 0.11 | % |
(a) Net investment income is affected by the timing of the declaration of the dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
12
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investment in foreign bond and currency markets, primarily by investing in other fund(s) of the Trust "(underlying fund(s)"), including GMO Short-Duration Collateral Fund, GMO World Opportunity Overlay Fund and GMO Emerging Country Debt Fund and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent, or another fixed income security). The Fund's benchmark is the JPMorgan Non-U.S. Government Bond Index.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, upon request, without charge by calling (617) 346-7646 (collect). Shares of the GMO Short-Duration Collateral Fund, the GMO World Opportunity Overlay Fund and the GMO Special Purpose Holding Fund are not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's
13
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and, at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund, or underlying fund(s) in which it invests, are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. As of February 28, 2006, the total value of these securities represented 28.6% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $233,673 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $1,300,783 (approximately $0.03 per share as of April 18, 2006) in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange
14
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or s ell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency
15
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the
16
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to th e issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
17
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of February 28, 2006, the Fund did not enter into any rever se repurchase agreements.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $3,035,942 collateralized by cash in the amount of $3,150,588, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $14,894,446 and $32,298,440, respectively and long-term capital gains – $287,353 and $749,042, respectively.
18
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $21,531,334.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 413,211,271 | $ | 10,453,473 | $ | (278,755 | ) | $ | 10,174,718 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains due to foreign currency transactions and certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Loss | Paid-in Capital | |||||||||
$ | (9,020,566 | ) | $ | 17,324,937 | $ | (8,304,371 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the ident ified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature
19
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. The Fund may invest in Class III shares of GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in GMO Short-Duration Collateral Fund ("SDCF"), GMO Special Purpose Holding Fund ("SPHF") and GMO World Opportunity Overlay Fund ("Overlay Fund").
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying fund(s) exceed 0.25% of the average daily net assets, with such indirect expenses subject to a maximum total reimbursement to the Fund equal to 0.25% of the Fund's average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying fund(s) excludes investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded.
20
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.017 | % | 0.005 | % | 0.016 | % | 0.038 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $5,020 and $2,835, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 4,988,672 | $ | — | |||||||
Investments (non-U.S. Government securities) | 158,289,829 | 166,380,585 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 48.8% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
21
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, 0.9% of the Fund's shares were held by seven related parties comprised of certain GMO employee accounts, and 49.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,855,130 | $ | 99,990,204 | 13,143,558 | $ | 138,918,584 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,466,265 | 14,090,802 | 2,982,381 | 31,230,984 | |||||||||||||||
Shares repurchased | (8,493,772 | ) | (83,336,592 | ) | (905,666 | ) | (9,444,747 | ) | |||||||||||
Net increase (decrease) | 2,827,623 | $ | 30,744,414 | 15,220,273 | $ | 160,704,821 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the securities of these issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 13,036,542 | $ | 2,883,792 | $ | 3,350,000 | $ | 1,513,057 | $ | 670,735 | $ | 12,966,615 | |||||||||||||||
GMO Short-Duration Collateral Fund | 297,103,689 | 137,633,842 | 143,100,000 | 8,333,842 | — | 295,468,092 | |||||||||||||||||||||
GMO Special Purpose Holding Fund | 581,096 | — | — | — | 326,076 | 308,345 | * | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 88,260,749 | 12,275,000 | 16,500,000 | — | — | 84,234,362 | |||||||||||||||||||||
Totals | $ | 398,982,076 | $ | 152,792,634 | $ | 162,950,000 | $ | 9,846,899 | $ | 996,811 | $ | 392,977,414 |
* After the effect of return of capital distributions of $206,540 and $58,414 on April 5, 2005 and February 21, 2006, respectively.
22
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO International Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
23
GMO International Bond Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.43 | % | $ | 1,000.00 | $ | 971.60 | $ | 2.10 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,022.66 | $ | 2.16 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
24
GMO International Bond Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $287,353 from long-term capital gains.
25
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
26
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
27
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
28
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
29
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Emerging Country Debt Fund returned +19.5% for the fiscal year ended February 28, 2006, as compared to +13.1% for the JPMorgan Emerging Markets Bond Index Global (EMBIG).
The Fund outperformed the benchmark during the fiscal year by 6.4%. EMBIG spreads over U.S. Treasuries tightened 93 basis points to 187 basis points (net of the effect of changes in the composition of the index's Argentina sub-component), while the yield on the 10-year U.S. Treasury bond rose by 17 basis points to 4.55%. The EMBIG return of +13.1% was driven by carry (the yield on the index averaged 7%) and capital gains from spread tightening, despite the 17 basis point increase in U.S. interest rates.
The biggest gainers of the fiscal year were Ivory Coast (+47.8%), Argentina (+25.2%), Venezuela (+23.8%), and Dominican Republic (+23.8%). Latin American countries outperformed those outside the region, +15.4% to +10.0%. The worst performing countries for the year were Bulgaria (+1.3%), Tunisia (+1.4%), and China (+2.9%).
Market selection added value, primarily from the Venezuela and Ivory Coast overweights and the Malaysia and China underweights. Overweighting Ukraine and underweighting Philippines detracted from value added. Security selection added 530 basis points of positive alpha in total. Positions in Brazil were the largest contributor, as credit default swaps and currency options added value. Bond selection was also highly positive in Russia, Turkey, and Mexico.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 85.3 | % | |||||
Loan Participations | 6.8 | ||||||
Loan Assignments | 6.6 | ||||||
Call Options Purchased | 4.4 | ||||||
Swaps | 4.4 | ||||||
Mutual Funds | 0.9 | ||||||
Rights and Warrants | 0.7 | ||||||
Promissory Notes | 0.3 | ||||||
Put Options Purchased | 0.2 | ||||||
Short-Term Investment(s) | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Futures | 0.0 | ||||||
Written Options | (1.6 | ) | |||||
Reverse Repurchase Agreements | (17.6 | ) | |||||
Other | 9.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
Brazil | 18.0 | % | |||||
Mexico | 16.2 | ||||||
Russia | 12.6 | ||||||
Venezuela | 10.5 | ||||||
Turkey | 10.3 | ||||||
Colombia | 4.0 | ||||||
Ukraine | 3.7 | ||||||
Philippines | 3.0 | ||||||
Uruguay | 2.3 | ||||||
Argentina | 2.1 | ||||||
Peru | 1.9 | ||||||
Qatar | 1.3 | ||||||
Indonesia | 1.3 | ||||||
Nigeria | 1.2 | ||||||
Ecuador | 1.1 | ||||||
Algeria | 1.0 | ||||||
India | 0.9 | ||||||
Thailand | 0.9 | ||||||
Ivory Coast | 0.8 | ||||||
Vietnam | 0.7 | ||||||
Malaysia | 0.7 | ||||||
Jamaica | 0.6 | ||||||
Serbia | 0.6 | ||||||
Dominican Republic | 0.6 | ||||||
Chile | 0.5 | ||||||
Panama | 0.5 | ||||||
Poland | 0.5 | ||||||
Egypt | 0.4 | ||||||
Africa | 0.4 | ||||||
South Africa | 0.4 | ||||||
Bosnia | 0.3 | ||||||
Morocco | 0.3 | ||||||
El Salvador | 0.3 | ||||||
Costa Rica | 0.2 | ||||||
China | 0.2 | ||||||
Nicaragua | 0.2 | ||||||
Tunisia | 0.2 | ||||||
Belize | 0.1 | ||||||
Trinidad & Tobago | 0.1 | ||||||
Bulgaria | (0.1 | ) | |||||
Lebanon | (0.1 | ) | |||||
Romania | (0.1 | ) | |||||
South Korea | (0.6 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
2
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATION(S) — 80.9% | |||||||||||||||
Argentina — 7.8% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 24,087 | Republic of Argentina, 8.28%, due 12/31/33 | 23,461 | ||||||||||||
USD | 3,433,525 | Republic of Argentina Capitalization Bond, 12.25%, due 06/19/18 (a) | 1,098,728 | ||||||||||||
USD | 45,720,000 | Republic of Argentina Capitalization Bond, 12.00%, due 06/19/31 (a) | 14,630,400 | ||||||||||||
USD | 32,000,000 | Republic of Argentina Discount Bond, Series L-GL, Variable Rate, 6 mo. LIBOR + .81%, 5.44%, due 03/31/23 (a) | 16,640,000 | ||||||||||||
DEM | 3,830,000 | Republic of Argentina Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 3.40%, due 03/31/23 (a) | 1,213,902 | ||||||||||||
ARS | 220,171,475 | Republic of Argentina GDP linked, 0.00%, due 12/15/35 (a) (b) (c) | 16,921,387 | ||||||||||||
DEM | 5,000,000 | Republic of Argentina Global Bond, 9.00%, due 11/19/08 (a) | 822,840 | ||||||||||||
ARS | 7,400,813 | Republic of Argentina Global Bond, 2.00%, due 02/04/18 (a) | 2,845,382 | ||||||||||||
USD | 26,545,000 | Republic of Argentina Global Bond, 12.13%, due 02/25/19 (a) | 7,963,500 | ||||||||||||
USD | 6,931,000 | Republic of Argentina Global Bond, 12.00%, due 02/01/20 (a) | 2,079,300 | ||||||||||||
USD | 3,540,000 | Republic of Argentina Global Bond, 8.88%, due 03/01/29 (a) | 920,400 | ||||||||||||
ARS | 28,000,000 | Republic of Argentina Global Bond, 0.63%, due 12/31/38 (c) | 4,022,336 | ||||||||||||
USD | 31,390,000 | Republic of Argentina Global Bond, Reg. S, Variable Rate, 3 mo. LIBOR + .58%, 10.30%, due 04/06/04 (a) | 8,396,825 | ||||||||||||
USD | 198,230 | Republic of Argentina Global Bond, Series 2008, Step Up, 15.50%, due 12/19/08 (a) | 61,451 | ||||||||||||
USD | 8,000,000 | Republic of Argentina Global Bond, Series BT04, 9.38%, due 09/19/27 (a) | 2,400,000 | ||||||||||||
DEM | 20,000,000 | Republic of Argentina Global Bond, Series DM, 5.87%, due 03/31/23 (a) | 7,070,328 | ||||||||||||
EUR | 3,500,000 | Republic of Argentina Global Bond, Series FEB, Step Down, 8.00%, due 02/26/08 (a) | 1,350,798 | ||||||||||||
USD | 15,000,000 | Republic of Argentina Global Par Bond, Series L-GP, Variable Rate, Step Up, 6.00%, due 03/31/23 (a) | 7,800,000 | ||||||||||||
USD | 2,000,000 | Republic of Argentina Pro 4, 2.00%, due 12/28/10 (a) | 335,000 | ||||||||||||
JPY | 500,000,000 | Republic of Argentina Series EMTN, 7.40%, due 04/25/06 (a) (c) | 1,339,035 | ||||||||||||
EUR | 2,500,000 | Republic of Argentina Series EMTN, Variable Rate, 3 mo. EURIBOR +5.10%, 7.59%, due 12/22/04 (a) | 774,865 | ||||||||||||
EUR | 112,500,000 | Republic of Argentina, Step Up, 1.20%, due 12/31/38 | 54,482,695 | ||||||||||||
USD | 164,600,000 | Republic of Argentina, Step Up, 1.33%, due 12/31/38 | 66,251,500 | ||||||||||||
219,444,133 |
See accompanying notes to the financial statements.
3
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Belize — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,000,000 | Belize Government International Bond, 9.50%, due 08/15/12 | 3,700,000 | ||||||||||||
Bosnia & Herzegovina — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
DEM | 24,739,120 | Bosnia & Herzegovina, Series A, Step Up, Variable Rate, 6 mo. DEM LIBOR + .81%, 3.50%, due 12/11/17 | 13,080,830 | ||||||||||||
Brazil — 13.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 38,236,106 | Brazil DCB (Bearer), Series 18 Yr, Variable Rate, 6 mo. LIBOR + .88%, 5.25%, due 04/15/12 | 38,236,106 | ||||||||||||
USD | 68,442,440 | Brazil DCB (Registered), Variable Rate, 6 mo. LIBOR + .88%, 5.25%, due 04/15/12 | 68,442,440 | ||||||||||||
USD | 29,525,000 | Brazil Discount ZL Bond, Series 30 Yr, Variable Rate, 6 mo. LIBOR + .81%, 5.19%, due 04/15/24 | 29,525,000 | ||||||||||||
USD | 14,172,765 | Brazil FLIRB (Registered), Variable Rate, 6 mo. LIBOR + .81%, 5.19%, due 04/15/09 | 14,155,049 | ||||||||||||
USD | 5,537,732 | Brazil MYDFA Trust Certificates, 144A, Variable Rate, 6 mo. LIBOR + .81%, 5.94%, due 09/15/07 | 5,537,732 | ||||||||||||
USD | 10,533,484 | Brazilian Government International Exit Bonds, 6.00%, due 09/15/13 | 10,533,484 | ||||||||||||
USD | 527,304 | Brazilian Government International Exit Bonds Odd Lot, 6.00%, due 09/15/13 | 516,758 | ||||||||||||
USD | 14,000,000 | Republic of Brazil, 8.75%, due 02/04/25 | 16,919,000 | ||||||||||||
USD | 56,000,000 | Republic of Brazil, 8.25%, due 01/20/34 | 66,976,000 | ||||||||||||
USD | 101,000,000 | Republic of Brazil, 11.00%, due 08/17/40 (b) | 134,229,000 | ||||||||||||
385,070,569 | |||||||||||||||
China — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 7,500,000 | China Government International Bond, 6.80%, due 05/23/11 | 8,033,812 |
See accompanying notes to the financial statements.
4
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Colombia — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 8,000,000 | Republic of Colombia, 8.70%, due 02/15/16 | 9,040,000 | ||||||||||||
USD | 3,800,000 | Republic of Colombia, 11.85%, due 03/09/28 | 5,016,000 | ||||||||||||
14,056,000 | |||||||||||||||
Costa Rica — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 3,000,000 | Republic of Costa Rica, Reg S, 8.05%, due 01/31/13 | 3,277,500 | ||||||||||||
USD | 3,710,000 | Republic of Costa Rica, Reg S, 10.00%, due 08/01/20 | 4,748,800 | ||||||||||||
8,026,300 | |||||||||||||||
Dominican Republic — 1.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 2,355,962 | Dominican Republic Bond, Variable Rate, 6 mo. LIBOR + .81%, 5.81%, due 08/30/09 | 2,338,292 | ||||||||||||
USD | 42,557,000 | Dominican Republic Bond, Variable Rate, 6 mo. LIBOR + .81%, 5.39%, due 08/30/24 | 39,578,010 | ||||||||||||
41,916,302 | |||||||||||||||
Ecuador — 1.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 2,755,597 | Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, Variable Rate, 6 mo. LIBOR + .81%, 5.81%, due 02/27/15 (c) | 1,561,505 | ||||||||||||
USD | 2,000,000 | Republic of Ecuador, 144A, 9.38%, due 12/15/15 | 2,095,000 | ||||||||||||
USD | 33,587,000 | Republic of Ecuador, Variable Rate, Step Up, 9.00%, due 08/15/30 | 33,251,130 | ||||||||||||
36,907,635 |
See accompanying notes to the financial statements.
5
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
El Salvador — 0.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 7,000,000 | Republic of El Salvador, Reg S, 8.50%, due 07/25/11 | 7,875,000 | ||||||||||||
USD | 4,000,000 | Republic of El Salvador, Reg S, 8.25%, due 04/10/32 | 4,680,000 | ||||||||||||
12,555,000 | |||||||||||||||
Iraq — 0.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 16,000,000 | Republic of Iraq, 144A, 5.80%, due 01/15/28 | 11,400,000 | ||||||||||||
Ivory Coast — 1.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
FRF | 37,500,000 | Ivory Coast Discount Bond, Series FF, Variable Rate, Step Up, 3.00%, due 03/31/28 (a) | 2,317,115 | ||||||||||||
FRF | 155,755,000 | Ivory Coast FLIRB, Variable Rate, Step Up, 2.50%, due 03/29/18 (a) | 21,209,356 | ||||||||||||
FRF | 256,889,500 | Ivory Coast PDI, Series FF, Variable Rate, Step Up, 1.90%, due 03/30/18 (a) | 11,204,563 | ||||||||||||
34,731,034 | |||||||||||||||
Jamaica — 0.8% | |||||||||||||||
Corporate Debt — 0.7% | |||||||||||||||
USD | 17,000,000 | Air Jamaica Ltd., Reg S, 144A, 9.38%, due 07/08/15 | 17,637,500 | ||||||||||||
Foreign Government Obligations — 0.1% | |||||||||||||||
USD | 3,000,000 | Government of Jamaica, 10.63%, due 06/20/17 | 3,492,000 | ||||||||||||
Total Jamaica | 21,129,500 | ||||||||||||||
Kazakhstan — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,000,000 | Kaztransoil, Reg S, 8.50%, due 07/06/06 | 4,040,000 |
See accompanying notes to the financial statements.
6
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Luxembourg — 0.7% | |||||||||||||||
Corporate Debt | |||||||||||||||
USD | 19,000,000 | VTB Capital SA, Reg S, 6.25%, due 06/30/35 | 19,592,800 | ||||||||||||
Malaysia — 1.3% | |||||||||||||||
Corporate Debt — 1.0% | |||||||||||||||
MYR | 45,000,000 | Transshipment Megahub Berhad, Series C, 5.45%, due 11/03/09 | 12,576,985 | ||||||||||||
MYR | 50,000,000 | Transshipment Megahub Berhad, Series F, 6.70%, due 11/03/12 | 14,592,194 | ||||||||||||
27,169,179 | |||||||||||||||
Foreign Government Obligations — 0.3% | |||||||||||||||
USD | 8,000,000 | Malaysia Global Bond, 7.50%, due 07/15/11 | 8,845,038 | ||||||||||||
Total Malaysia | 36,014,217 | ||||||||||||||
Mexico — 10.3% | |||||||||||||||
Corporate Debt — 2.4% | |||||||||||||||
USD | 4,000,000 | Pemex Project Funding Master Trust, 8.63%, due 02/01/22 | 4,960,000 | ||||||||||||
USD | 16,500,000 | Pemex Project Funding Master Trust, 144A, 9.50%, due 09/15/27 | 22,481,250 | ||||||||||||
EUR | 7,500,000 | Pemex Project Funding Master Trust, Reg S, 6.38%, due 08/05/16 | 10,165,633 | ||||||||||||
USD | 8,000,000 | Pemex Project Funding Master Trust, Reg S, 6.63%, due 06/15/35 | 8,096,658 | ||||||||||||
GBP | 7,689,000 | Pemex Project Funding Master Trust, Series EMTN, 7.50%, due 12/18/13 | 15,206,902 | ||||||||||||
ITL | 11,955,000,000 | Petroleos Mexicanos, Series EMTN, Variable Rate, 11.25% - 12 mo. IL LIBOR, 8.91%, due 03/04/08 | 7,967,540 | ||||||||||||
68,877,983 | |||||||||||||||
Foreign Government Obligations — 7.9% | |||||||||||||||
USD | 89,500,000 | United Mexican States, 8.30%, due 08/15/31 (b) | 117,245,000 | ||||||||||||
USD | 10,000,000 | United Mexican States Global Bond, 11.50%, due 05/15/26 | 16,550,000 | ||||||||||||
ITL | 28,000,000,000 | United Mexican States, Series EMTN, 11.00%, due 05/08/17 | 27,366,455 | ||||||||||||
GBP | 29,994,000 | United Mexican States, Series GMTN, 6.75%, due 02/06/24 | 61,096,237 | ||||||||||||
222,257,692 | |||||||||||||||
Total Mexico | 291,135,675 |
See accompanying notes to the financial statements.
7
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Nicaragua — 0.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 10,194,188 | Republic of Nicaragua BPI Series E, 5.00%, due 02/01/11 | 8,636,924 | ||||||||||||
Nigeria — 0.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 26,000,000 | Central Bank of Nigeria Par Bond, Series WW, Step Up, 6.25%, due 11/15/20 | 26,000,000 | ||||||||||||
Panama — 0.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,000,000 | Republic of Panama, 7.13%, due 01/29/26 | 4,240,000 | ||||||||||||
USD | 14,317,875 | Republic of Panama PDI Bond, Variable Rate, 6 mo. LIBOR + .81%, 5.56%, due 07/17/16 | 14,031,517 | ||||||||||||
18,271,517 | |||||||||||||||
Peru — 3.8% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 17,566,500 | Peru FLIRB, Series 20 Yr, Variable Rate, Step Up, 5.00%, due 03/07/17 | 17,039,505 | ||||||||||||
USD | 25,000,000 | Peru Par Bond, Series 30 Yr, Variable Rate, Step Up, 3.00%, due 03/07/27 | 18,437,500 | ||||||||||||
USD | 4,824,253 | Peru Trust II, Series 98-A LB, 0.00%, due 02/28/16 | 3,473,462 | ||||||||||||
USD | 10,490,607 | Peru Trust, Series 97-I-P Class A3, 0.00%, due 12/31/15 | 5,943,558 | ||||||||||||
USD | 5,000,000 | Republic of Peru, 7.35%, due 07/21/25 | 5,262,500 | ||||||||||||
USD | 40,381,000 | Republic of Peru Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 5.88%, due 03/07/27 | 38,765,760 | ||||||||||||
EUR | 13,700,000 | Republic of Peru Global Bond, 7.50%, due 10/14/14 | 19,067,341 | ||||||||||||
107,989,626 | |||||||||||||||
Philippines — 5.0% | |||||||||||||||
Corporate Debt — 0.3% | |||||||||||||||
USD | 8,500,000 | National Power Corp. Global Bond, 8.40%, due 12/15/16 | 8,670,000 |
See accompanying notes to the financial statements.
8
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Foreign Government Obligations — 4.7% | |||||||||||||||
USD | 59,501,000 | Central Bank of the Philippines, Series A, 8.60%, due 06/15/27 | 59,739,004 | ||||||||||||
USD | 4,310,000 | Central Bank of the Philippines, Series B, Variable Rate, Step Up, 6.50%, due 12/01/17 | 4,310,000 | ||||||||||||
EUR | 12,000,000 | Republic of Philippines, 9.13%, due 02/22/10 | 16,415,217 | ||||||||||||
USD | 27,843,000 | Republic of Philippines, 8.38%, due 02/15/11 | 30,173,459 | ||||||||||||
USD | 7,450,000 | Republic of Philippines, 10.63%, due 03/16/25 | 9,666,375 | ||||||||||||
USD | 11,000,000 | Republic of Philippines, 144A, 7.75%, due 01/14/31 | 11,055,000 | ||||||||||||
USD | 1,600,000 | Republic of Philippines, Series 92-B, Variable Rate, 6 mo. LIBOR + .81%, 5.44%, due 12/01/09 | 1,552,000 | ||||||||||||
132,911,055 | |||||||||||||||
Total Philippines | 141,581,055 | ||||||||||||||
Poland — 0.6% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 10,000,000 | Delphes Co. No. 2 Ltd., Reg S, 7.75%, due 05/05/09 | 10,699,470 | ||||||||||||
USD | 6,000,000 | Poland Government International Bond, 6.25%, due 07/03/12 | 6,345,000 | ||||||||||||
17,044,470 | |||||||||||||||
Qatar — 0.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 17,000,000 | Qatar Government International Bond, Reg S, 9.75%, due 06/15/30 | 26,180,000 | ||||||||||||
Russia — 8.8% | |||||||||||||||
Corporate Debt — 2.5% | |||||||||||||||
USD | 70,000,000 | Volga Investments Ltd. Notes, Variable Rate, 3 mo. LIBOR + 1.85%, 5.99%, due 04/02/08 (b) | 70,280,000 | ||||||||||||
Foreign Government Obligations — 6.3% | |||||||||||||||
EUR | 45,000,000 | Aries Vermogensverwaltung, Reg S, 7.75%, due 10/25/09 | 60,953,563 | ||||||||||||
USD | 91,500,000 | Aries Vermogensverwaltung, Reg S, 9.60%, due 10/25/14 | 117,463,125 | ||||||||||||
178,416,688 | |||||||||||||||
Total Russia | 248,696,688 |
See accompanying notes to the financial statements.
9
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Serbia — 0.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 13,868,290 | Republic of Serbia, 144A, Step Up, 3.75%, due 11/01/24 | 12,793,498 | ||||||||||||
USD | 1,097,736 | Republic of Serbia, Reg S, Step Up, 3.75%, due 11/01/24 | 1,012,661 | ||||||||||||
13,806,159 | |||||||||||||||
South Africa — 0.1% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
ZAR | 163,000,000 | Eskom Holdings Ltd., 0.00%, due 12/31/32 | 3,525,538 | ||||||||||||
South Korea — 0.2% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 6,000,000 | Export Import Bank of Korea, 7.10%, due 03/15/07 | 6,113,323 | ||||||||||||
Thailand — 0.2% | |||||||||||||||
Foreign Government Agency | |||||||||||||||
USD | 5,000,000 | PTT Public Co. Ltd., 144A, 5.75%, due 08/01/14 | 5,150,975 | ||||||||||||
Tunisia — 0.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
JPY | 360,000,000 | Banque Centrale De Tunisie, Series 6RG, 4.35%, due 08/15/17 | 3,638,720 | ||||||||||||
Turkey — 1.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 10,000,000 | Republic of Turkey, 11.88%, due 01/15/30 (b) | 15,850,000 | ||||||||||||
USD | 31,500,000 | Republic of Turkey, 6.88%, due 03/17/36 (b) | 31,893,750 | ||||||||||||
47,743,750 | |||||||||||||||
Ukraine — 0.7% | |||||||||||||||
Corporate Debt — 0.3% | |||||||||||||||
USD | 9,000,000 | Credit Suisse First Boston The EXIM of Ukraine, 6.80%, due 10/04/12 | 8,775,000 |
See accompanying notes to the financial statements.
10
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Foreign Government Obligations — 0.4% | |||||||||||||||
USD | 10,000,000 | Dresdner Kleinwort Wasserstein for CJSC The EXIM of Ukraine, Note, 7.75%, due 09/23/09 | 10,213,000 | ||||||||||||
USD | 560,040 | Ukraine Government International Bond Series, Reg S, 11.00%, due 03/15/07 | 575,441 | ||||||||||||
10,788,441 | |||||||||||||||
Total Ukraine | 19,563,441 | ||||||||||||||
United Kingdom — 0.3% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
GBP | 1,883,978 | RMAC Plc, Series 03-NS1A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.09%, due 06/12/35 | 3,316,252 | ||||||||||||
GBP | 3,206,596 | RMAC Plc, Series 03-NS2A, Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.04%, due 09/12/35 | 5,637,628 | ||||||||||||
8,953,880 | |||||||||||||||
United States — 3.2% | |||||||||||||||
Asset-Backed Securities — 1.8% | |||||||||||||||
USD | 4,000,000 | Aircraft Finance Trust, Series 99-1A, Class A1, Variable Rate, 1 mo. LIBOR + .48%, 5.05%, due 05/15/24 | 2,540,000 | ||||||||||||
USD | 879,859 | California Infrastructure PG&E, Series 97-1, Class A7, 6.42%, due 09/25/08 | 883,017 | ||||||||||||
USD | 1,161,244 | Chevy Chase Mortgage Funding Corp., Series 03-4, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .34%, 4.72%, due 10/25/34 | 1,162,638 | ||||||||||||
USD | 3,256,332 | CHYPS CBO Ltd., Series 1997-1A, Class A2A, 6.72%, due 01/15/10 | 1,660,729 | ||||||||||||
USD | 3,797,309 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .44%, 5.26%, due 10/25/30 | 3,823,207 | ||||||||||||
USD | 4,516,556 | Golden Securities Corp., Series 03-A, Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 4.87%, due 12/02/13 | 4,517,595 | ||||||||||||
USD | 15,000,000 | Huntsman International Asset-Backed Securities Ltd., Series 1, Class A1, Variable Rate, 1 mo. LIBOR + .39%, 4.96%, due 03/15/07 | 14,983,050 | ||||||||||||
USD | 10,000,000 | Morgan Stanley ACES SPC, Series 04-15, Class I, 144A, Variable Rate, 3 mo. LIBOR + .45%, 4.95%, due 12/20/09 | 10,014,062 | ||||||||||||
USD | 2,029,563 | Quest Trust, Series 03-X4A, Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .43%, 5.01%, due 12/25/33 | 2,033,007 | ||||||||||||
USD | 422,310 | Rhyno CBO Delaware Corp., Series 97-1, Class A-2, 144A, Step Up, 6.33%, due 09/15/09 | 423,193 | ||||||||||||
USD | 10,313,033 | SHYPPCO Finance Co., Series II, Class A-2B, 144A, 6.64%, due 06/15/10 | 9,797,381 | ||||||||||||
51,837,879 |
See accompanying notes to the financial statements.
11
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
U.S. Government — 1.4% | |||||||||||||||
USD | 37,768,540 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (d) (e) | 39,108,019 | ||||||||||||
Total United States | 90,945,898 | ||||||||||||||
Uruguay — 3.0% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 350,000 | Republic of Uruguay, 7.63%, due 01/20/12 | 346,500 | ||||||||||||
USD | 1,000,000 | Republic of Uruguay, 7.50%, due 03/15/15 | 1,060,000 | ||||||||||||
USD | 1,000,000 | Republic of Uruguay, 9.25%, due 05/17/17 | 1,185,000 | ||||||||||||
USD | 28,270,738 | Republic of Uruguay PIK Bond, 7.88%, due 01/15/33 | 30,249,690 | ||||||||||||
USD | 4,056,000 | Uruguay Government International Bond, 7.00%, due 04/07/08 | 4,137,120 | ||||||||||||
USD | 400,000 | Uruguay Government International Bond, 7.88%, due 03/25/09 | 409,000 | ||||||||||||
USD | 5,650,000 | Uruguay Government International Bond, 7.25%, due 05/04/09 | 5,650,000 | ||||||||||||
USD | 75,000 | Uruguay Government International Bond, 8.38%, due 09/26/11 | 80,250 | ||||||||||||
USD | 24,500,000 | Uruguay Government International Bond, 8.00%, due 11/18/22 | 26,460,000 | ||||||||||||
USD | 69,106 | Uruguay Government International Bond PIK, 7.88%, due 01/15/33 | 73,944 | ||||||||||||
JPY | 1,648,000,000 | Uruguay Government International Bond, Series 3BR, 2.50%, due 03/14/11 | 13,738,672 | ||||||||||||
83,390,176 | |||||||||||||||
Venezuela — 7.8% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 25,000,000 | Republic of Venezuela, 11.00%, due 03/05/08 | 33,989,751 | ||||||||||||
EUR | 8,400,000 | Republic of Venezuela, 11.13%, due 07/25/11 | 13,017,732 | ||||||||||||
USD | 7,000,000 | Republic of Venezuela, 8.50%, due 10/08/14 | 7,945,000 | ||||||||||||
EUR | 5,000,000 | Republic of Venezuela, 7.00%, due 03/16/15 | 6,690,661 | ||||||||||||
USD | 49,250,000 | Republic of Venezuela, 9.38%, due 01/13/34 (b) | 64,271,250 | ||||||||||||
USD | 413,580 | Republic of Venezuela DCB DL Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 5.56%, due 12/18/07 (c) | 409,445 | ||||||||||||
USD | 4,304,348 | Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 5.56%, due 12/18/08 | 4,239,783 | ||||||||||||
DEM | 34,500,000 | Republic of Venezuela Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 3.13%, due 03/31/20 (c) | 20,187,006 |
See accompanying notes to the financial statements.
12
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Venezuela — continued | |||||||||||||||
CHF | 5,713,600 | Republic of Venezuela FLIRB, Series SFR, Variable Rate, CHF 6 mo. LIBOR + .88%, 1.75%, due 03/31/07 | 4,311,494 | ||||||||||||
DEM | 30,190,000 | Republic of Venezuela Global Bond, Step Down, 7.38%, due 10/29/08 | 19,873,230 | ||||||||||||
DEM | 24,500,000 | Republic of Venezuela Par Bond, 6.66%, due 03/31/20 | 13,902,642 | ||||||||||||
USD | 20,000,000 | Republic of Venezuela Par Bond, Series B, 6.75%, due 03/31/20 | 20,000,000 | ||||||||||||
FRF | 54,175,000 | Republic of Venezuela Par Bond, Series WOIL, 7.71%, due 03/31/20 | 9,855,311 | ||||||||||||
218,693,305 | |||||||||||||||
Vietnam — 0.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 4,000,000 | Vietnam Discount Bond, Series 30 Yr, Variable Rate, 6 mo. LIBOR + .81%, 5.88%, due 03/13/28 | 3,810,000 | ||||||||||||
USD | 19,750,000 | Vietnam Par Bond, Series 30 Yr, Variable Rate, Step Up, 3.75%, due 03/12/28 | 16,046,876 | ||||||||||||
USD | 5,478,261 | Vietnam PDI, Series 18 Yr, Variable Rate, Step Up, 5.88%, due 03/12/16 | 5,327,609 | ||||||||||||
25,184,485 | |||||||||||||||
TOTAL DEBT OBLIGATION(S) (COST $2,100,501,656) | 2,281,943,737 | ||||||||||||||
LOAN ASSIGNMENTS — 6.6% | |||||||||||||||
Algeria — 1.0% | |||||||||||||||
JPY | 76,220,035 | Algeria Tranche 1 Loan Agreement, 6 mo. JPY LIBOR + .8125%, (0.9375%), due 09/04/10 | 655,168 | ||||||||||||
JPY | 2,728,212,391 | Algeria Tranche 3 Loan Agreement, 6 mo. JPY LIBOR + .8125%, (2.14875%), due 03/04/10 | 23,451,007 | ||||||||||||
JPY | 421,875,000 | Algeria Tranche 3 Loan Agreement, JPY Long Term Prime +.8125%, (2.3875%), due 03/04/10 | 3,626,328 | ||||||||||||
27,732,503 | |||||||||||||||
Argentina — 0.0% | |||||||||||||||
ARS | 15,432,863 | Argentina INDER Certificates (a) | 336,671 |
See accompanying notes to the financial statements.
13
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Congo Republic (Brazzaville) — 0.5% | |||||||||||||||
EUR | 4,976,732 | Republic of Congo Loan Agreement * | 1,275,544 | ||||||||||||
EUR | 14,565,612 | Republic of Congo Loan Agreement * | 3,733,188 | ||||||||||||
FRF | 102,097,963 | Republic of Congo Loan Agreement * | 3,989,265 | ||||||||||||
USD | 8,496,466 | Republic of Congo Loan Agreement * | 1,826,740 | ||||||||||||
EUR | 6,987,247 | Republic of Congo Loan Agreement * | 1,790,842 | ||||||||||||
12,615,579 | |||||||||||||||
Indonesia — 1.0% | |||||||||||||||
JPY | 230,040,002 | Republic of Indonesia Loan Agreement, 6 mo. JPY LIBOR + .88% (0.95%), due 3/29/13 | 1,927,682 | ||||||||||||
USD | 4,708,000 | Republic of Indonesia Loan Agreement, dated January 1, 1994, 6 mo. LIBOR + .88% , (5.10%), due 3/29/13 | 4,613,840 | ||||||||||||
USD | 3,837,600 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 3 mo. LIBOR + .88%, (5.56%), due 12/14/19 | 3,434,652 | ||||||||||||
USD | 5,116,800 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 3 mo. LIBOR + .88%, (5.56%), due 12/14/19 | 4,579,536 | ||||||||||||
USD | 3,837,600 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 3 mo. LIBOR + .88%, (5.56%), due 12/14/19 | 3,434,652 | ||||||||||||
USD | 1,961,066 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR, (4.63%), due 12/01/19 | 1,794,376 | ||||||||||||
USD | 3,438,334 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR, (4.63%), due 12/01/19 | 3,146,076 | ||||||||||||
USD | 2,811,119 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR, (4.63%), due 12/01/19 | 2,572,174 | ||||||||||||
EUR | 3,986,211 | Republic of Indonesia, Indonesia Paris Club Debt, 4.76%, due 6/01/21 * | 3,706,530 | ||||||||||||
29,209,518 | |||||||||||||||
Morocco — 0.2% | |||||||||||||||
USD | 6,136,364 | Morocco Tranche A Restructuring and Consolidating Agreement 6 mo. LIBOR + .8125%, (5.69%), due 1/01/09 | 6,136,364 | ||||||||||||
Russia — 3.9% | |||||||||||||||
USD | 12,727,607 | Russia Foreign Trade Obligations * (c) | 16,864,128 | ||||||||||||
USD | 7,489,028 | Russia Foreign Trade Obligations * (c) | 9,854,812 | ||||||||||||
USD | 269,844 | Russia Foreign Trade Obligations * (c) | 348,670 | ||||||||||||
USD | 3,281,440 | Russia Foreign Trade Obligations * (c) | 4,511,155 |
See accompanying notes to the financial statements.
14
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
USD | 3,006,950 | Russia Foreign Trade Obligations * (c) | 4,054,162 | ||||||||||||
ATS | 1,208,022 | Russia Foreign Trade Obligations * (c) | 128,618 | ||||||||||||
ATS | 964,717 | Russia Foreign Trade Obligations * (c) | 98,467 | ||||||||||||
ATS | 1,733,698 | Russia Foreign Trade Obligations * (c) | 170,414 | ||||||||||||
ATS | 447,177 | Russia Foreign Trade Obligations * (c) | 53,055 | ||||||||||||
ATS | 631,501 | Russia Foreign Trade Obligations * (c) | 56,852 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (c) | 734,987 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (c) | 673,824 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (c) | 628,192 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (c) | 585,150 | ||||||||||||
FRF | 3,660,000 | Russia Foreign Trade Obligations * (c) | 551,936 | ||||||||||||
NLG | 495,100 | Russia Foreign Trade Obligations * (c) | 331,562 | ||||||||||||
USD | 15,060,875 | Russia Foreign Trade Obligations * (c) | 13,954,923 | ||||||||||||
USD | 18,580,206 | Russia Foreign Trade Obligations * (c) | 24,261,024 | ||||||||||||
DEM | 2,503,894 | Russia Foreign Trade Obligations * (c) | 1,454,419 | ||||||||||||
FRF | 71,883,000 | Russia Foreign Trade Obligations * (c) | 16,721,786 | ||||||||||||
CHF | 231,420 | Russia Foreign Trade Obligations * (c) | 169,056 | ||||||||||||
USD | 10,840,000 | Russia Foreign Trade Obligations * (c) | 14,718,520 | ||||||||||||
110,925,712 | |||||||||||||||
TOTAL LOAN ASSIGNMENTS (COST $155,776,564) | 186,956,347 | ||||||||||||||
LOAN PARTICIPATIONS — 6.8% | |||||||||||||||
Algeria — 0.3% | |||||||||||||||
JPY | 112,500,000 | Algeria Tranche 3 Loan Agreement (Participation with Salomon Brothers), JPY Long Term Prime +.8125%, (2.3875%), due 03/04/10 | 967,021 | ||||||||||||
JPY | 756,710,526 | Algeria Tranche S1 Loan Agreement (Participation with Merrill Lynch), JPY Long Term Prime + .8125%, (2.14875%), due 03/04/10 | 6,504,488 | ||||||||||||
7,471,509 | |||||||||||||||
Egypt — 0.1% | |||||||||||||||
CHF | 6,576,771 | Egypt Paris Club Loan (Participation with Standard Chartered Bank), 0.00%, due 1/03/24 * | 3,132,131 |
See accompanying notes to the financial statements.
15
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value | Description | Value ($) | |||||||||||||
Indonesia — 2.1% | |||||||||||||||
USD | 28,962,050 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 3 mo. LIBOR + 1.25%, (5.99%), due 02/12/13 | 26,645,086 | ||||||||||||
JPY | 1,315,305,185 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), dated January 1, 1994, 6 mo. JPY LIBOR + .88%, (0.95%), due 3/29/13 | 11,135,580 | ||||||||||||
USD | 22,366,236 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), dated September 29, 1995, 3 mo. LIBOR + .88%, (5.42%), due 9/29/19 | 20,129,612 | ||||||||||||
USD | 472,320 | Republic of Indonesia Loan Agreement (Participation with Salomon Brothers), dated June 14, 1995, 3 mo. LIBOR + .88%, (5.56%), due 12/14/19 | 422,726 | ||||||||||||
USD | 472,320 | Republic of Indonesia Loan Agreement (Participation with Salomon Brothers), dated June 14, 1995, 3 mo. LIBOR + .88%, (5.56%), due 12/14/19 | 422,726 | ||||||||||||
USD | 629,760 | Republic of Indonesia Loan Agreement (Participation with Salomon Brothers), dated June 14, 1995, 3 mo. LIBOR + 88%, (5.56%), due 12/14/19 | 563,635 | ||||||||||||
59,319,365 | |||||||||||||||
Poland — 0.6% | |||||||||||||||
JPY | 2,120,000,000 | Poland Paris Club Debt (Participation with Deutsche Bank), 2.22%, due 3/31/09 | 18,314,544 | ||||||||||||
Russia — 3.7% | |||||||||||||||
USD | 10,000,000 | Russia Foreign Trade Obligations, (Participation with Banca Lombardi) * (c) | 13,539,556 | ||||||||||||
USD | 531,297 | Russia Foreign Trade Obligations, (Participation with Deutsche Bank) * (c) | 766,207 | ||||||||||||
USD | 214,371 | Russia Foreign Trade Obligations, (Participation with Deutsche Bank) * (c) | 275,759 | ||||||||||||
USD | 81,965 | Russia Foreign Trade Obligations, (Participation with Deutsche Bank) * (c) | 110,897 | ||||||||||||
DEM | 2,625,598 | Russia Foreign Trade Obligations, (Participation with Deutsche Bank) * (c) | 1,974,032 | ||||||||||||
DEM | 10,399,680 | Russia Foreign Trade Obligations, (Participation with Deutsche Bank) * (c) | 7,231,890 | ||||||||||||
EUR | 2,244,362 | Russian Paris Club Debt, (Participation with Deutsche Bank), Variable Rate, 6.28%, due 08/20/20 | 2,675,505 | ||||||||||||
USD | 14,040,695 | Russian Paris Club Debt, (Participation with Deutsche Bank), Variable Rate, 6.37%, due 08/20/16 | 13,727,587 | ||||||||||||
EUR | 9,647,573 | Russian Paris Club Debt, (Participation with Deutsche Bank), Variable Rate, 6.45%, due 08/20/20 | 11,500,871 | ||||||||||||
EUR | 24,171,956 | Russian Paris Club Debt, (Participation with Deutsche Bank), Variable Rate, 6.52%, due 08/20/20 | 28,815,389 | ||||||||||||
EUR | 8,577,706 | Russian Paris Club Debt, (Participation with Deutsche Bank), Variable Rate, 6.61%, due 08/20/20 | 10,225,484 |
See accompanying notes to the financial statements.
16
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Par Value / Principal Amount | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
USD | 965,249 | Russian Paris Club Debt, (Participation with Mediocredito), Variable Rate, 6 mo. USD LIBOR + .50%, 5.44%, due 8/20/20 | 945,944 | ||||||||||||
EUR | 2,562,438 | Russian Paris Club Debt, (Participation with Mediocredito), Variable Rate, EURIBOR + .50%, 3.22%, due 8/20/20 | 3,024,135 | ||||||||||||
USD | 8,849,042 | Russian Paris Club Debt, (Participation with Standard Bank), Variable Rate, 6 mo. USD LIBOR + .05%, 6.37%, due 08/20/16 | 8,495,081 | ||||||||||||
103,308,337 | |||||||||||||||
TOTAL LOAN PARTICIPATIONS (COST $163,213,335) | 191,545,886 | ||||||||||||||
PROMISSORY NOTES — 0.3% | |||||||||||||||
Nigeria — 0.3% | |||||||||||||||
USD | 27,000,000 | Central Bank of Nigeria Promissory Notes, Series RC, 0.00%, due 1/5/2010 | 7,560,000 | ||||||||||||
TOTAL PROMISSORY NOTES (COST $13,653,619) | 7,560,000 | ||||||||||||||
CALL OPTIONS PURCHASED — 4.4% | |||||||||||||||
Options on Bonds — 0.2% | |||||||||||||||
USD | 10,000,000 | Qatar Government International Bond, 9.75%, due 06/15/30, Expires 04/20/06, Strike 157.50 | 77,005 | ||||||||||||
USD | 50,000,000 | Republic of Brazil, 11.00%, due 08/17/40, Expires 03/08/06, Strike 130.00 | 1,395,790 | ||||||||||||
USD | 7,500,000 | Republic of Turkey, 11.875%, due 01/15/30, Expires 05/02/06 Strike 153.25 | 373,337 | ||||||||||||
USD | 45,000,000 | Republic of Turkey, 11.875%, due 1/15/30, Expires 4/19/06, Strike 153.75 | 2,040,169 | ||||||||||||
USD | 25,000,000 | Republic of Turkey, 6.875%, due 03/17/36, Expires 03/06/06, Strike 96.25 | 1,300,985 | ||||||||||||
USD | 17,500,000 | Republic of Venezuela, 9.375%, due 01/13/34, Expires 03/06/06, Strike 125.40 | 882,200 | ||||||||||||
USD | 12,500,000 | Republic of Venezuela, 9.375%, due 01/13/34, Expires 03/08/06, Strike 127.30 | 399,546 | ||||||||||||
6,469,032 | |||||||||||||||
Options on Interest Rates | |||||||||||||||
TWD | 1,849,200,000 | TWD Interest Rate Cap Option, 2.19%, Expires 03/15/10, Strike 2.19 | 329,805 | ||||||||||||
TWD | 1,849,200,000 | TWD Interest Rate Floor Option, 2.19%, Expires 03/16/10, Strike 2.19 | 730,212 | ||||||||||||
1,060,017 |
See accompanying notes to the financial statements.
17
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Principal Amount | Description | Value ($) | |||||||||||||
Options on Interest Rate Swaps — 0.2% | |||||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 02/24/09, Strike 6.05 | 2,718,990 | ||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 04/08/09, Strike 6.20 | 495,316 | ||||||||||||
3,214,306 | |||||||||||||||
Currency Options — 4.0% | |||||||||||||||
USD | 30,000,000 | Republic of Brazil Real, Expires 04/06/06, Strike 2.985 | 11,405,430 | ||||||||||||
USD | 40,000,000 | Republic of Brazil Real, Expires 04/07/06, Strike 2.954 | 14,636,000 | ||||||||||||
USD | 40,000,000 | Republic of Brazil Real, Expires 04/20/06, Strike 2.939 | 14,170,160 | ||||||||||||
USD | 110,000,000 | Republic of Brazil Real, Expires 04/27/06, Strike 2.8715 | 35,278,320 | ||||||||||||
USD | 60,000,000 | Republic of Brazil Real, Expires 05/17/06, Strike 2.822 | 17,477,580 | ||||||||||||
USD | 30,000,000 | Republic of Brazil Real, Expires 06/20/06, Strike 2.703 | 6,844,710 | ||||||||||||
USD | 40,000,000 | Republic of Brazil Real, Expires 04/25/07, Strike 3.24 | 14,019,840 | ||||||||||||
113,832,040 | |||||||||||||||
TOTAL CALL OPTIONS PURCHASED (COST $30,998,439) | 124,575,395 | ||||||||||||||
PUT OPTIONS PURCHASED — 0.1% | |||||||||||||||
Options on Bonds — 0.0% | |||||||||||||||
USD | 10,000,000 | Qatar Government International Bond, 9.75%, due 06/15/30, Expires 04/20/06, Strike 152.50 | 129,013 | ||||||||||||
Options on Interest Rate Swaps — 0.1% | |||||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 02/24/09, Strike 6.05 | 550,037 | ||||||||||||
KRW | 72,000,000,000 | KRW Swaption, Expires 04/08/09, Strike 6.20 | 3,133,244 | ||||||||||||
3,683,281 | |||||||||||||||
Currency Options — 0.0% | |||||||||||||||
USD | 30,000,000 | Republic of Brazil Real, Expires 04/06/06, Strike 2.985 | 30 | ||||||||||||
USD | 30,000,000 | Republic of Brazil Real, Expires 06/20/06, Strike 2.703 | 52,470 | ||||||||||||
USD | 40,000,000 | Republic of Brazil Real, Expires 04/25/07, Strike 3.24 | 456,880 | ||||||||||||
509,380 | |||||||||||||||
TOTAL PUT OPTIONS PURCHASED (COST $10,770,938) | 4,321,674 |
See accompanying notes to the financial statements.
18
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 5.4% | |||||||||||||||
3,846,873 | GMO Short-Duration Collateral Fund (f) | 98,479,942 | |||||||||||||
21,409 | GMO Special Purpose Holding Fund (f) | 176,198 | |||||||||||||
1,175,193 | GMO World Opportunity Overlay Fund (f) | 29,650,120 | |||||||||||||
23,041,261 | Merrimac Cash Series, Premium Class | 23,041,261 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $150,558,421) | 151,347,521 | ||||||||||||||
RIGHTS AND WARRANTS — 0.7% | |||||||||||||||
Mexico — 0.2% | |||||||||||||||
48,000 | Mexican Government International Bond Warrants, Expires 10/10/06 ** | 2,112,000 | |||||||||||||
33,077,000 | United Mexican States Value Recovery Rights, Series D, Expires 6/30/06 ** | 446,539 | |||||||||||||
2,942,000 | United Mexican States Value Recovery Rights, Series F, Expires 6/30/08 ** | 70,608 | |||||||||||||
36,000 | United Mexican States Warrants, Series XW20, Expires 9/1/06 ** | 2,700,000 | |||||||||||||
5,329,147 | |||||||||||||||
Nigeria — 0.0% | |||||||||||||||
25,000 | Central Bank of Nigeria Warrants, Expires 11/15/20 ** | 550,000 | |||||||||||||
Uruguay — 0.0% | |||||||||||||||
4,000,000 | Banco Central Del Uruguay Value Recovery Rights Series VRRB, Expires 1/02/21 ** | — | |||||||||||||
Venezuela — 0.5% | |||||||||||||||
164,215 | Republic of Venezuela Bond Warrants, Expires 4/18/20 ** | 5,172,773 | |||||||||||||
262,360 | Republic of Venezuela Recovery Warrants, Expires 4/15/20 ** | 8,264,340 | |||||||||||||
13,437,113 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $2,460,000) | 19,316,260 | ||||||||||||||
TOTAL INVESTMENTS — 105.2% (Cost $2,627,932,972) | 2,967,566,820 | ||||||||||||||
Other Assets and Liabilities (net) — (5.2%) | (146,798,768 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,820,768,052 |
See accompanying notes to the financial statements.
19
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||
Buys | |||||||||||||||||||||||
4/25/06 | EUR | 38,000,000 | $ | 45,439,288 | $ | (54,312 | ) | ||||||||||||||||
Sales | |||||||||||||||||||||||
4/18/06 | CHF | 8,000,000 | $ | 6,126,610 | $ | 60,552 | |||||||||||||||||
4/25/06 | EUR | 352,500,000 | 421,509,186 | 1,100,949 | |||||||||||||||||||
4/11/06 | GBP | 50,500,000 | 88,600,856 | 1,082,094 | |||||||||||||||||||
10/25/06 | HKD | 382,500,000 | 49,487,657 | 512,343 | |||||||||||||||||||
11/01/06 | HKD | 190,000,000 | 24,584,776 | 415,224 | |||||||||||||||||||
3/07/06 | JPY | 9,800,000,000 | 84,715,235 | 151,252 | |||||||||||||||||||
$ | 3,322,414 |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
4,500 | Federal Funds 30 day | March 2006 | $ | 1,789,830,675 | $ | (109,242 | ) |
At February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Reverse repurchase agreements
Face Value | Description | Market Value | |||||||||
USD | 70,000,000 | Deutsche Bank, 4.31%, dated 12/09/05, to be repurchased on demand at face value plus accrued interest. | $ | 70,687,206 | |||||||
USD | 26,070,056 | Chase Manhattan Bank, 4.50%, dated 1/31/06, to be repurchased on demand at face value plus accrued interest. | 26,158,043 |
See accompanying notes to the financial statements.
20
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Reverse repurchase agreements — continued
Face Value | Description | Market Value | |||||||||
USD | 38,634,688 | Deutsche Bank, 4.60%, dated 2/10/06, to be repurchased on demand at face value plus accrued interest. | $ | 38,708,737 | |||||||
USD | 12,741,458 | Deutsche Bank, 4.50%, dated 2/16/06, to be repurchased on demand at face value plus accrued interest. | 12,754,200 | ||||||||
USD | 89,810,625 | Chase Manhattan Bank, 4.40%, dated 2/17/06, to be repurchased on demand at face value plus accrued interest. | 89,887,463 | ||||||||
USD | 3,521,600 | Chase Manhattan Bank, 3.00%, dated 2/21/06, to be repurchased on demand at face value plus accrued interest. | 3,523,361 | ||||||||
USD | 11,258,590 | Lehman Brothers, 4.40%, dated 2/22/06, to be repurchased on demand at face value plus accrued interest. | 11,265,470 | ||||||||
USD | 66,227,000 | Lehman Brothers, 4.40%, dated 2/22/06, to be repurchased on demand at face value plus accrued interest. | 66,267,472 | ||||||||
USD | 15,336,000 | Lehman Brothers, 4.65%, dated 2/27/06, to be repurchased on demand at face value plus accrued interest. | 15,336,000 | ||||||||
USD | 96,270,000 | Lehman Brothers, 1.90%, dated 2/28/06, to be repurchased on demand at face value plus accrued interest. | 96,270,000 | ||||||||
USD | 33,477,082 | Chase Manhattan Bank, 4.40%, dated 2/28/06, to be repurchased on demand at face value plus accrued interest. | 33,477,082 | ||||||||
USD | 33,477,083 | Chase Manhattan Bank, 4.40%, dated 2/28/06, to be repurchased on demand at face value plus accrued interest. | 33,477,083 | ||||||||
$ | 497,812,117 |
See accompanying notes to the financial statements.
21
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Average balance outstanding | $ | 230,466,041 | |||||
Average interest rate | 2.29 | % | |||||
Maximum balance outstanding | $ | 496,824,183 | |||||
Average shares outstanding | 235,636,829 | ||||||
Average balance per share outstanding | $ | 0.98 |
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements.
Written options
A summary of open written option contracts for the Fund at February 28, 2006, is as follows:
Currency options
Notional Amount | Expiration Date | Description | Market Value | ||||||||||||
$ | 40,000,000 | 4/7/2006 | BRL Call/ USD Put Currency Option, Strike 2.592 | $ | 7,968,000 | ||||||||||
40,000,000 | 4/20/2006 | BRL Call/ USD Put Currency Option, Strike 2.565 | 7,329,200 | ||||||||||||
50,000,000 | 5/4/2006 | USD Put/ BRL Call Currency Option, Strike 2.367 | 4,729,250 | ||||||||||||
110,000,000 | 4/27/2006 | USD Put/ BRL Call Currency Option, Strike 2.512 | 17,318,620 | ||||||||||||
60,000,000 | 5/17/2006 | USD Put/ BRL Call Currency Option, Strike 2.475 | 8,259,360 | ||||||||||||
Total written options (premiums received, $5,344,500) | $ | 45,604,430 |
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
15,000,000 | USD | 4/3/2006 | Morgan Guaranty | (Pay) | 0.25 | % | Banco Santander | ||||||||||||||||||||||||
Trust Company | Senior Bonds or Loans | $ | (8,843 | ) | |||||||||||||||||||||||||||
15,000,000 | USD | 4/6/2006 | Morgan Guaranty Trust Company | (Pay) | 0.26 | % | Banco Santander Senior Bonds or Loans | (9,169 | ) |
See accompanying notes to the financial statements.
22
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
30,000,000 | USD | 4/10/2006 | Morgan Guaranty | (Pay) | 0.28 | % | Banco Santander | ||||||||||||||||||||||||
Trust Company | Senior Bonds or Loans | $ | (19,331 | ) | |||||||||||||||||||||||||||
10,000,000 | USD | 4/10/2006 | Morgan Guaranty Trust Company | (Pay) | 0.26 | % | Banco Santander Senior Bonds or Loans | (6,142 | ) | ||||||||||||||||||||||
25,000,000 | USD | 5/1/2006 | Morgan Guaranty Trust Company | (Pay) | 0.27 | % | Banco Bilbao Vizcaya Senior Bonds and Notes | (15,582 | ) | ||||||||||||||||||||||
15,000,000 | USD | 6/8/2006 | JP Morgan Chase Bank | Receive | 2.95 | % | United Mexican States | 213,663 | |||||||||||||||||||||||
35,000,000 | USD | 7/5/2006 | Deutsche Bank AG | Receive | 5.00 | % | Gazprom Loan Facility | 825,141 | |||||||||||||||||||||||
35,000,000 | USD | 7/5/2006 | UBS AG | (Pay) | 3.40 | % | Gazprom Loan Facility | (548,517 | ) | ||||||||||||||||||||||
20,000,000 | USD | 8/9/2006 | JP Morgan Chase Bank | (Pay) | 0.42 | % | Banco Bilbao Vizcaya Argentaria SA | (38,786 | ) | ||||||||||||||||||||||
15,000,000 | USD | 8/21/2006 | Deutsche Bank AG | Receive | 5.45 | % | Gazprom Loan Facility | 377,931 | |||||||||||||||||||||||
5,000,000 | USD | 9/27/2006 | Merrill Lynch | Receive | 5.70 | % | Dominican Republic | 238,620 | |||||||||||||||||||||||
25,000,000 | USD | 10/19/2006 | Deutsche Bank AG | (Pay) | 2.10 | % | Government of Ukraine | (386,096 | ) | ||||||||||||||||||||||
15,000,000 | USD | 11/20/2006 | Deutsche Bank AG | (Pay) | 4.55 | % | Republic of Brazil | (651,960 | ) | ||||||||||||||||||||||
10,000,000 | USD | 11/20/2006 | Deutsche Bank AG | (Pay) | 4.40 | % | Republic of Brazil | (419,842 | ) | ||||||||||||||||||||||
30,000,000 | USD | 12/7/2006 | Deutsche Bank AG | (Pay) | 1.60 | % | Gazprom Loan Facility | (399,421 | ) | ||||||||||||||||||||||
8,000,000 | USD | 12/20/2006 | JP Morgan Chase Bank | Receive | 3.00 | % | Kingdom of Swaziland | (13,960 | ) | ||||||||||||||||||||||
5,000,000 | USD | 12/20/2006 | JP Morgan Chase Bank | Receive | 3.00 | % | Kingdom of Swaziland | (8,725 | ) | ||||||||||||||||||||||
20,000,000 | USD | 12/20/2006 | JP Morgan Chase Bank | (Pay) | 4.75 | % | Republic of Brazil | (904,060 | ) | ||||||||||||||||||||||
40,000,000 | USD | 1/20/2007 | JP Morgan Chase Bank | (Pay) | 0.45 | % | Republic of Turkey | (107,886 | ) | ||||||||||||||||||||||
10,000,000 | USD | 2/18/2007 | JP Morgan Chase Bank | (Pay) | 4.60 | % | Russia Federation | (428,717 | ) | ||||||||||||||||||||||
45,000,000 | USD | 2/20/2007 | Deutsche Bank AG | (Pay) | 1.50 | % | Republic of Ecuador | (284,657 | ) | ||||||||||||||||||||||
10,000,000 | USD | 2/20/2007 | JP Morgan Chase Bank | (Pay) | 1.25 | % | Republic of Ecuador | (7,648 | ) | ||||||||||||||||||||||
10,000,000 | USD | 2/26/2007 | Citigroup | (Pay) | 2.15 | % | Republic of South Africa | (198,055 | ) | ||||||||||||||||||||||
5,000,000 | USD | 3/20/2007 | JP Morgan Chase Bank | (Pay) | 1.70 | % | Republic of Philippines | (77,425 | ) |
See accompanying notes to the financial statements.
23
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
10,000,000 | USD | 6/27/2007 | JP Morgan | (Pay) | 0.33 | % | Banco Bilbao | ||||||||||||||||||||||||
Chase Bank | Vizcaya Argentaria SA | $ | (43,053 | ) | |||||||||||||||||||||||||||
3,000,000 | USD | 7/2/2007 | Deutsche Bank AG | (Pay) | 0.64 | % | Bank of China Bonds or Loans | (24,475 | ) | ||||||||||||||||||||||
10,000,000 | USD | 7/2/2007 | Citibank N.A. | (Pay) | 0.64 | % | Bank of China Bonds or Loans | (80,997 | ) | ||||||||||||||||||||||
15,000,000 | USD | 8/20/2007 | Morgan Stanley | (Pay) | 0.87 | % | Government of Ukraine | 47,699 | |||||||||||||||||||||||
15,000,000 | USD | 9/27/2007 | JP Morgan Chase Bank | (Pay) | 0.33 | % | HSBC Bank Plc | (90,197 | ) | ||||||||||||||||||||||
10,000,000 | USD | 10/10/2007 | JP Morgan Chase Bank | (Pay) | 0.70 | % | Banco Bilbao Vizcaya Argentaria SA | (111,445 | ) | ||||||||||||||||||||||
8,000,000 | USD | 10/19/2007 | Deutsche Bank AG | (Pay) | 15.00 | % | Republic of Venezuela | (2,270,635 | ) | ||||||||||||||||||||||
5,000,000 | USD | 10/22/2007 | JP Morgan Chase Bank | (Pay) | 0.54 | % | Banco Bilbao Vizcaya Argentaria SA | (41,889 | ) | ||||||||||||||||||||||
5,000,000 | USD | 10/23/2007 | JP Morgan Chase Bank | (Pay) | 0.48 | % | Banco Bilbao Vizcaya Argentaria SA | (36,868 | ) | ||||||||||||||||||||||
5,000,000 | USD | 10/30/2007 | Deutsche Bank AG | (Pay) | 0.44 | % | Banco Bilbao Vizcaya Argentaria SA | (33,380 | ) | ||||||||||||||||||||||
10,000,000 | USD | 11/4/2007 | Deutsche Bank AG | Receive | 1.68 | % | Aries Russia Paris Club | 344,579 | |||||||||||||||||||||||
10,000,000 | USD | 11/4/2007 | Deutsche Bank AG | (Pay) | 1.21 | % | Russian Federation | (197,439 | ) | ||||||||||||||||||||||
10,000,000 | USD | 11/23/2007 | Deutsche Bank AG | (Pay) | 1.15 | % | Endesa SA Spain | (206,460 | ) | ||||||||||||||||||||||
15,000,000 | USD | 11/27/2007 | JP Morgan Chase Bank | (Pay) | 1.10 | % | Endesa SA Spain | (294,524 | ) | ||||||||||||||||||||||
30,000,000 | USD | 12/23/2007 | Deutsche Bank AG | (Pay) | 2.35 | % | Gazprom Loan Facility | (1,106,421 | ) | ||||||||||||||||||||||
15,000,000 | USD | 2/20/2008 | JP Morgan Chase Bank | (Pay) | 1.70 | % | Republic of Ecuador | (1,479 | ) | ||||||||||||||||||||||
50,000,000 | USD | 5/4/2008 | Deutsche Bank AG | (Pay) | 1.80 | % | Government of Ukraine | (815,287 | ) | ||||||||||||||||||||||
5,000,000 | USD | 5/7/2008 | JP Morgan Chase Bank | Receive | 9.65 | % | Republic of Brazil | 1,095,217 | |||||||||||||||||||||||
5,000,000 | USD | 5/30/2008 | JP Morgan Chase Bank | Receive | 8.65 | % | Republic of Turkey | 960,654 | |||||||||||||||||||||||
5,000,000 | USD | 8/6/2008 | Bear Stearns International Limited | Receive | 1.10 | % | Republic of Trinidad and Tobago | 96,823 | |||||||||||||||||||||||
2,000,000 | USD | 9/20/2008 | UBS AG | Receive | 9.20 | % | Dominican Republic | 437,383 |
See accompanying notes to the financial statements.
24
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
10,000,000 | USD | 9/20/2008 | Morgan Stanley | Receive | 5.15 | % | Republic of Colombia | ||||||||||||||||||||||||
Capital Services, Inc. | $ | 1,332,226 | |||||||||||||||||||||||||||||
4,000,000 | USD | 10/20/2008 | Deutsche Bank AG | Receive | 8.50 | % | Republic of Uruguay | 789,357 | |||||||||||||||||||||||
18,000,000 | USD | 11/20/2008 | Deutsche Bank AG | Receive | 1.50 | % | Credit of Uttam Galva | 53,431 | |||||||||||||||||||||||
10,000,000 | USD | 11/20/2008 | Deutsche Bank AG | Receive | 5.70 | % | Republic of Brazil | 1,445,679 | |||||||||||||||||||||||
9,000,000 | USD | 11/20/2008 | Deutsche Bank AG | Receive | 4.77 | % | Republic of Colombia | 1,075,825 | |||||||||||||||||||||||
14,000,000 | USD | 12/20/2008 | Deutsche Bank AG | (Pay) | 0.79 | % | Korean Deposit Insurance Corporation | (282,991 | ) | ||||||||||||||||||||||
5,000,000 | USD | 3/20/2009 | JP Morgan Chase Bank | Receive | 2.85 | % | Republic of Peru | 357,206 | |||||||||||||||||||||||
10,000,000 | USD | 3/20/2009 | JP Morgan Chase Bank | Receive | 4.30 | % | Republic of Philippines | 966,521 | |||||||||||||||||||||||
10,000,000 | USD | 4/17/2009 | Deutsche Bank AG | Receive | 3.90 | % | Gazprom Loan Facility | 1,072,409 | |||||||||||||||||||||||
5,000,000 | USD | 5/20/2009 | JP Morgan Chase Bank | Receive | 4.40 | % | Gazprom Loan Facility | 607,493 | |||||||||||||||||||||||
25,000,000 | USD | 5/21/2009 | UBS AG | Receive | 4.50 | % | Gazprom Loan Facility | 3,119,682 | |||||||||||||||||||||||
25,000,000 | USD | 6/20/2009 | JP Morgan Chase Bank | Receive | 8.01 | % | Republic of Brazil | 5,860,043 | |||||||||||||||||||||||
7,000,000 | USD | 8/5/2009 | Deutsche Bank AG | Receive | 4.85 | % | Government of Ukraine | 734,011 | |||||||||||||||||||||||
10,000,000 | USD | 11/20/2009 | JP Morgan Chase Bank | (Pay) | 0.90 | % | United Mexican States | (195,517 | ) | ||||||||||||||||||||||
10,000,000 | USD | 11/20/2009 | JP Morgan Chase Bank | (Pay) | 0.88 | % | United Mexican States | (188,221 | ) | ||||||||||||||||||||||
25,000,000 | USD | 12/29/2009 | Deutsche Bank AG | Receive | 2.25 | % | Videocon Loan Facility | 266,415 | |||||||||||||||||||||||
7,000,000 | USD | 2/5/2010 | Deutsche Bank AG | Receive | 4.85 | % | Government of Ukraine | 792,038 | |||||||||||||||||||||||
20,000,000 | USD | 2/20/2010 | JP Morgan Chase Bank | Receive | 3.70 | % | Republic of Brazil | 1,989,594 | |||||||||||||||||||||||
10,000,000 | USD | 2/20/2010 | JP Morgan Chase Bank | Receive | 3.57 | % | Republic of Brazil | 948,477 | |||||||||||||||||||||||
12,000,000 | USD | 2/20/2010 | Morgan Stanley Capital Services, Inc. | Receive | 3.63 | % | Republic of Brazil | 1,163,827 | |||||||||||||||||||||||
10,000,000 | USD | 2/20/2010 | UBS AG | Receive | 3.62 | % | Republic of Brazil | 966,292 | |||||||||||||||||||||||
12,000,000 | USD | 3/5/2010 | Deutsche Bank AG | Receive | 9.10 | % | Republic of Turkey | 3,978,736 |
See accompanying notes to the financial statements.
25
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
18,000,000 | USD | 3/20/2010 | Morgan Stanley | Receive | 0.75 | % | United Mexican States | ||||||||||||||||||||||||
Capital Services, Inc. | $ | 277,239 | |||||||||||||||||||||||||||||
3,000,000 | USD | 3/29/2010 | JP Morgan Chase Bank | Receive | 4.70 | % | Arab Republic of Egypt | 533,462 | |||||||||||||||||||||||
85,000,000 | USD | 6/20/2010 | Deutsche Bank AG | (Pay) | 2.10 | % | Reference security within CDX Index | (4,639,583 | ) | ||||||||||||||||||||||
36,000,000 | USD | 6/20/2010 | Lehman Brothers | (Pay) | 2.10 | % | Reference security within CDX Index | (1,965,000 | ) | ||||||||||||||||||||||
12,000,000 | USD | 6/20/2010 | JP Morgan Chase Bank | (Pay) | 4.00 | % | Republic of Argentina | (940,666 | ) | ||||||||||||||||||||||
12,000,000 | USD | 6/20/2010 | JP Morgan Chase Bank | (Pay) | 3.87 | % | Republic of Argentina | (879,939 | ) | ||||||||||||||||||||||
10,000,000 | USD | 7/20/2010 | Deutsche Bank AG | (Pay) | 3.77 | % | Republic of Argentina | (655,927 | ) | ||||||||||||||||||||||
6,000,000 | USD | 7/20/2010 | Deutsche Bank AG | (Pay) | 3.80 | % | Republic of Argentina | (400,510 | ) | ||||||||||||||||||||||
5,000,000 | USD | 7/23/2010 | Deutsche Bank AG | Receive | 4.56 | % | Government of Ukraine | 554,077 | |||||||||||||||||||||||
7,000,000 | USD | 8/5/2010 | Deutsche Bank AG | Receive | 4.90 | % | Government of Ukraine | 859,048 | |||||||||||||||||||||||
3,000,000 | USD | 8/25/2010 | Deutsche Bank AG | Receive | 3.40 | % | Deutsche Bank Loan to Ukrtelekom | (8,655 | ) | ||||||||||||||||||||||
5,000,000 | USD | 10/25/2010 | Deutsche Bank AG | Receive | 4.60 | % | Government of Ukraine | 635,899 | |||||||||||||||||||||||
10,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.57 | % | Republic of Argentina | (590,235 | ) | ||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.43 | % | Republic of Argentina | (264,204 | ) | ||||||||||||||||||||||
5,000,000 | USD | 1/25/2011 | Deutsche Bank AG | Receive | 4.63 | % | Government of Ukraine | 599,231 | |||||||||||||||||||||||
7,000,000 | USD | 2/7/2011 | Deutsche Bank AG | Receive | 4.95 | % | Government of Ukraine | 925,378 | |||||||||||||||||||||||
5,000,000 | USD | 2/20/2011 | Morgan Stanley Capital Services, Inc. | (Pay) | 2.80 | % | Republic of Argentina | (91,211 | ) | ||||||||||||||||||||||
3,000,000 | USD | 2/25/2011 | Deutsche Bank AG | Receive | 3.50 | % | Deutsche Bank Loan to Ukrtelekom | (10,197 | ) | ||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | Citigroup | (Pay) | 3.70 | % | Republic of Iraq | (11,079 | ) | ||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | UBS AG | (Pay) | 3.55 | % | Republic of Iraq | 65,430 | |||||||||||||||||||||||
5,000,000 | USD | 4/26/2011 | Deutsche Bank AG | Receive | 4.66 | % | Government of Ukraine | 678,674 | |||||||||||||||||||||||
9,000,000 | USD | 7/17/2011 | UBS AG | Receive | 5.05 | % | Government of Ukraine | 1,307,273 | |||||||||||||||||||||||
5,000,000 | USD | 7/25/2011 | Deutsche Bank AG | Receive | 4.68 | % | Government of Ukraine | 637,252 |
See accompanying notes to the financial statements.
26
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
7,000,000 | USD | 8/5/2011 | Deutsche Bank AG | Receive | 5.00 | % | Government of Ukraine | $ | 985,939 | ||||||||||||||||||||||
3,000,000 | USD | 8/25/2011 | Deutsche Bank AG | Receive | 3.60 | % | Deutsche Bank Loan to Ukrtelekom | (3,506 | ) | ||||||||||||||||||||||
15,000,000 | USD | 10/17/2011 | Deutsche Bank AG | Receive | 3.55 | % | Gazprom Loan Facility | 2,010,532 | |||||||||||||||||||||||
5,000,000 | USD | 10/25/2011 | Deutsche Bank AG | Receive | 4.70 | % | Government of Ukraine | 714,664 | |||||||||||||||||||||||
19,000,000 | USD | 10/30/2011 | Deutsche Bank AG | Receive | 4.00 | % | Naftofaz Ukraine | 697,015 | |||||||||||||||||||||||
9,895,840 | USD | 12/20/2011 | Deutsche Bank AG | Receive | 1.60 | % | Stemcor UK Ltd. | 173,741 | |||||||||||||||||||||||
3,000,000 | USD | 2/25/2012 | Deutsche Bank AG | Receive | 3.68 | % | Deutsche Bank Loan to Ukrtelekom | 1,294 | |||||||||||||||||||||||
19,000,000 | USD | 5/5/2012 | Deutsche Bank AG | Receive | 4.00 | % | Naftofaz Ukraine | 639,118 | |||||||||||||||||||||||
10,000,000 | USD | 6/20/2012 | Morgan Stanley Capital Services, Inc. | Receive | 2.10 | % | Republic of Panama | 509,161 | |||||||||||||||||||||||
5,000,000 | USD | 7/30/2012 | JP Morgan Chase Bank | Receive | 3.05 | % | Republic of Chile | 792,769 | |||||||||||||||||||||||
3,000,000 | USD | 8/28/2012 | Deutsche Bank AG | Receive | 3.75 | % | Deutsche Bank Loan to Ukrtelekom | 5,080 | |||||||||||||||||||||||
10,000,000 | USD | 10/4/2012 | JP Morgan Chase Bank | Receive | 2.95 | % | Republic of Chile | 1,661,435 | |||||||||||||||||||||||
5,000,000 | USD | 11/5/2012 | Deutsche Bank AG | Receive | 6.50 | % | Republic of Jamaica | 253,856 | |||||||||||||||||||||||
10,000,000 | USD | 1/8/2013 | Deutsche Bank AG | Receive | 7.15 | % | Republic of Colombia | 3,365,754 | |||||||||||||||||||||||
10,000,000 | USD | 1/9/2013 | Deutsche Bank AG | Receive | 8.25 | % | Republic of Turkey | 3,804,956 | |||||||||||||||||||||||
7,000,000 | USD | 1/10/2013 | JP Morgan Chase Bank | Receive | 7.50 | % | Republic of Colombia | 2,496,454 | |||||||||||||||||||||||
10,000,000 | USD | 2/7/2013 | JP Morgan Chase Bank | Receive | 8.30 | % | Republic of Colombia | 3,989,133 | |||||||||||||||||||||||
15,000,000 | USD | 2/11/2013 | JP Morgan Chase Bank | Receive | 3.05 | % | United Mexican States | 2,087,912 | |||||||||||||||||||||||
10,000,000 | USD | 6/6/2013 | Deutsche Bank AG | Receive | 9.40 | % | Republic of Brazil | 4,767,880 | |||||||||||||||||||||||
20,000,000 | USD | 6/12/2013 | Deutsche Bank AG | Receive | 9.08 | % | Republic of Brazil | 9,134,928 | |||||||||||||||||||||||
130,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 3.30 | % | Republic of Brazil | 15,546,969 | |||||||||||||||||||||||
80,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 4.05 | % | Republic of Brazil | 13,183,450 | |||||||||||||||||||||||
15,000,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.20 | % | Republic of Brazil | (17,733,585 | ) | ||||||||||||||||||||||
9,000,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.95 | % | Republic of Brazil | (14,704,587 | ) |
See accompanying notes to the financial statements.
27
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
10,000,000 | USD | 12/20/2013 | Deutsche Bank AG | Receive | 10.50 | % | Republic of Ecuador | $ | 2,864,432 | ||||||||||||||||||||||
10,000,000 | USD | 12/24/2013 | JP Morgan Chase Bank | Receive | 3.80 | % | Republic of Turkey | 1,367,033 | |||||||||||||||||||||||
10,000,000 | USD | 1/20/2014 | Deutsche Bank AG | Receive | 4.28 | % | Republic of Brazil | 1,705,538 | |||||||||||||||||||||||
10,000,000 | USD | 1/20/2014 | Citibank N.A. | Receive | 4.94 | % | Republic of Colombia | 2,235,728 | |||||||||||||||||||||||
10,000,000 | USD | 1/20/2014 | Deutsche Bank AG | Receive | 1.77 | % | United Mexican States | 697,380 | |||||||||||||||||||||||
15,000,000 | USD | 3/20/2014 | JP Morgan Chase Bank | Receive | 4.30 | % | Republic of Brazil | 2,814,201 | |||||||||||||||||||||||
5,000,000 | USD | 3/20/2014 | JP Morgan Chase Bank | Receive | 4.32 | % | Republic of Brazil | 944,691 | |||||||||||||||||||||||
5,000,000 | USD | 3/20/2014 | JP Morgan Chase Bank | Receive | 4.90 | % | Republic of Colombia | 1,199,587 | |||||||||||||||||||||||
20,000,000 | USD | 4/20/2014 | Goldman Sachs | Receive | 1.59 | % | United Mexican States | 1,254,980 | |||||||||||||||||||||||
20,000,000 | USD | 4/20/2014 | Lehman Brothers | Receive | 1.58 | % | United Mexican States | 1,241,301 | |||||||||||||||||||||||
10,000,000 | USD | 5/14/2014 | Deutsche Bank AG | Receive | 6.64 | % | Republic of Turkey | 3,278,333 | |||||||||||||||||||||||
5,000,000 | USD | 5/19/2014 | Deutsche Bank AG | Receive | 6.42 | % | Republic of Turkey | 1,562,464 | |||||||||||||||||||||||
7,000,000 | USD | 5/20/2014 | JP Morgan Chase Bank | Receive | 6.25 | % | Republic of Turkey | 2,110,379 | |||||||||||||||||||||||
5,000,000 | USD | 5/20/2014 | Deutsche Bank AG | Receive | 2.03 | % | United Mexican States | 457,119 | |||||||||||||||||||||||
10,000,000 | USD | 5/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 961,836 | |||||||||||||||||||||||
10,000,000 | USD | 5/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 961,836 | |||||||||||||||||||||||
10,000,000 | USD | 5/20/2014 | UBS AG | Receive | 2.10 | % | United Mexican States | 961,836 | |||||||||||||||||||||||
15,000,000 | USD | 6/7/2014 | Deutsche Bank AG | Receive | 3.10 | % | Gazprom Loan Facility | 1,914,671 | |||||||||||||||||||||||
10,000,000 | USD | 6/16/2014 | Deutsche Bank AG | Receive | 6.22 | % | Republic of Turkey | 2,964,097 | |||||||||||||||||||||||
10,000,000 | USD | 6/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 949,266 | |||||||||||||||||||||||
10,000,000 | USD | 6/20/2014 | JP Morgan Chase Bank | Receive | 2.10 | % | United Mexican States | 949,266 | |||||||||||||||||||||||
10,000,000 | USD | 6/20/2014 | JP Morgan Chase Bank | Receive | 2.15 | % | United Mexican States | 983,114 | |||||||||||||||||||||||
10,000,000 | USD | 7/20/2014 | JP Morgan Chase Bank | Receive | 2.00 | % | United Mexican States | 868,108 |
See accompanying notes to the financial statements.
28
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Credit Default Swaps — continued | |||||||||||||||||||||||||||||||
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Annual Premium | Deliverable On Default | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
35,000,000 | USD | 7/20/2014 | JP Morgan | Receive | 2.01 | % | United Mexican States | ||||||||||||||||||||||||
Chase Bank | $ | 3,061,942 | |||||||||||||||||||||||||||||
2,000,000 | USD | 8/24/2014 | Deutsche Bank AG | (Pay) | 4.25 | % | Lebanese Republic | (209,596 | ) | ||||||||||||||||||||||
15,000,000 | USD | 12/7/2014 | Deutsche Bank AG | Receive | 3.10 | % | Gazprom Loan Facility | 1,967,567 | |||||||||||||||||||||||
50,000,000 | USD | 12/23/2014 | Deutsche Bank AG | Receive | 3.35 | % | Gazprom Loan Facility | 7,366,278 | |||||||||||||||||||||||
600,000,000 | EUR | 3/20/2015 | Deutsche Bank AG | (Pay) | 3.72 | % | Bolivarian Republic of Venezuela | (113,635,776 | ) | ||||||||||||||||||||||
800,000,000 | USD | 3/20/2015 | Deutsche Bank AG | Receive | 3.80 | % | Bolivarian Republic of Venezuela | 119,373,655 | |||||||||||||||||||||||
412,500,000 | USD | 4/20/2015 | Deutsche Bank AG | Receive | 4.40 | % | Bolivarian Republic of Venezuela | 76,927,322 | |||||||||||||||||||||||
300,000,000 | EUR | 4/20/2015 | Deutsche Bank AG | (Pay) | 4.32 | % | Bolivarian Republic of Venezuela | (71,567,358 | ) | ||||||||||||||||||||||
10,000,000 | USD | 4/20/2015 | JP Morgan Chase Bank | Receive | 4.65 | % | Republic of Colombia | 2,316,881 | |||||||||||||||||||||||
15,000,000 | USD | 5/20/2015 | Deutsche Bank AG | Receive | 3.85 | % | Republic of Turkey | 2,233,786 | |||||||||||||||||||||||
25,000,000 | USD | 11/20/2015 | Deutsche Bank AG | Receive | 3.83 | % | Republic of Brazil | 3,979,518 | |||||||||||||||||||||||
25,000,000 | USD | 11/20/2015 | Citigroup | Receive | 1.81 | % | Republic of Colombia | 1,410,841 | |||||||||||||||||||||||
15,000,000 | USD | 2/20/2016 | Citigroup | (Pay) | 2.16 | % | Republic of Colombia | (635,918 | ) | ||||||||||||||||||||||
25,000,000 | USD | 2/20/2016 | Citigroup | Receive | 1.46 | % | Republic of Colombia | 708,462 | |||||||||||||||||||||||
10,000,000 | USD | 10/7/2017 | JP Morgan Chase Bank | Receive | 4.20 | % | United Mexican States | 2,981,373 | |||||||||||||||||||||||
20,000,000 | USD | 3/20/2019 | JP Morgan Chase Bank | Receive | 1.90 | % | United Mexican States | 2,064,430 | |||||||||||||||||||||||
30,000,000 | USD | 8/15/2031 | Goldman Sachs | (Pay) | 1.84 | % | United Mexican States | (3,441,550 | ) | ||||||||||||||||||||||
20,000,000 | USD | 8/15/2031 | Goldman Sachs | (Pay) | 1.89 | % | United Mexican States | (2,419,630 | ) | ||||||||||||||||||||||
$ | 120,326,414 |
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
6,000,000,000 | JPY | 3/10/2008 | Deutsche Bank AG | (Pay) | 0.29 | % | 6 month | ||||||||||||||||||||
Japanese LIBOR | $ | 340,779 |
See accompanying notes to the financial statements.
29
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Interest Rate Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay) | Fixed Rate | Variable Rate | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||||||
6,000,000,000 | JPY | 5/29/2008 | Deutsche Bank AG | (Pay) | 0.22 | % | 6 month | ||||||||||||||||||||||||
Japanese LIBOR | $ | 357,866 | |||||||||||||||||||||||||||||
6,000,000,000 | JPY | 6/11/2008 | JP Morgan Chase Bank | (Pay) | 0.19 | % | 6 month Japanese LIBOR | 580,526 | |||||||||||||||||||||||
6,000,000,000 | JPY | 6/12/2008 | Deutsche Bank AG | (Pay) | 0.19 | % | 6 month Japanese LIBOR | 588,092 | |||||||||||||||||||||||
1,983,674 | USD | 12/1/2008 | Citigroup | (Pay) | 7.10 | % | 6 month LIBOR | (100,473 | ) | ||||||||||||||||||||||
3,438,368 | USD | 12/1/2011 | Citigroup | (Pay) | 6.32 | % | 6 month LIBOR | (210,101 | ) | ||||||||||||||||||||||
36,000,000,000 | KRW | 3/16/2014 | Deutsche Bank AG | (Pay) | 4.80 | % | Korean bond rate for 91 day certificates of deposit | 336,488 | |||||||||||||||||||||||
36,000,000,000 | KRW | 3/16/2014 | Deutsche Bank AG | (Pay) | 5.03 | % | Korean bond rate for 91 day certificates of deposit | 659,434 | |||||||||||||||||||||||
20,000,000 | USD | 10/3/2015 | JP Morgan Chase Bank | Receive | 4.64 | % | 3 month LIBOR | (668,297 | ) | ||||||||||||||||||||||
25,000,000 | USD | 12/2/2023 | JP Morgan Chase Bank | Receive | 5.34 | % | 3 month LIBOR | 667,184 | |||||||||||||||||||||||
$ | 2,551,498 |
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
223,800,000 | RUB | 12/5/2007 | JP Morgan Chase Bank | 3 month | Return on | ||||||||||||||||||||||
LIBOR +0.25% | Russian Railways | $ | 202,048 |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ACES - Aerolineas Centrales de Colombia
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
BPI - Indemnification payment bonds
CBO - Collateralized Bond Obligation
See accompanying notes to the financial statements.
30
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
DCB - Debt Conversion Bond
EMTN - Euromarket Medium Term Note
EURIBOR - Euro Interbank Offered Rate
FLIRB - Front Loaded Interest Reduction Bond
GDP - Gross Domestic Product
GMTN - Global Medium Term Note
LIBOR - London Interbank Offered Rate
MYDFA - Multi-Year Deposit Facility Agreement
PDI - Past Due Interest
PIK - Payment In Kind
VRRB - Variable Rate Reduction Bond
* Non-performing. Borrower not currently paying interest.
* * Non-income producing security.
(a) Security is in default.
(b) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 2).
(c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(d) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(e) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
(f) Affiliated issuer (Note 8).
Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 2006, which are subject to change based on the terms of the security, including varying reset dates.
Currency Abbreviations:
ARS - Argentine Peso | JPY - Japanese Yen | ||||||||||
ATS - Austrian Schilling | KRW - Korean Won | ||||||||||
CHF - Swiss Franc | MYR - Malaysian Ringgit | ||||||||||
DEM - German Mark | NLG - Netherlands Guilder | ||||||||||
EUR - Euro | TWD - Taiwan Dollar | ||||||||||
FRF - French Franc | USD - United States Dollar | ||||||||||
GBP - British Pound | ZAR - South African Rand | ||||||||||
ITL - Italian Lira | |||||||||||
See accompanying notes to the financial statements.
31
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $2,500,415,812) (Note 2) | $ | 2,839,248,808 | |||||
Investments in affiliated issuers, at value (cost $127,517,160) (Notes 2 and 8) | 128,318,012 | ||||||
Foreign currency, at value (cost $453,810) (Note 2) | 432,861 | ||||||
Receivable for investments sold | 404,860,599 | ||||||
Receivable for Fund shares sold | 150,038 | ||||||
Interest receivable | 39,352,625 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 3,322,414 | ||||||
Receivable for open swap contracts (Note 2) | 369,423,643 | ||||||
Receivable for closed swap contracts (Note 2) | 5,409,373 | ||||||
Receivable for option premiums | 1,843,500 | ||||||
Total assets | 3,792,361,873 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 178,663,750 | ||||||
Payable for Fund shares repurchased | 516,268 | ||||||
Written options outstanding, at value (premiums $5,344,500) (Note 2) | 45,604,430 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 749,555 | ||||||
Shareholder service fee | 254,777 | ||||||
Trustees and Chief Compliance Officer fees | 3,505 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 54,312 | ||||||
Payable for open swap contracts (Note 2) | 246,343,683 | ||||||
Payable for closed swap contracts (Note 2) | 971,134 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 109,242 | ||||||
Payable for reverse repurchase agreements (Note 2) | 497,812,117 | ||||||
Accrued expenses | 511,048 | ||||||
Total liabilities | 971,593,821 | ||||||
Net assets | $ | 2,820,768,052 |
See accompanying notes to the financial statements.
32
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006 — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,381,733,152 | |||||
Distributions in excess of net investment income | (51,321,688 | ) | |||||
Accumulated net realized gain | 71,439,459 | ||||||
Net unrealized appreciation | 418,917,129 | ||||||
$ | 2,820,768,052 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,020,976,146 | |||||
Class IV shares | $ | 1,799,791,906 | |||||
Shares outstanding: | |||||||
Class III | 90,323,171 | ||||||
Class IV | 159,207,055 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.30 | |||||
Class IV | $ | 11.30 |
See accompanying notes to the financial statements.
33
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Interest | $ | 224,377,329 | |||||
Dividends | 1,451,764 | ||||||
Dividends from affiliated issuers (Note 8) | 2,565,653 | ||||||
Total investment income | 228,394,746 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 9,396,929 | ||||||
Shareholder service fee – Class III (Note 3) | 1,631,227 | ||||||
Shareholder service fee – Class IV (Note 3) | 1,597,352 | ||||||
Custodian and fund accounting agent fees | 1,413,104 | ||||||
Audit and tax fees | 120,449 | ||||||
Legal fees | 251,820 | ||||||
Trustees fees and related expenses (Note 3) | 74,660 | ||||||
Registration fees | 33,336 | ||||||
Interest expense (Note 2) | 5,823,624 | ||||||
Miscellaneous | 48,131 | ||||||
Total expenses | 20,390,632 | ||||||
Net investment income (loss) | 208,004,114 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 96,077,973 | ||||||
Investments in affiliated issuers | 1,052,526 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 185,975 | ||||||
Closed futures contracts | (13,666 | ) | |||||
Closed swap contracts | 65,169,364 | ||||||
Written options | 1,990,250 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 53,378,078 | ||||||
Net realized gain (loss) | 217,840,500 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 59,109,815 | ||||||
Open futures contracts | (107,028 | ) | |||||
Open swap contracts | 28,652,429 | ||||||
Written options | (40,259,930 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 8,051,656 | ||||||
Net unrealized gain (loss) | 55,446,942 | ||||||
Net realized and unrealized gain (loss) | 273,287,442 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 481,291,556 |
See accompanying notes to the financial statements.
34
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 208,004,114 | $ | 199,238,722 | |||||||
Net realized gain (loss) | 217,840,500 | 106,376,098 | |||||||||
Change in net unrealized appreciation (depreciation) | 55,446,942 | 158,824,769 | |||||||||
Net increase (decrease) in net assets from operations | 481,291,556 | 464,439,589 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (109,362,466 | ) | (101,367,334 | ) | |||||||
Class IV | (171,688,730 | ) | (152,736,370 | ) | |||||||
Total distributions from net investment income | (281,051,196 | ) | (254,103,704 | ) | |||||||
Net realized gains | |||||||||||
Class III | (50,025,113 | ) | (25,122,881 | ) | |||||||
Class IV | (74,287,587 | ) | (37,649,329 | ) | |||||||
Total distributions from net realized gains | (124,312,700 | ) | (62,772,210 | ) | |||||||
(405,363,896 | ) | (316,875,914 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (100,779,282 | ) | 104,134,829 | ||||||||
Class IV | 205,303,225 | 220,470,474 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 104,523,943 | 324,605,303 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 839,203 | 1,308,564 | |||||||||
Class IV | 466,801 | 1,294,427 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 1,306,004 | 2,602,991 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 105,829,947 | 327,208,294 | |||||||||
Total increase (decrease) in net assets | 181,757,607 | 474,771,969 | |||||||||
Net assets: | |||||||||||
Beginning of period | 2,639,010,445 | 2,164,238,476 | |||||||||
End of period (including distributions in excess of net investment income of $51,321,688 and $43,698,393, respectively) | $ | 2,820,768,052 | $ | 2,639,010,445 |
See accompanying notes to the financial statements.
35
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.09 | $ | 10.51 | $ | 9.51 | $ | 9.30 | $ | 8.96 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.88 | 0.89 | 1.01 | 0.90 | 0.97 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.14 | 1.16 | 1.81 | 0.49 | 0.56 | ||||||||||||||||||
Total from investment operations | 2.02 | 2.05 | 2.82 | 1.39 | 1.53 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (1.26 | ) | (1.18 | ) | (1.06 | ) | (0.99 | ) | (1.19 | ) | |||||||||||||
From net realized gains | (0.55 | ) | (0.29 | ) | (0.76 | ) | (0.19 | ) | — | ||||||||||||||
Total distributions | (1.81 | ) | (1.47 | ) | (1.82 | ) | (1.18 | ) | (1.19 | ) | |||||||||||||
Net asset value, end of period | $ | 11.30 | $ | 11.09 | $ | 10.51 | $ | 9.51 | $ | 9.30 | |||||||||||||
Total Return(a) | 19.50 | % | 20.58 | % | 30.46 | % | 15.94 | %(b) | 18.53 | %(b) | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,020,976 | $ | 1,088,609 | $ | 925,517 | $ | 822,080 | $ | 570,459 | |||||||||||||
Net operating expenses to average daily net assets(c) | 0.57 | % | 0.57 | % | 0.57 | % | 0.57 | % | 0.57 | % | |||||||||||||
Interest expense to average daily net assets(d) | 0.22 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.14 | % | |||||||||||||
Total net expenses to average daily net assets | 0.79 | % | 0.65 | % | 0.65 | % | 0.65 | % | 0.71 | % | |||||||||||||
Net investment income to average daily net assets | 7.75 | % | 8.22 | % | 9.44 | % | 9.78 | % | 10.78 | % | |||||||||||||
Portfolio turnover rate | 144 | % | 121 | % | 119 | % | 121 | % | 130 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | — | (e) | — | (e) | — | (e) | 0.01 | %(e) | 0.02 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.03 | $ | 0.01 | — | (f) |
(a) Calculation excludes purchase premiums and redemption fees which are borne by shareholders.
(b) The total returns would have been lower had certain expenses not been reimbursed during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(e) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or expenses (See Note 3).
(f) Purchase and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
36
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.09 | $ | 10.51 | $ | 9.52 | $ | 9.29 | $ | 8.95 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.88 | 0.90 | 1.06 | 0.91 | 0.98 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.15 | 1.16 | 1.75 | 0.50 | 0.55 | ||||||||||||||||||
Total from investment operations | 2.03 | 2.06 | 2.81 | 1.41 | 1.53 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (1.27 | ) | (1.19 | ) | (1.06 | ) | (0.99 | ) | (1.19 | ) | |||||||||||||
From net realized gains | (0.55 | ) | (0.29 | ) | (0.76 | ) | (0.19 | ) | — | ||||||||||||||
Total distributions | (1.82 | ) | (1.48 | ) | (1.82 | ) | (1.18 | ) | (1.19 | ) | |||||||||||||
Net asset value, end of period | $ | 11.30 | $ | 11.09 | $ | 10.51 | $ | 9.52 | $ | 9.29 | |||||||||||||
Total Return(a) | 19.57 | % | 20.64 | % | 30.38 | % | 16.25 | %(b) | 18.60 | %(b) | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,799,792 | $ | 1,550,402 | $ | 1,238,209 | $ | 616,174 | $ | 489,615 | |||||||||||||
Net operating expenses to average daily net assets(c) | 0.52 | % | 0.52 | % | 0.52 | % | 0.52 | % | 0.52 | % | |||||||||||||
Interest expense to average daily net assets(d) | 0.22 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.14 | % | |||||||||||||
Total net expenses to average daily net assets | 0.74 | % | 0.60 | % | 0.60 | % | 0.60 | % | 0.66 | % | |||||||||||||
Net investment income to average daily net assets | 7.75 | % | 8.29 | % | 9.95 | % | 9.89 | % | 10.83 | % | |||||||||||||
Portfolio turnover rate | 144 | % | 121 | % | 119 | % | 121 | % | 130 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | — | (e) | — | (e) | — | (e) | 0.01 | %(e) | 0.02 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | — | (f) | $ | 0.01 | $ | 0.04 | $ | 0.01 | — | (f) |
(a) Calculation excludes purchase premiums and redemption fees which are borne by shareholders.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through invesment in underlying fund(s) (See Note 3).
(d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(e) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or expenses (See Note 3).
(f) Purchase and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
37
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investment primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Eastern Europe. The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global (EMBIG).
Throughout the year ended February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the classes of shares is generally based on the total amount of assets invested in the Fund or with GMO, as more fully outlined in the Fund's prospectus.
The financial statements of other fund(s) of the Trust in which the Fund invests ("underlying fund(s)") should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). Shares of GMO Short-Duration Collateral Fund, GMO Special Purpose Holding Fund and GMO World Opportunity Overlay Fund are not publicly available for direct purchase.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations
38
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security, and at its discretion, may override a price supplied by a source (by taking a price supplied by another source).
Certain investments in securities held by the Fund, or underlying fund(s) in which it invests, are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or underlying fund(s). As of February 28, 2006, the total value of these securities represented 25.3% of net assets.
GMO Special Purpose Holding Fund ("SPHF"), a holding of the Fund, has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $133,529 indirectly in conjunction with the settlement. In April of 2006, SPHF entered into an additional settlement agreement with another defendant and the Fund indirectly received $743,312 in conjunction with that settlement. Those settlement proceeds received in April of 2006 are not reflected in the net asset value of the Fund as of February 28, 2006. The outcome of the lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net assets of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fu nd.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and
39
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
40
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. See the Schedule of Investments for open written options contracts entered into by the Fund as of February 28, 2006.
For the year ended February 28, 2006, the Fund's investment activity in written option contracts was as follows:
Puts | Calls | ||||||||||||||||||
Principal Amount of Contracts | Premiums | Principal Amount of Contracts | Premiums | ||||||||||||||||
Outstanding, beginning of period | $ | — | $ | — | $ | — | $ | — | |||||||||||
Options written | 480,000,000 | 6,943,750 | 130,000,000 | 1,187,250 | |||||||||||||||
Options exercised | (60,000,000 | ) | (540,000 | ) | (38,000,000 | ) | (256,250 | ) | |||||||||||
Options expired | (120,000,000 | ) | (1,059,250 | ) | (92,000,000 | ) | (931,000 | ) | |||||||||||
Options sold | — | — | — | — | |||||||||||||||
Outstanding, end of period | $ | 300,000,000 | $ | 5,344,500 | $ | — | $ | — |
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss.
41
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for open purchased option contracts entered into by the Fund as of February 28, 2006.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Loan agreements
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both t he borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. See the Schedule of Investments for open loan agreements entered into by the Fund as of February 28, 2006.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the
42
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set a side as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the St atement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with banks and broker-dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its
43
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
custodian in which the Fund maintains cash, U.S. government securities or other assets equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expense. As of February 28, 2006, the Fund had entered into reverse repurchase agreements having a market value plus accrued interest of $497,812,117, collateralized by securities with a market value of $498,754,640. See the Schedule of Investments for open rever se repurchase agreements entered into by the Fund as of February 28, 2006.
Delayed delivery commitments
The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained with the custodian in an amount at least equal to these commitments. As of February 28, 2006, the Fund did not enter into any delayed delivery commitments.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. For the year ended Februar y 28, 2006, the Fund did not participate in securities lending.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in
44
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $314,677,198 and $254,103,704, respectively and long-term capital gains – $90,686,698 and $62,772,210, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $65,079,075 and $33,725,771 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to differing treatments for defaulted bonds and certain differences in the computation of distributable income and capital gains under U.S. Federal tax rules versus U.S. GAAP.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,646,629,059 | $ | 442,963,600 | $ | (122,025,839 | ) | $ | 320,937,761 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and certain differences in the computation of distributable income and capital gains under U.S. Federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 65,423,787 | $ | (65,423,787 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if
45
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Income is not recognized, nor are premiums amortized or discounts accreted on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases of Fund shares was 0.50% of the amount invested. In the case of cash redemptions, the fee is currently 0.25% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $394,550 and $1,785,929 in purchase premiums and $911,454 and $817,062 in redemption fees, respectively. There is no pre mium for reinvested distributions or in-kind transactions.
Investment risks
Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in the Fund's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are typically less liquid than those of developed markets.
The Fund owns loans and bonds representing significant exposure to the risk of default in many countries, but has the most sizable of such positions relating to Russia, Mexico and Brazil. The Fund's financial
46
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
position would be substantially adversely affected in the case of a default by these countries on obligations held by the Fund, or on obligations issued by those countries generally. The Fund has purchased default protection in the form of credit default swap agreements with respect to debt associated with those countries, which may offset some of the losses that the Fund might experience in the case of a default on bonds issued by such countries; however the Fund as of February 28, 2006, has sold more of such default protection than it has purchased. In addition, it is important to note that (i) such protection would not cover losses due to defaults on loan assignments or participations, (ii) such protection will generally not be sufficient to cover all of the Fund's losses in the case of default, and (iii) due to the privately negotiated nature of such instruments, under some circumstances, the protection offered by such instr uments may not be realized, even if the Fund incurs substantial losses due to weakening of the credit or virtual default by the countries.
Other matters
In July 2005, the Fund entered into litigation against the Government of Argentina ("Argentina") related to Argentina's failure to make payments on certain sovereign debt. The applicable defaulted sovereign debt, which continues to be valued according to the Fund's valuation policy, represented 1.6% of the net assets of the Fund as of February 28, 2006. The Fund's costs associated with this action will be borne by the Fund.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
< 0.001% | 0.000 | % | 0.001 | % | 0.001 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and Chief Compliance Officer ("CCO") during the year ended February 28, 2006 was $51,874 and $16,734, respectively. No remuneration was paid to any other officer of the Trust.
47
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $3,818,839,739 and $3,887,455,427, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 50.1% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 0.2% of the Fund's shares were held by twenty-five related parties comprised of certain GMO employee accounts, and 18.4% of the Fund's shares was held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,279,052 | $ | 82,133,042 | 18,447,846 | $ | 196,778,449 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 14,206,621 | 151,317,024 | 10,496,759 | 111,419,528 | |||||||||||||||
Shares repurchased | (29,288,921 | ) | (334,229,348 | ) | (18,872,655 | ) | (204,063,148 | ) | |||||||||||
Purchase premiums and redemption fees | — | 839,203 | — | 1,308,564 | |||||||||||||||
Net increase (decrease) | (7,803,248 | ) | $ | (99,940,079 | ) | 10,071,950 | $ | 105,443,393 |
48
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 12,753,479 | $ | 144,733,629 | 20,627,830 | $ | 217,128,999 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 22,808,057 | 243,099,656 | 17,398,521 | 184,619,120 | |||||||||||||||
Shares repurchased | (16,093,592 | ) | (182,530,060 | ) | (16,105,655 | ) | (181,277,645 | ) | |||||||||||
Purchase premiums and redemption fees | — | 466,801 | — | 1,294,427 | |||||||||||||||
Net increase (decrease) | 19,467,944 | $ | 205,770,026 | 21,920,696 | $ | 221,764,901 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 102,308,184 | $ | 107,465,653 | $ | 113,000,000 | $ | 2,565,653 | $ | — | $ | 98,479,942 | |||||||||||||||
GMO Special Purpose Holding Fund | 332,058 | — | — | — | 185,975 | 176,198 | * | ||||||||||||||||||||
GMO World Opportunity Overlay Fund | 16,308,824 | 13,200,000 | — | — | — | 29,650,120 | |||||||||||||||||||||
Totals | $ | 118,949,066 | $ | 120,665,653 | $ | 113,000,000 | $ | 2,565,653 | $ | 185,975 | $ | 128,306,260 |
* After the effect of return of capital distributions of $118,024 and $33,736 on April 5, 2005 and February 21, 2006, respectively.
49
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Country Debt Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Account ing Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
50
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.83 | % | $ | 1,000.00 | $ | 1,105.60 | $ | 4.33 | |||||||||||
2) Hypothetical | 0.83 | % | $ | 1,000.00 | $ | 1,020.68 | $ | 4.16 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.78 | % | $ | 1,000.00 | $ | 1,106.10 | $ | 4.07 | |||||||||||
2) Hypothetical | 0.78 | % | $ | 1,000.00 | $ | 1,020.93 | $ | 3.91 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
51
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $90,686,698 from long-term capital gains.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $9,012,028 and $19,353,010, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
52
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
53
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
54
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
55
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
56
GMO Emerging Markets Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Emerging Markets Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Emerging Markets Fund returned +38.0% for the fiscal year ended February 28, 2006, as compared to +37.9% for the S&P/IFC Investable Composite Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in emerging markets equities throughout the fiscal year.
Country selection detracted 0.3% from performance during the period. The Fund's overweights in Brazil and Korea contributed positively to performance. The Fund's underweight in Russia and overweight in Taiwan detracted from performance.
Stock selection added 0.4% during the fiscal year. Stock selection was particularly successful in Brazil, Korea, and Taiwan. Stock selection in South Africa detracted from performance.
For the period, the value and the momentum models outperformed while the macroeconomic and the reversal models underperformed.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .80% on the purchase and .80% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Performance for Class IV, V and VI shares will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most re cent month-end may be obtained by visiting www.gmo.com.
* For the period from 10/27/04 to 2/11/05, no Class V shares were outstanding. Performance for that period is that of Class IV shares, which have higher expenses. Therefore, the performance shown is lower than it would have been if Class V shares had been outstanding.
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 77.9 | % | |||||
Preferred Stocks | 16.6 | ||||||
Debt Obligation(s) | 2.0 | ||||||
Private Equity Securities | 0.7 | ||||||
Investment Funds | 0.3 | ||||||
Convertible Securities | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Rights And Warrants | 0.0 | ||||||
Swaps | 0.1 | ||||||
Short-Term Investment(s) | 2.5 | ||||||
Other | (0.1 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
South Korea | 25.3 | % | |||||
Brazil | 19.2 | ||||||
Taiwan | 18.6 | ||||||
China | 7.8 | ||||||
Mexico | 6.6 | ||||||
South Africa | 6.3 | ||||||
Russia | 3.3 | ||||||
India | 2.8 | ||||||
United States | 2.0 | ||||||
Malaysia | 1.8 | ||||||
Israel | 1.7 | ||||||
Thailand | 1.4 | ||||||
Turkey | 1.1 | ||||||
Poland | 0.9 | ||||||
Philippines | 0.5 | ||||||
Chile | 0.3 | ||||||
Argentina | 0.2 | ||||||
Venezuela | 0.1 | ||||||
Indonesia | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table excludes short-term investments and any investment in the underlying fund(s) that is less than 3% of invested assets.
1
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Investments* | ||||||
Financials | 21.3 | % | |||||
Information Technology | 20.7 | ||||||
Energy | 13.5 | ||||||
Materials | 9.6 | ||||||
Telecommunication Services | 9.3 | ||||||
Consumer Discretionary | 8.8 | ||||||
Industrials | 8.1 | ||||||
Utilities | 3.6 | ||||||
Consumer Staples | 3.0 | ||||||
Health Care | 1.0 | ||||||
Miscellaneous | 1.1 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
2
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 77.8% | |||||||||||||||
Argentina — 0.2% | |||||||||||||||
431,100 | IRSA Inversiones y Representaciones SA GDR * | 5,505,147 | |||||||||||||
273,350 | Telecom Argentina SA ADR * | 3,441,477 | |||||||||||||
124,598 | Tenaris SA ADR | 19,954,370 | |||||||||||||
28,900,994 | |||||||||||||||
Brazil — 5.3% | |||||||||||||||
267,637,000 | Aes Tiete SA | 6,742,915 | |||||||||||||
6,380,020 | Banco do Brasil SA | 165,216,529 | |||||||||||||
3,834,000 | Companhia de Concessoes Rodoviarias | 36,200,471 | |||||||||||||
383,277,898 | Companhia Saneamento Basico SAO PA | 30,882,434 | |||||||||||||
1,574,272 | Companhia Siderurgica Nacional SA | 47,402,379 | |||||||||||||
14,306 | Cyrela Brazil Realty ADR | 2,628,099 | |||||||||||||
896,700 | Cyrela Brazil Realty SA | 16,472,930 | |||||||||||||
2,425,069,400 | Electrobras (Centro) | 51,379,266 | |||||||||||||
1,791,100 | Iochpe Maxion SA | 14,296,748 | |||||||||||||
1,503,000 | Localiza Rent A Car * | 26,167,134 | |||||||||||||
2,533,400 | Petroleo Brasileiro SA (Petrobras) | 57,981,276 | |||||||||||||
200,000 | Petroleo Brasileiro SA (Petrobras) ADR | 17,508,000 | |||||||||||||
1,073,200 | Rossi Residencial SA | 14,302,595 | |||||||||||||
2,413,104 | Souza Cruz SA (Registered) | 39,807,409 | |||||||||||||
3,029,538 | Tele Centro Oeste Celular Participacoes SA | 46,366,840 | |||||||||||||
535,900 | Tractebel Energia SA | 4,403,793 | |||||||||||||
872,900 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 76,771,555 | |||||||||||||
357,400 | Universo Online SA * | 2,642,421 | |||||||||||||
657,172,794 | |||||||||||||||
Chile — 0.3% | |||||||||||||||
123,076 | Banco De Chile ADR | 5,398,113 | |||||||||||||
230,600 | Banco Santander Chile SA ADR | 10,951,194 | |||||||||||||
131,000 | Compania Cervecerias Unidas ADR | 3,563,200 | |||||||||||||
624,600 | Compania de Telecommunicaciones de Chile ADR | 5,371,560 | |||||||||||||
129,400 | Empresa Nacional de Electricidad SA ADR | 4,089,040 |
See accompanying notes to the financial statements.
3
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
Chile — continued | |||||||||||||||
354,281 | Enersis SA ADR | 4,347,028 | |||||||||||||
86,700 | Lan Airlines SA | 3,541,695 | |||||||||||||
37,261,830 | |||||||||||||||
China — 7.5% | |||||||||||||||
41,492,000 | Bank of Communications Co Ltd * | 24,886,429 | |||||||||||||
6,316,800 | Beijing Enterprises H Shares | 12,514,884 | |||||||||||||
64,444,000 | China Construction Bank Class H 144A * | 30,112,466 | |||||||||||||
38,171,100 | China Cosco Holdings Co Ltd * | 18,426,477 | |||||||||||||
282,600 | China Finance Online Co ADR * | 1,667,340 | |||||||||||||
50,708,442 | China Mobile Ltd | 245,005,068 | |||||||||||||
382,249 | China Mobile Ltd ADR * | 9,261,893 | |||||||||||||
8,516,000 | China Paradise Eletronics * | 4,061,563 | |||||||||||||
209,189,301 | China Petroleum & Chemical Corp Class H | 124,455,487 | |||||||||||||
9,779,000 | China Resources Enterprise Ltd | 21,386,513 | |||||||||||||
983,000 | China Telecom Corp Ltd ADR | 36,066,270 | |||||||||||||
173,074,100 | China Telecom Corp Ltd Class H | 63,244,920 | |||||||||||||
25,108,000 | CNOOC Ltd | 20,807,415 | |||||||||||||
52,000 | CNOOC Ltd ADR | 4,309,760 | |||||||||||||
10,622,000 | Foxconn International Holdings 144A * | 18,271,499 | |||||||||||||
32,395,200 | Guangdong Investments Ltd | 14,672,818 | |||||||||||||
16,304,000 | Huaneng Power International Inc Class H | 10,914,658 | |||||||||||||
2,258,000 | Parkson Retail Group Ltd * | 5,733,846 | |||||||||||||
2,910,000 | Peace Mark Holdings Ltd | 1,259,891 | |||||||||||||
217,104,601 | PetroChina Co Ltd Class H | 211,135,407 | |||||||||||||
21,824,000 | Pico Far East Holding Ltd * | 4,810,456 | |||||||||||||
1,060,300 | Shandong Molong Petroleum Machinery Co Ltd | 239,712 | |||||||||||||
12,255,000 | Shanghai Industrial Holdings Ltd | 26,235,958 | |||||||||||||
33,902,000 | Sinochem Hong Kong Holding * | 9,900,228 | |||||||||||||
9,064,887 | Weiqiao Textile Co | 14,515,224 | |||||||||||||
933,896,182 | |||||||||||||||
Hungary — 0.0% | |||||||||||||||
100 | Magyar Telecom | 2,325 |
See accompanying notes to the financial statements.
4
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
India — 2.7% | |||||||||||||||
1,686,500 | Amtek Auto Ltd | 13,231,862 | |||||||||||||
2,252,000 | Bank of India | 6,801,956 | |||||||||||||
535,463 | Bharat Electronics Ltd | 13,284,667 | |||||||||||||
5,948,177 | CBAY Systems Ltd (a) (b) | 9,718,528 | |||||||||||||
2,974,088 | CBAY Systems Ltd INR (a) (b) | 4,859,264 | |||||||||||||
21,797,849 | Centurion Bank Ltd * | 12,622,863 | |||||||||||||
3,000 | Cipla Ltd (Shares Under Objection) * (b) | — | |||||||||||||
184,105 | Galaxy Entertainment Corp Ltd * | 1,034,715 | |||||||||||||
2,242,410 | Gammon India Ltd | 26,989,834 | |||||||||||||
1,046,820 | Geodesic Information Systems Ltd | 4,983,537 | |||||||||||||
200 | HCL Infosystems Ltd (Shares Under Objection) | — | |||||||||||||
636,800 | HCL Technologies Ltd | 8,731,941 | |||||||||||||
155,789 | Hero Honda Motors Ltd | 3,120,138 | |||||||||||||
2,593,725 | Hexaware Technologies Ltd | 8,006,792 | |||||||||||||
714,000 | ICICI Bank Ltd | 9,851,236 | |||||||||||||
136,000 | Infosys Technologies Inc | 8,646,585 | |||||||||||||
1,500 | ITC Ltd (Shares Under Objection) * | — | |||||||||||||
1,522,593 | IVRCL Infrastructure | 35,438,891 | |||||||||||||
1,656,245 | Jaiprakash Associates Ltd | 16,585,849 | |||||||||||||
325,272 | Jindal Steel & Power Ltd | 11,296,194 | |||||||||||||
440,338 | KEI Industries | 3,077,357 | |||||||||||||
1,235,178 | Kirloskar Brothers Ltd | 8,591,711 | |||||||||||||
87 | Mahind GESCO Developers Ltd * | 707 | |||||||||||||
680,000 | Mahindra & Mahindra | 8,976,883 | |||||||||||||
700 | National Thermal Power Co | 2,077 | |||||||||||||
15,956 | NIIT Technologies Ltd | 63,016 | |||||||||||||
306,800 | Raymond Ltd | 3,021,769 | |||||||||||||
912,279 | Reliance Capital Ltd | 10,263,152 | |||||||||||||
364,911 | Reliance Energy Ltd | 5,083,355 | |||||||||||||
900 | Reliance Energy Ltd (Shares Under Objection) * | — | |||||||||||||
7,133 | Reliance Industries Ltd (Shares Under Objection) * | — | |||||||||||||
1,882,800 | Rolta India Ltd | 9,374,809 | |||||||||||||
174,899 | Sakthi Sugars Ltd * | 668,057 | |||||||||||||
328,200 | Satyam Computer Services Ltd | 5,697,594 | |||||||||||||
2,889,220 | Shasun Chemicals | 6,270,165 |
See accompanying notes to the financial statements.
5
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
India — continued | |||||||||||||||
219,144 | Siemens India Ltd | 22,257,439 | |||||||||||||
1,975,450 | Sintex Industries Ltd | 8,548,449 | |||||||||||||
2,053,963 | Spicejet Ltd * | 3,474,814 | |||||||||||||
1,846,700 | Syndicate Bank | 3,872,902 | |||||||||||||
668,119 | Tasc Pharmaceuticals Ltd * | 3,381,618 | |||||||||||||
1,850,100 | Union Bank of India | 5,065,672 | |||||||||||||
5,748,111 | United Phosphorous | 35,110,682 | |||||||||||||
262,100 | UTV Software Communications Ltd * (a) | 1,050,192 | |||||||||||||
67,166 | Welspun India Ltd * | 155,249 | |||||||||||||
600 | Wockhardt Ltd | 6,908 | |||||||||||||
339,219,429 | |||||||||||||||
Indonesia — 0.1% | |||||||||||||||
60,628,000 | Matahari Putra Prima Tbk PT | 5,184,576 | |||||||||||||
15,814,950 | Mayora Indah Tbk PT | 1,253,708 | |||||||||||||
63,946,500 | Summarecon Agung | 5,884,793 | |||||||||||||
12,323,077 | |||||||||||||||
Israel — 1.6% | |||||||||||||||
8,509,700 | Bank Hapoalim B.M. | 38,945,062 | |||||||||||||
5,624,300 | Bank Leumi Le | 20,293,995 | |||||||||||||
1,296,500 | Check Point Software Technologies Ltd * | 27,563,590 | |||||||||||||
2,359,900 | Israel Chemicals Ltd | 8,814,993 | |||||||||||||
4,167,800 | Israel Discount Bank Class A * | 7,868,888 | |||||||||||||
22,300 | Teva Pharmaceutical Industries | 937,994 | |||||||||||||
2,138,400 | Teva Pharmaceutical Industries ADR | 89,791,416 | |||||||||||||
31,500 | The Israel Corp Ltd | 10,517,956 | |||||||||||||
204,733,894 | |||||||||||||||
Lebanon — 0.0% | |||||||||||||||
12,059 | Banque Libanaise pour le Commerce Sal * | 35,695 | |||||||||||||
Malaysia — 1.8% | |||||||||||||||
21,744,060 | Arab-Malaysian Corp Berhad * | 7,613,640 |
See accompanying notes to the financial statements.
6
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
Malaysia — continued | |||||||||||||||
18,047,700 | Berjaya Sports Toto | 22,256,239 | |||||||||||||
49,781,030 | Bumiputra-Commerce Holdings Berhad | 77,632,947 | |||||||||||||
1,073,817 | Edaran Otomobil Berhad | 866,685 | |||||||||||||
11,370,000 | Habib Corporation Berhad | 4,342,636 | |||||||||||||
9,802,531 | Highlands and Lowlands Berhad | 11,120,002 | |||||||||||||
9,954,740 | IJM Corp Berhad | 12,264,293 | |||||||||||||
11,900,860 | Maxis Communications Berhad | 27,855,701 | |||||||||||||
14,749,540 | MISC Berhad | 38,476,647 | |||||||||||||
1,370,900 | Sunway City Berhad | 622,127 | |||||||||||||
3,343,628 | Top Glove Corp Berhad | 6,886,344 | |||||||||||||
6,651,800 | UMW Holdings Berhard | 12,888,198 | |||||||||||||
222,825,459 | |||||||||||||||
Mexico — 6.4% | |||||||||||||||
5,700,900 | Alfa SA de CV Class A | 30,265,112 | |||||||||||||
3,034,530 | America Movil SA de CV Class L ADR | 105,389,227 | |||||||||||||
4,595,289 | Carso Global Telecom Class A * | 11,055,015 | |||||||||||||
77,471 | Cemex SA de CV ADR (Participating Certificates) | 4,784,609 | |||||||||||||
22,703,072 | Cemex SA de CV CPO | 140,531,474 | |||||||||||||
27,921,500 | Corporacion GEO SA de CV Series B * | 109,287,017 | |||||||||||||
2,985,854 | Fomento Economico Mexicano SA de CV | 25,796,638 | |||||||||||||
6,551,000 | Grupo Cementos de Chihuahua SA de CV | 20,000,094 | |||||||||||||
31,344,600 | Grupo Financiero Banorte SA de CV | 76,483,816 | |||||||||||||
8,232,755 | Grupo Financiero Serfin SA de CV Class B * (b)(c)(c) | 7,859 | |||||||||||||
11,703,800 | Grupo Mexico SA Class B | 29,999,716 | |||||||||||||
3,638,532 | Sare Holding SA de CV * | 4,473,918 | |||||||||||||
9,395,400 | Telefonos de Mexico SA de CV Class L ADR | 210,363,006 | |||||||||||||
11,406,320 | Wal-Mart de Mexico SA de CV Class V | 32,580,152 | |||||||||||||
801,017,653 | |||||||||||||||
Philippines — 0.5% | |||||||||||||||
88,961,950 | Ayala Land Inc | 19,291,321 | |||||||||||||
4,011,240 | Bank of the Philippine Islands | 4,566,677 | |||||||||||||
6,219,000 | Fil-Hispano Corp * | 936,447 |
See accompanying notes to the financial statements.
7
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
Philippines — continued | |||||||||||||||
5,745,823 | First Philippine Holdings | 4,605,572 | |||||||||||||
367,517 | Philippine Long Distance Telephone | 12,615,911 | |||||||||||||
253,700 | Philippine Long Distance Telephone ADR | 8,752,650 | |||||||||||||
4,665,776 | San Miguel Corp Class B | 7,490,745 | |||||||||||||
39,545,999 | SM Prime Holdings | 6,091,155 | |||||||||||||
64,350,478 | |||||||||||||||
Poland — 0.2% | |||||||||||||||
179,000 | BRE Bank * | 10,590,931 | |||||||||||||
850,100 | Polski Koncern Naftowy Orlen SA | 15,633,478 | |||||||||||||
26,224,409 | |||||||||||||||
Russia — 2.9% | |||||||||||||||
410,400 | JSC Mining & Smelting Co ADR | 36,525,600 | |||||||||||||
2,705,600 | Lukoil ADR | 216,448,000 | |||||||||||||
651,800 | Mobile Telesystems ADR | 23,510,426 | |||||||||||||
204,400 | OAO Gazprom ADR | 17,292,240 | |||||||||||||
317,700 | Polyus Gold Co ZAO ADR * | 11,437,200 | |||||||||||||
135,000 | Rusia Petroleum * | 418,500 | |||||||||||||
5,500 | Sberbank RF | 8,552,500 | |||||||||||||
2,200 | Sberbank RF * | 3,399,000 | |||||||||||||
726,500 | Unified Energy Systems GDR | 50,092,175 | |||||||||||||
367,675,641 | |||||||||||||||
South Africa — 6.1% | |||||||||||||||
857,875 | ABSA Group Ltd | 15,935,203 | |||||||||||||
1,850,600 | AECI Ltd | 16,033,546 | |||||||||||||
6,088,430 | African Bank Investments Ltd | 28,450,519 | |||||||||||||
204,300 | AngloGold Ashanti Ltd | 10,449,935 | |||||||||||||
6,330,100 | AVI Ltd | 17,153,856 | |||||||||||||
2,060,000 | Barlow Ltd | 39,729,890 | |||||||||||||
4,335,790 | Foschini Ltd | 40,053,715 | |||||||||||||
632,700 | Impala Platinum Holdings Ltd | 107,425,853 | |||||||||||||
2,422,500 | Mr. Price Group Ltd | 8,324,239 |
See accompanying notes to the financial statements.
8
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
South Africa — continued | |||||||||||||||
1,051,000 | Naspers Ltd Class N | 20,788,728 | |||||||||||||
632,953 | Nedcor Ltd | 12,217,293 | |||||||||||||
35,105,000 | Old Mutual Plc | 110,323,744 | |||||||||||||
2,990,842 | Remgro Ltd | 62,729,159 | |||||||||||||
27,075,971 | Sanlam Ltd | 70,091,550 | |||||||||||||
2,581,310 | Sasol Ltd | 88,396,459 | |||||||||||||
4,106,400 | Steinhoff International Holdings | 13,439,998 | |||||||||||||
2,469,541 | Telkom SA Ltd | 64,974,545 | |||||||||||||
1,400,948 | Tiger Brands Ltd | 34,727,214 | |||||||||||||
413,600 | Tongaat-Hulett Group | 6,172,067 | |||||||||||||
767,417,513 | |||||||||||||||
South Korea — 21.5% | |||||||||||||||
856,356 | Ace Digitech Co Ltd * | 7,552,915 | |||||||||||||
78,080 | Amorepacific Corp | 27,232,786 | |||||||||||||
497,400 | CDNetworks Co Ltd * | 12,940,875 | |||||||||||||
1,093,400 | Cheil Industries Inc | 42,079,559 | |||||||||||||
131,800 | CJ CGV Co Ltd | 3,488,812 | |||||||||||||
51,236 | Clover Hitech Co Ltd * | 212,395 | |||||||||||||
767,230 | Dae Han Pulp Industries * | 2,893,639 | |||||||||||||
88,400 | Dae Won Kang Up Co | 1,624,446 | |||||||||||||
3,479,450 | Daegu Bank | 53,870,386 | |||||||||||||
420,320 | Daelim Industrial Co Ltd | 28,091,741 | |||||||||||||
709,260 | Daesang Corp * | 10,815,967 | |||||||||||||
401,390 | Daewoo Engineering & Construction Co Ltd | 5,186,567 | |||||||||||||
600,240 | Daewoo International Corp | 22,805,217 | |||||||||||||
629,800 | Daewoo Securities Co Ltd * | 10,946,873 | |||||||||||||
1,235,300 | Dongwon Financial Holding Co Ltd | 47,324,088 | |||||||||||||
2,305,610 | Doosan Infracore Co Ltd | 38,724,355 | |||||||||||||
924,000 | DPI Co Ltd | 7,456,217 | |||||||||||||
853,000 | Ecoplastic Corp | 4,956,874 | |||||||||||||
995,300 | Global Enterprises | 8,710,859 | |||||||||||||
482,679 | Hana Financial Group Inc | 20,629,432 | |||||||||||||
500,200 | Hana Securities Co Ltd | 9,133,022 |
See accompanying notes to the financial statements.
9
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
251,400 | Hana Tour Service Inc | 16,412,339 | |||||||||||||
221,465 | Hanil Cement Manufacturing | 17,377,087 | |||||||||||||
956,500 | Hanjin Heavy Industry & Construction | 23,947,385 | |||||||||||||
637,900 | Hanjin Shipping | 14,932,126 | |||||||||||||
286,700 | Hanjin Transportation Co | 8,171,584 | |||||||||||||
2,287,200 | Hansol CSN | 10,009,688 | |||||||||||||
3,452,938 | Hanwha Corp | 106,514,373 | |||||||||||||
147,800 | Honam Petrochemical Co | 8,676,699 | |||||||||||||
3,144,140 | Hynix Semiconductor Inc * | 106,060,741 | |||||||||||||
1,917,800 | Hyundai Development Co | 87,034,985 | |||||||||||||
193,100 | Hyundai Engineering & Construction * | 9,292,999 | |||||||||||||
165,069 | Hyundai Mipo Dockyard | 13,150,238 | |||||||||||||
518,300 | Hyundai Mobis | 43,577,020 | |||||||||||||
2,122,820 | Hyundai Motor Co | 180,417,706 | |||||||||||||
1,998,100 | Hyundai Securities Co * | 31,438,319 | |||||||||||||
5,032,000 | Industrial Bank of Korea | 82,504,570 | |||||||||||||
549,800 | Inzi Controls Co Ltd | 5,240,969 | |||||||||||||
3,510,700 | KIA Motors Corp | 75,369,746 | |||||||||||||
1,798,970 | Kolon Construction | 21,481,194 | |||||||||||||
2,794,590 | Kookmin Bank | 211,822,192 | |||||||||||||
40,900 | Kookmin Bank ADR | 3,098,175 | |||||||||||||
212,900 | Korea Cement Co Ltd * | 2,847,441 | |||||||||||||
1,402,500 | Korea Electric Power Corp | 59,847,411 | |||||||||||||
201,500 | Korea Electric Terminal Co | 3,585,412 | |||||||||||||
9,249,900 | Korea Real Estate * | 10,386,417 | |||||||||||||
963,500 | Korean Air Lines Co Ltd | 31,760,443 | |||||||||||||
400 | KT Corp | 15,845 | |||||||||||||
1,743,300 | KT&G Corp | 103,343,982 | |||||||||||||
576,000 | KT&G Corp GDR 144A * | 16,646,400 | |||||||||||||
343,400 | Kumgang Construction Co | 8,139,342 | |||||||||||||
563,100 | Kumho Industrial Co Ltd | 12,809,937 | |||||||||||||
3,089,894 | LG Corp | 107,337,400 | |||||||||||||
127,618 | LG Home Shopping Inc | 12,958,530 | |||||||||||||
1,431,800 | LG Insurance Co Ltd | 21,688,919 |
See accompanying notes to the financial statements.
10
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
1,003,120 | LG Investment & Securities Co Ltd | 23,725,550 | |||||||||||||
214,600 | Megastudy Co Ltd | 12,588,125 | |||||||||||||
747,360 | Nasan Co Ltd * | 10,823,742 | |||||||||||||
166,828 | NHN Corp * | 47,028,839 | |||||||||||||
1,058,600 | Poongsan Corp | 22,798,626 | |||||||||||||
267,349 | POSCO | 63,007,528 | |||||||||||||
794,190 | Pumyang Construction Co Ltd | 8,679,199 | |||||||||||||
455,300 | Pyung Hwa Industrial Co | 3,008,757 | |||||||||||||
4,176,800 | Samick Musical Instruments | 7,993,729 | |||||||||||||
566,924 | Samsung Electronics Co Ltd | 397,455,647 | |||||||||||||
215,900 | Samsung SDI Co Ltd | 19,076,960 | |||||||||||||
188,690 | Samsung Securities | 11,078,186 | |||||||||||||
656,400 | Sejong Industrial Co | 3,051,900 | |||||||||||||
234,600 | SFA Engineering Corp | 7,355,942 | |||||||||||||
979,270 | Shinhan Financial Group Co Ltd | 38,258,377 | |||||||||||||
1,523,620 | Simm Tech Co Ltd | 15,909,963 | |||||||||||||
605,120 | SK Corp | 37,286,324 | |||||||||||||
6,000 | SK Telecom Co Ltd | 1,246,844 | |||||||||||||
2,150,400 | SK Telecom Co Ltd ADR | 51,932,160 | |||||||||||||
264,683 | SM Entertainment * | 3,364,342 | |||||||||||||
1,006,200 | SSCP Co Ltd * | 21,968,527 | |||||||||||||
629,233 | Taewoong Co Ltd | 9,428,581 | |||||||||||||
275,127 | Wooree Eti Co Ltd | 4,765,972 | |||||||||||||
1,863,700 | Woori Finance Holdings Co Ltd | 36,609,454 | |||||||||||||
2,693,017,913 | |||||||||||||||
Sri Lanka — 0.0% | |||||||||||||||
417,000 | Lanka Walltile Ltd | 182,528 | |||||||||||||
Taiwan — 18.1% | |||||||||||||||
30,826,240 | Acer Inc | 68,209,486 | |||||||||||||
62,206,511 | Asustek Computer Inc | 175,314,417 | |||||||||||||
13,154,000 | AU Optronics Corp | 21,016,444 | |||||||||||||
4,689,000 | Avermedia Technologies Inc | 6,257,443 |
See accompanying notes to the financial statements.
11
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
Taiwan — continued | |||||||||||||||
26,736,255 | Benq Corp | 26,229,469 | |||||||||||||
27,470,820 | Cheng Loong Corp | 8,566,362 | |||||||||||||
70,039,000 | China Bills Finance Corp | 22,827,830 | |||||||||||||
75,319,651 | China Development Financial Holding Corp * | 28,839,438 | |||||||||||||
72,193,096 | China Steel Corp | 65,321,176 | |||||||||||||
23,883,382 | Chinatrust Financial Holding Co | 20,032,734 | |||||||||||||
37,486,499 | Chung Hung Steel Corp | 12,095,765 | |||||||||||||
41,326,000 | Chunghwa Telecom Co Ltd | 75,236,103 | |||||||||||||
845,220 | Chunghwa Telecom Co Ltd ADR | 15,974,658 | |||||||||||||
24,561,565 | Compal Electronics Inc | 22,846,142 | |||||||||||||
5,901,000 | Delta Electronics Inc | 14,047,110 | |||||||||||||
22,474,300 | Evergreen Marine Corp | 14,549,825 | |||||||||||||
25,671,305 | Far Eastern International Bank | 11,206,756 | |||||||||||||
32,829,868 | Far Eastern Textile Co Ltd | 24,163,119 | |||||||||||||
9,187,000 | Far Eastone Telecommunications Co Ltd | 11,241,374 | |||||||||||||
26,176,960 | Formosa Chemicals & Fibre Co | 41,153,177 | |||||||||||||
19,951,587 | Formosa Petrochemical Corp | 35,606,240 | |||||||||||||
33,523,590 | Formosa Plastics Corp | 53,047,862 | |||||||||||||
21,184,000 | Fubon Financial Holding Co Ltd | 18,923,842 | |||||||||||||
18,975,917 | Gigabyte Technology Co Ltd | 15,985,546 | |||||||||||||
4,200,600 | High Tech Computer Corp | 89,978,987 | |||||||||||||
41,810,477 | Hon Hai Precision Industry Co Ltd | 264,378,841 | |||||||||||||
47,844,876 | Inventec Co Ltd | 29,167,232 | |||||||||||||
21,232,080 | KGI Securities Co Ltd | 6,549,063 | |||||||||||||
4,020,633 | Les Enphants Co Ltd | 2,479,707 | |||||||||||||
30,850,842 | Lite-On Technology Corp | 41,576,502 | |||||||||||||
10,013,000 | MediaTek Inc | 102,485,102 | |||||||||||||
96,647,000 | Mega Financial Holdings Co Ltd | 73,309,119 | |||||||||||||
22,259,735 | Micro-Star International Co Ltd | 12,595,935 | |||||||||||||
15,411,306 | Mitac International Corp | 21,665,303 | |||||||||||||
6,987,772 | Nan Ya Plastic Corp | 9,884,433 | |||||||||||||
6,530,719 | Novatek Microelectronics | 45,018,279 | |||||||||||||
14,792,462 | Oriental Union Chemical | 9,543,156 | |||||||||||||
22,582,556 | Realtek Semiconductor Corp | 24,761,722 |
See accompanying notes to the financial statements.
12
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
Taiwan — continued | |||||||||||||||
22,886,736 | Shin Kong Financial Holdings | 19,783,639 | |||||||||||||
19,969,636 | Siliconware Precision Industries Co | 25,311,324 | |||||||||||||
39,289,128 | Sinopac Holdings Co | 20,784,294 | |||||||||||||
49,900,125 | Taishin Financial Holdings Co Ltd | 30,316,511 | |||||||||||||
50,716,000 | Taiwan Cellular Corp | 46,800,066 | |||||||||||||
65,597,046 | Taiwan Cement Corp | 49,434,142 | |||||||||||||
6,491,000 | Taiwan FU Hsing Ind Co Ltd | 7,031,995 | |||||||||||||
193,917,804 | Taiwan Semiconductor Manufacturing Co Ltd | 359,321,465 | |||||||||||||
2,873,238 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 27,956,606 | |||||||||||||
12,636,800 | Tsann Kuen Enterprises Co Ltd | 22,056,737 | |||||||||||||
14,451,000 | U-Ming Marine Transport Co | 14,545,721 | |||||||||||||
5,649,000 | Waffer Technology Co Ltd | 5,448,651 | |||||||||||||
68,902,450 | Walsin Lihwa Corp | 22,408,133 | |||||||||||||
23,361,703 | Wan Hai Lines Ltd | 14,353,296 | |||||||||||||
44,157,000 | Waterland Financial Holdings | 14,372,644 | |||||||||||||
9,903,445 | Wintek Corp | 13,928,180 | |||||||||||||
29,161,600 | Yang Ming Marine Transport | 17,845,995 | |||||||||||||
35,196,659 | Yieh Phui Enterprise | 14,355,135 | |||||||||||||
2,268,140,233 | |||||||||||||||
Thailand — 1.4% | |||||||||||||||
5,246,500 | Advanced Info Service Pcl (Foreign Registered) (b) | 12,632,166 | |||||||||||||
27,379,600 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (b) | 16,544,951 | |||||||||||||
14,833,400 | Central Pattana Pcl (Foreign Registered) (b) | 6,824,236 | |||||||||||||
13,394,100 | Home Product Center Pcl (Foreign Registered) (b) | 2,722,656 | |||||||||||||
24,756,000 | Kasikornbank Pcl NVDR (b) | 42,159,702 | |||||||||||||
20,525,000 | Major Cineplex Group (b) | 8,081,948 | |||||||||||||
28,256,000 | Power Line Engineering PCL (b) | 6,412,833 | |||||||||||||
7,807,900 | Ptt Pcl (Foreign Registered) (b) | 49,738,719 | |||||||||||||
14,256,100 | Saha Pathana International Holding Pcl (Foreign Registered) (b) | 6,215,820 | |||||||||||||
2,268,000 | Siam Cement Pcl (Foreign Registered) NVDR (b) | 14,021,384 | |||||||||||||
3,108,050 | Star Block Co Ltd (Foreign Registered) * (b) (c) | 795 | |||||||||||||
18,117,900 | Yarnapund PCL (b) | 6,055,761 | |||||||||||||
171,410,971 |
See accompanying notes to the financial statements.
13
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
Turkey — 1.1% | |||||||||||||||
5,937,992 | Akbank TAS | 60,109,746 | |||||||||||||
2,862,695 | Doktas Dokumculuk Ticaret | 5,739,551 | |||||||||||||
926,823 | Finansbank AS * | 5,074,956 | |||||||||||||
81,588 | Galatasaray Sportif Sinai ve Ticari Yatirimlar AS | 7,420,149 | |||||||||||||
42,150 | Medya Holding AS * (b) (c) | 321 | |||||||||||||
2,865,700 | Petkim Petrokimya Holding * | 15,892,640 | |||||||||||||
2,210,123 | Trakya Cam Sanayii AS | 9,580,564 | |||||||||||||
2,178,571 | Turkiye IS Bankasi Class C | 20,571,747 | |||||||||||||
1,716,996 | Vestel Elektronik Sanayi * | 7,460,047 | |||||||||||||
131,849,721 | |||||||||||||||
Venezuela — 0.1% | |||||||||||||||
1,054,012 | Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR | 18,255,488 | |||||||||||||
TOTAL COMMON STOCKS (COST $6,647,108,966) | 9,745,914,227 | ||||||||||||||
PREFERRED STOCKS — 16.6% | |||||||||||||||
Brazil — 13.4% | |||||||||||||||
2,978,106 | Banco Bradesco SA 3.66% | 122,854,761 | |||||||||||||
4,803,370 | Banco Itau Holding Financeira SA 2.79% | 155,399,821 | |||||||||||||
31,182,998 | Caemi Mineracao e Metalurgica SA 1.35% | 53,746,067 | |||||||||||||
1,365,517,800 | Companhia Energetica de Minas Gerais 4.11% | 70,092,508 | |||||||||||||
3,538,342,100 | Companhia Paranaense de Energia 2.89% | 38,824,286 | |||||||||||||
449,800 | Companhia Vale do Rio Doce Class A 0.36% | 19,148,538 | |||||||||||||
2,592,292,560 | Electrobras (Centro) SA Class B 8.09% | 56,948,645 | |||||||||||||
741,656,700 | Geracao Tiete 8.80% | 19,380,518 | |||||||||||||
4,145,388 | Gerdau SA 4.84% | 95,655,292 | |||||||||||||
63,983,539 | Investimentos Itau SA 4.28% | 278,713,320 | |||||||||||||
65,404,510 | Net Servicos de Comunicacoa SA * | 34,804,378 | |||||||||||||
31,021,652 | Petroleo Brasileiro SA (Petrobras) 0.44% | 653,740,959 | |||||||||||||
521,700 | Petroleo Brasileiro SA ADR 2.26% | 41,720,349 | |||||||||||||
7,876,923 | Sadia SA 4.03% | 25,223,959 | |||||||||||||
407,300 | Tele Centro Oeste Celular SA ADR 6.50% (d) | 5,991,383 | |||||||||||||
13,373,023 | Unipar, Class B 1.99% | 13,413,958 | |||||||||||||
1,685,658,742 |
See accompanying notes to the financial statements.
14
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
South Korea — 3.2% | |||||||||||||||
679,600 | Hyundai Motor Co 2.48% | 36,492,562 | |||||||||||||
425,560 | LG Electronics Inc 2.84% | 21,718,533 | |||||||||||||
644,353 | Samsung Electronics Co Ltd (Non Voting) 1.18% * | 340,956,779 | |||||||||||||
399,167,874 | |||||||||||||||
TOTAL PREFERRED STOCKS (COST $591,967,972) | 2,084,826,616 | ||||||||||||||
DEBT OBLIGATION(S) — 2.0% | |||||||||||||||
United States — 2.0% | |||||||||||||||
61,922,771 | U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (e) (f) | 65,514,787 | |||||||||||||
173,156,573 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (e) | 179,284,757 | |||||||||||||
244,799,544 | |||||||||||||||
TOTAL DEBT OBLIGATION(S) (COST $246,364,578) | 244,799,544 | ||||||||||||||
PRIVATE EQUITY SECURITIES — 0.7% | |||||||||||||||
Poland — 0.7% | |||||||||||||||
18,179,074 | CHP Investors (Multimedia) * (a) (b) | 42,295,435 | |||||||||||||
18,340,378 | MHP Investors (Tri Media Holdings Ltd) * (a) (b) | 39,633,556 | |||||||||||||
81,928,991 | |||||||||||||||
Russia — 0.0% | |||||||||||||||
90,000 | Divot Holdings NV-Class D * (a) (b) (c) | 900 | |||||||||||||
124,330 | Divot Holdings NV-Class E * (a) (b) (c) | 1,243 | |||||||||||||
46,624 | Divot Holdings NV, Convertible Securities-Class F * (a) (b) (c) | 466 | |||||||||||||
2,609 | |||||||||||||||
Sri Lanka — 0.0% | |||||||||||||||
2,545,869 | Millenium Information Technology * (a) (b) | 787,470 | |||||||||||||
TOTAL PRIVATE EQUITY SECURITIES (COST $51,088,068) | 82,719,070 |
See accompanying notes to the financial statements.
15
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||||||
INVESTMENT FUNDS — 0.4% | |||||||||||||||
China — 0.1% | |||||||||||||||
692,433 | Martin Currie Sino-American Class B Series January 2007 (a) | 7,755,247 | |||||||||||||
500,000 | Martin Currie Sino-American Class B Series June 2006 * (a) | 5,600,000 | |||||||||||||
13,355,247 | |||||||||||||||
India — 0.0% | |||||||||||||||
170 | SPG Infinity Technology Fund I * (a) (b) | 132,688 | |||||||||||||
1,371,900 | TDA India Technology Fund II LP * (a) (b) | 1,030,146 | |||||||||||||
100 | UTI Masterplus 1991 Units (Shares Under Objection) * (b) | — | |||||||||||||
1,162,834 | |||||||||||||||
Kazakhstan — 0.0% | |||||||||||||||
450,000 | Kazakhstan Investment Fund * (a) (b) | 98,466 | |||||||||||||
Poland — 0.0% | |||||||||||||||
1,749,150 | The Emerging European Fund II, LP* (a) (b) | 519,497 | |||||||||||||
Russia — 0.3% | |||||||||||||||
9,500,000 | NCH Eagle Fund LP* (a) (b) | 30,201,328 | |||||||||||||
Ukraine — 0.0% | |||||||||||||||
16,667 | Societe Generale Thalmann Ukraine Fund* (a) (b) | 57,856 | |||||||||||||
TOTAL INVESTMENT FUNDS (COST $28,855,825) | 45,395,228 | ||||||||||||||
MUTUAL FUNDS — 0.0% | |||||||||||||||
United States — 0.0% | |||||||||||||||
Affiliated Issuer | |||||||||||||||
8,064 | GMO Special Purpose Holding Fund | 45,402 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $0) | 45,402 |
See accompanying notes to the financial statements.
16
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
India — 0.0% | |||||||||||||||
126,997 | Arvind Mills Ltd Warrants, 144A, Expires 06/12/07 (Goldman Sachs) * (b) (g) | 282,788 | |||||||||||||
107,835 | Hero Honda Motors Ltd Warrants, 144A, Expires 05/05/06 (Merrill Lynch) * (b) (g) | 2,153,419 | |||||||||||||
32,542 | Uniphos Enterprises Ltd Warrants, 144A, Expires 01/28/09 (Merrill Lynch) * (b) (g) | 25,523 | |||||||||||||
142,330 | United Phosphorus Ltd Warrants, 144A, Expires 01/28/09 (Merrill Lynch) * (b) (g) | 4,346,566 | |||||||||||||
6,808,296 | |||||||||||||||
Taiwan — 0.0% | |||||||||||||||
301,091 | Waffer Technology Corp Rights, Expires 03/22/06 * | 15,310 | |||||||||||||
Thailand — 0.0% | |||||||||||||||
2,689,393 | True Corp Pcl Warrants, Expires 04/03/08 * (b) | — | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $2,604,510) | 6,823,606 | ||||||||||||||
CONVERTIBLE SECURITIES — 0.0% | |||||||||||||||
India — 0.0% | |||||||||||||||
USD | 182,000 | Jaiprakash, 0.50%, due 02/17/10 | 326,690 | ||||||||||||
Russia — 0.0% | |||||||||||||||
USD | 56,000 | Lukinter Finance BV, 0.03%, due 11/29/07 | 221,746 | ||||||||||||
TOTAL CONVERTIBLE SECURITIES (COST $373,240) | 548,436 | ||||||||||||||
SHORT-TERM INVESTMENT(S) — 2.5% | |||||||||||||||
310,600,000 | Societe Generale Time Deposit, 4.56%, due 03/01/06 | 310,600,000 | |||||||||||||
2,049,075 | The Boston Global Investment Trust (h) | 2,049,075 | |||||||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $312,649,075) | 312,649,075 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $7,881,012,234) | 12,523,721,204 | ||||||||||||||
Other Assets and Liabilities (net) — 0.0% | (3,811,068 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 12,519,910,136 |
See accompanying notes to the financial statements.
17
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Additional information on each restricted security is as follows:
Issuer, Description | Acquisition Date | Acquisition Cost | Market Value as a Percentage of Fund's Net Assets | Market Value as of February 28, 2006 | |||||||||||||||
CBAY Systems Ltd | 5/06/03-8/04/05 | $ | 6,100,570 | 0.12 | % | $ | 14,577,792 | ||||||||||||
CHP Investors (Multimedia) | 12/13/99-3/05/01 | 18,178,923 | 0.34 | % | 42,295,435 | ||||||||||||||
Divot Holdings NV, Private Equity Securities-Class E | 9/21/01 | 124,330 | 0.00 | % | 1,243 | ||||||||||||||
Divot Holdings NV, Private Equity Securities-Class D | 6/26/00 | 1,502,100 | 0.00 | % | 900 | ||||||||||||||
Divot Holdings NV, Convertible Securities-Class F | 3/27/02 | 46,624 | 0.00 | % | 466 | ||||||||||||||
Kazakhstan Investment Fund | 10/16/97 | 3,285,000 | 0.00 | % | 98,466 | ||||||||||||||
Martin Currie Sino-American Class B Series June 2006 | 3/17/05 | 5,000,000 | 0.04 | % | 5,600,000 | ||||||||||||||
Martin Currie Sino-American Class B Series January 2007 | 1/20/06 | 7,500,000 | 0.06 | % | 7,755,247 | ||||||||||||||
MHP Investors (Tri Media Holdings Ltd) | 11/27/01 | 27,983,521 | 0.32 | % | 39,633,556 | ||||||||||||||
Millenium Information Technology | 10/21/99 | 2,252,570 | 0.01 | % | 787,470 | ||||||||||||||
NCH Eagle Fund LP | 1/21/97 | 9,500,000 | 0.24 | % | 30,201,328 | ||||||||||||||
Societe Generale Thalmann Ukraine Fund | 7/15/97 | 260,172 | 0.00 | % | 57,856 | ||||||||||||||
SPG Infinity Technology Fund I | 12/23/99 | 189,555 | 0.00 | % | 132,688 | ||||||||||||||
TDA India Technology Fund II LP | 2/23/00-3/23/04 | 1,371,900 | 0.01 | % | 1,030,146 | ||||||||||||||
The Emerging European Fund II, LP | 12/05/97-3/17/00 | 1,749,150 | 0.00 | % | 519,498 | ||||||||||||||
UTV Software Communications Ltd. | 2/29/00 | 3,004,959 | 0.01 | % | 1,050,192 | ||||||||||||||
$ | 143,742,283 |
See accompanying notes to the financial statements.
18
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Receive | (Pay) | Index | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
47,818,481 | USD | 1/10/2007 | Deutsche Bank | Return on | 1 month LIBOR | ||||||||||||||||||||||
Index | + 0.55 | % | Gazprom | $ | 1,330,874 | ||||||||||||||||||||||
37,919,200 | USD | 1/31/2007 | Deutsche Bank | Return on | 1 month LIBOR | ||||||||||||||||||||||
Index | + 0.55 | % | Gazprom | 203,404 | |||||||||||||||||||||||
21,450,275 | USD | 2/02/2007 | Deutsche Bank | Return on | 1 month LIBOR | ||||||||||||||||||||||
Index | + 0.55 | % | Gazprom | 1,185 | |||||||||||||||||||||||
45,986,950 | USD | 2/02/2007 | Deutsche Bank | Return on | 1 month LIBOR | ||||||||||||||||||||||
Index | + 0.55 | % | Gazprom | 246,680 | |||||||||||||||||||||||
50,231,250 | USD | 2/07/2007 | Deutsche Bank | Return on | 1 month LIBOR | ||||||||||||||||||||||
Index | + 0.55 | % | Gazprom | 6,924,535 | |||||||||||||||||||||||
37,175,077 | USD | 5/19/2006 | Merrill Lynch | Return on | 3 month LIBOR | MSCI Turkey | |||||||||||||||||||||
Index | –4.00% | Index | 1,555,922 | ||||||||||||||||||||||||
13,763,101 | USD | 9/11/2006 | Merrill Lynch | Return on | 3 month LIBOR | MSCI Taiwan | |||||||||||||||||||||
Index | –3.50% | Index | 1,156,625 | ||||||||||||||||||||||||
$ | 11,419,225 |
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
USD - United States Dollar
* Non-income producing security.
(a) Direct placement securities are restricted as to resale.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
See accompanying notes to the financial statements.
19
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
(c) Bankrupt issuer.
(d) All or a portion of this security is out on loan (Note 2).
(e) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2).
(f) All or a portion of this security is held as collateral for open swap contracts.
(g) Structured warrants with risks similar to equity swaps.
(h) All or a portion of this security represents investment of security lending collateral (Note 2).
As of February 28, 2006, 62.3% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor.
See accompanying notes to the financial statements.
20
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value, including securities on loan of $1,913,771 (cost $7,881,012,234) (Note 2) | $ | 12,523,675,802 | |||||
Investments in affiliated issuers, at value (cost $0) (Notes 2 and 8) | 45,402 | ||||||
Cash | 22,043,505 | ||||||
Foreign currency, at value (cost $38,143,871) (Note 2) | 38,097,296 | ||||||
Receivable for investments sold | 36,039,997 | ||||||
Receivable for Fund shares sold | 1,521 | ||||||
Dividends and interest receivable | 42,503,387 | ||||||
Foreign taxes receivable | 1,677,267 | ||||||
Receivable for open swap contracts (Note 2) | 11,419,225 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 149,214 | ||||||
Total assets | 12,675,652,616 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 58,386,649 | ||||||
Collateral on securities loaned (Note 2) | 2,049,075 | ||||||
Payable for Fund shares repurchased | 78,440,056 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 3,521,633 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 7,813,815 | ||||||
Shareholder service fee | 1,053,721 | ||||||
Trustees and Chief Compliance Officer fees | 22,987 | ||||||
Accrued expenses | 4,454,544 | ||||||
Total liabilities | 155,742,480 | ||||||
Net assets | $ | 12,519,910,136 |
See accompanying notes to the financial statements.
21
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006 — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 6,853,244,910 | |||||
Distributions in excess of net investment income | (4,399,665 | ) | |||||
Accumulated net realized gain | 1,018,497,950 | ||||||
Net unrealized appreciation | 4,652,566,941 | ||||||
$ | 12,519,910,136 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 4,788,394,870 | |||||
Class IV shares | $ | 3,081,021,381 | |||||
Class V shares | $ | 1,447,059,003 | |||||
Class VI shares | $ | 3,203,434,882 | |||||
Shares outstanding: | |||||||
Class III | 212,880,072 | ||||||
Class IV | 137,260,284 | ||||||
Class V | 64,500,031 | ||||||
Class VI | 142,667,750 | ||||||
Net asset value per share: | |||||||
Class III | $ | 22.49 | |||||
Class IV | $ | 22.45 | |||||
Class V | $ | 22.44 | |||||
Class VI | $ | 22.45 |
See accompanying notes to the financial statements.
22
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $33,147,118) | $ | 299,376,263 | |||||
Interest (including securities lending income of $166,046) | 8,064,424 | ||||||
Total investment income | 307,440,687 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 84,958,860 | ||||||
Shareholder service fee – Class III (Note 3) | 6,846,533 | ||||||
Shareholder service fee – Class IV (Note 3) | 3,053,914 | ||||||
Shareholder service fee – Class V (Note 3) | 678,348 | ||||||
Shareholder service fee – Class VI (Note 3) | 1,219,588 | ||||||
Custodian and fund accounting agent fees | 14,030,341 | ||||||
Transfer agent fees | 65,019 | ||||||
Audit and tax fees | 164,658 | ||||||
Legal fees | 229,315 | ||||||
Trustees fees and related expenses (Note 3) | 197,225 | ||||||
Registration fees | 142,282 | ||||||
Miscellaneous | 271,915 | ||||||
Total expenses | 111,857,998 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (696,016 | ) | |||||
Net expenses | 111,161,982 | ||||||
Net investment income (loss) | 196,278,705 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers (net of foreign capital gains tax and CPMF tax of $1,857,451 and $440,804, respectively) (Note 2) | 2,073,003,290 | ||||||
Investments in affiliated issuers | 70,333 | ||||||
Closed swap contracts | 21,272,655 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (10,347,881 | ) | |||||
Net realized gain (loss) | 2,083,998,397 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $218,291) (Note 2) | 1,325,998,306 | ||||||
Open swap contracts | 7,318,173 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 53,411 | ||||||
Net unrealized gain (loss) | 1,333,369,890 | ||||||
Net realized and unrealized gain (loss) | 3,417,368,287 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,613,646,992 |
See accompanying notes to the financial statements.
23
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 196,278,705 | $ | 163,707,788 | |||||||
Net realized gain (loss) | 2,083,998,397 | 979,476,425 | |||||||||
Change in net unrealized appreciation (depreciation) | 1,333,369,890 | 1,234,346,922 | |||||||||
Net increase (decrease) in net assets from operations | 3,613,646,992 | 2,377,531,135 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (94,886,366 | ) | (72,005,938 | ) | |||||||
Class IV | (59,321,922 | ) | (49,441,849 | ) | |||||||
Class V | (24,130,575 | ) | (1,769,486 | ) | |||||||
Class VI | (48,705,197 | ) | (31,573,876 | ) | |||||||
Total distributions from net investment income | (227,044,060 | ) | (154,791,149 | ) | |||||||
Net realized gains | |||||||||||
Class III | (605,236,149 | ) | (257,307,655 | ) | |||||||
Class IV | (364,582,631 | ) | (179,643,341 | ) | |||||||
Class V | (160,197,509 | ) | (24,240 | ) | |||||||
Class VI | (297,291,532 | ) | (117,184,878 | ) | |||||||
Total distributions from net realized gains | (1,427,307,821 | ) | (554,160,114 | ) | |||||||
(1,654,351,881 | ) | (708,951,263 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (459,485,882 | ) | (332,269,901 | ) | |||||||
Class IV | (618,210,434 | ) | 842,762,604 | ||||||||
Class V | 1,113,485,811 | (316,414,743 | ) | ||||||||
Class VI | 706,806,874 | 801,130,131 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 742,596,369 | 995,208,091 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 2,889,096 | 3,225,794 | |||||||||
Class IV | 1,273,937 | 697,130 | |||||||||
Class V | 611,195 | — | |||||||||
Class VI | 2,341,043 | 2,255,094 | |||||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 7,115,271 | 6,178,018 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 749,711,640 | 1,001,386,109 | |||||||||
Total increase (decrease) in net assets | 2,709,006,751 | 2,669,965,981 | |||||||||
Net assets: | |||||||||||
Beginning of period | 9,810,903,385 | 7,140,937,404 | |||||||||
End of period (including distributions in excess of net investment income of $4,399,665 and accumulated undistributed net investment income of $1,958,038, respectively) | $ | 12,519,910,136 | $ | 9,810,903,385 |
See accompanying notes to the financial statements.
24
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 19.05 | $ | 15.78 | $ | 8.82 | $ | 9.84 | $ | 9.04 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.37 | 0.34 | 0.23 | 0.11 | 0.18 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 6.24 | 4.40 | 6.97 | (1.00 | ) | 0.80 | |||||||||||||||||
Total from investment operations | 6.61 | 4.74 | 7.20 | (0.89 | ) | 0.98 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.43 | ) | (0.32 | ) | (0.24 | ) | (0.13 | ) | (0.18 | ) | |||||||||||||
From net realized gains | (2.74 | ) | (1.15 | ) | — | — | — | ||||||||||||||||
Total distributions | (3.17 | ) | (1.47 | ) | (0.24 | ) | (0.13 | ) | (0.18 | ) | |||||||||||||
Net asset value, end of period | $ | 22.49 | $ | 19.05 | $ | 15.78 | $ | 8.82 | $ | 9.84 | |||||||||||||
Total Return(a) | 37.99 | % | 31.45 | % | 82.10 | % | (9.14 | )% | 11.15 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,788,395 | $ | 4,433,098 | $ | 4,079,172 | $ | 1,215,653 | $ | 826,960 | |||||||||||||
Net expenses to average daily net assets | 1.10 | % | 1.11 | % | 1.12 | % | 1.16 | % | 1.19 | %(b) | |||||||||||||
Net investment income to average daily net assets | 1.88 | % | 2.17 | % | 1.85 | % | 1.12 | % | 2.32 | % | |||||||||||||
Portfolio turnover rate | 41 | % | 57 | % | 46 | % | 59 | % | 74 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.01 | % | 0.02 | % | 0.02 | % | 0.02 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.06 | $ | 0.05 | $ | 0.05 |
(a) The total returns would have been lower had certain expenses not been reimbursed on the Fund and underlying fund(s) during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Includes stamp duties and transfer taxes not reimbursed by the Manager, which approximate 0.035% of average daily net assets.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
25
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 19.02 | $ | 15.75 | $ | 8.81 | $ | 9.83 | $ | 9.03 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.40 | 0.34 | 0.24 | 0.11 | 0.17 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 6.20 | 4.41 | 6.94 | (0.99 | ) | 0.82 | |||||||||||||||||
Total from investment operations | 6.60 | 4.75 | 7.18 | (0.88 | ) | 0.99 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.43 | ) | (0.33 | ) | (0.24 | ) | (0.14 | ) | (0.19 | ) | |||||||||||||
From net realized gains | (2.74 | ) | (1.15 | ) | — | — | — | ||||||||||||||||
Total distributions | (3.17 | ) | (1.48 | ) | (0.24 | ) | (0.14 | ) | (0.19 | ) | |||||||||||||
Net asset value, end of period | $ | 22.45 | $ | 19.02 | $ | 15.75 | $ | 8.81 | $ | 9.83 | |||||||||||||
Total Return(a) | 38.05 | % | 31.59 | % | 81.97 | % | (9.09 | )% | 11.22 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,081,021 | $ | 3,255,865 | $ | 1,799,736 | $ | 1,003,594 | $ | 735,455 | |||||||||||||
Net expenses to average daily net assets | 1.05 | % | 1.06 | % | 1.08 | % | 1.12 | % | 1.14 | %(b) | |||||||||||||
Net investment income to average daily net assets | 2.03 | % | 2.13 | % | 2.05 | % | 1.16 | % | 2.27 | % | |||||||||||||
Portfolio turnover rate | 41 | % | 57 | % | 46 | % | 59 | % | 74 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.01 | % | 0.02 | % | 0.02 | % | 0.02 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.00 | (c) | $ | 0.05 | $ | 0.02 | $ | 0.03 |
(a) The total returns would have been lower had certain expenses not been reimbursed on the Fund and underlying fund(s) during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Includes stamp duties and transfer taxes not reimbursed by the Manager, which approximate 0.035% of average daily net assets.
(c) Purchase premiums and redemption fees were less than $0.01 per share
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
26
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class V share outstanding throughout each period)
Year Ended February 28, 2006 | Period from February 11, 2005 (commencement of operations) through February 28, 2005(a) | Period from March 1, 2004 through October 26, 2004(a) | Period from August 4, 2003 (commencement of operations) through February 29, 2004 | ||||||||||||||||
Net asset value, beginning of period | $ | 19.02 | $ | 17.88 | $ | 15.77 | $ | 10.81 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.22 | (0.01 | ) | 0.25 | 0.13 | ||||||||||||||
Net realized and unrealized gain (loss) | 6.39 | 1.15 | (0.09 | ) | 5.02 | ||||||||||||||
Total from investment operations | 6.61 | 1.14 | 0.16 | 5.15 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.45 | ) | — | (0.07 | ) | (0.19 | ) | ||||||||||||
From net realized gains | (2.74 | ) | — | (0.00 | )(b) | — | |||||||||||||
Total distributions | (3.19 | ) | — | (0.07 | ) | (0.19 | ) | ||||||||||||
Net asset value, end of period | $ | 22.44 | $ | 19.02 | $ | 15.86 | $ | 15.77 | |||||||||||
Total Return(c) | 38.12 | % | 6.38 | %** | 1.10 | %** | 47.82 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 1,447,059 | $ | 38,564 | $ | 116,417 | $ | 382,193 | |||||||||||
Net expenses to average daily net assets | 1.04 | % | 1.03 | %* | 1.05 | %* | 1.07 | %* | |||||||||||
Net investment income to average daily net assets | 1.06 | % | (0.05)%(d)** | 1.70%(d)** | 1.69 | %* | |||||||||||||
Portfolio turnover rate | 41 | % | 57 | %*** | 57 | %*** | 46 | %**** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.02 | %* | 0.01 | %* | 0.02 | %* | |||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | — | — | $ | 0.03 |
(a) The class was inactive from October 27, 2004 to February 11, 2005.
(b) Distributions from net realized gains were less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed on the Fund and underlying fund(s) during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) The ratio for the period has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
*** Calculation represents portfolio turnover of the Fund for the year ended February 28, 2005.
**** Calculation represents portfolio turnover of the Fund for the year ended February 29, 2004.
See accompanying notes to the financial statements.
27
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||
2006 | 2005 | 2004(a) | |||||||||||||
Net asset value, beginning of period | $ | 19.03 | $ | 15.76 | $ | 10.45 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.38 | 0.34 | 0.14 | ||||||||||||
Net realized and unrealized gain (loss) | 6.23 | 4.41 | 5.42 | ||||||||||||
Total from investment operations | 6.61 | 4.75 | 5.56 | ||||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (0.45 | ) | (0.33 | ) | (0.25 | ) | |||||||||
From net realized gains | (2.74 | ) | (1.15 | ) | — | ||||||||||
Total distributions | (3.19 | ) | (1.48 | ) | (0.25 | ) | |||||||||
Net asset value, end of period | $ | 22.45 | $ | 19.03 | $ | 15.76 | |||||||||
Total Return(b) | 38.07 | % | 31.63 | % | 53.62 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 3,203,435 | $ | 2,083,376 | $ | 879,837 | |||||||||
Net expenses to average daily net assets | 1.00 | % | 1.01 | % | 1.04 | %* | |||||||||
Net investment income to average daily net assets | 1.94 | % | 2.15 | % | 1.54 | %* | |||||||||
Portfolio turnover rate | 41 | % | 57 | % | 46 | %*** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.01 | % | 0.02 | %* | |||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 0.03 | $ | 0.04 |
(a) Period from June 30, 2003 (commencement of operations) through February 29, 2004.
(b) The total returns would have been lower had certain expenses not been reimbursed on the Fund and underlying fund(s) during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
*** Calculation represents portfolio turnover of the Fund for the year ended February 29, 2004.
See accompanying notes to the financial statements.
28
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investment in equity securities traded in the securities markets of emerging countries in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging Markets"). The Fund's benchmark is the S&P/IFC (Investable) Composite Index.
Throughout the year ended February 28, 2006, the Fund had four classes of shares outstanding: Class III, Class IV, Class V and Class VI. Class V was liquidated on October 26, 2004, but became operational again on February 11, 2005. The principal economic difference among the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested in the Fund or with GMO, as more fully outlined in the Fund's prospectus.
The financial statements of other fund(s) of the Trust in which the Fund invests ("underlying fund(s)") should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). Shares of GMO Special Purpose Holding Fund are not publicly available for direct purchase.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining
29
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of underlying fund(s) and other mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close, but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Indian regulators have alleged that the Fund violated certain conditions under which it was granted permission to operate in India and have restricted a portion of the Fund's locally held assets pending resolution of the dispute. The amount of these restricted assets is small relative to the size of the Fund, representing less than 0.1% of the Fund's net assets as of February 28, 2006. The valuation of this possible claim and all matters relating to the Fund's response to these allegations are subject to supervision and control of the Trustees, and all costs in respect of this matter are being borne by the Fund.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These
30
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are reco gnized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
31
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of
32
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfa vorable changes in the price of the security or index underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $1,913,771, collateralized by cash in the amount of $2,049,075, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
33
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $3,521,633 for potential capital gains and repatriation taxes as of February 28, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the year ended February 28, 2006, the Fund incurred $1,857,451 in capital gain taxes which is included in net realized gain (loss) in the Statement of Operations.
The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to/from the Brazilian market. During the year ended February 28, 2006, the Fund incurred $440,804 in CPMF tax which is included in the net realized gain (loss) on investments in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income - $394,742,796 and $226,404,971, respectively and long-term capital gains - $1,259,609,085 and $482,546,292, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $168,163,226 and $907,893,265 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 7,940,662,294 | $ | 4,769,558,410 | $ | (186,499,500 | ) | $ | 4,583,058,910 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and passive foreign investment company transactions. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 24,407,652 | $ | (24,407,652 | ) | $ | — |
34
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the ident ified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.80% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class's net assets on the share transaction date. For the years ended February 28, 2006 and February 28, 2005, the Fund received $1,258,611 and $4,614,444 in purchase premiums and $5,856,660 and $1,56 3,574 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
Investments in securities of issuers in emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may
35
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets in emerging countries are typically less liquid than those of developed markets. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares, and 0.055% for Class VI shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual direct operating expenses (excluding shareholder service fees, custody fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.81% of the average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the GMO Special Purpose Holding Fund. For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< (0.001%) | 0.000 | % | < 0.001% |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $117,529 and $70,965, respectively. No remuneration was paid to any other officer of the Trust.
36
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 were as follows:
Purchases | Sales | ||||||||||
Investments (non-U.S. Government securities) | $ | 4,236,416,328 | $ | 5,097,089,506 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Related parties
As of February 28, 2006, 0.7% of the Fund's shares were held by thirty-one related parties comprised of certain GMO employee accounts, and 25.4% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 11,031,646 | $ | 215,401,452 | 22,789,985 | $ | 356,466,932 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 33,704,110 | 653,183,451 | 18,207,389 | 302,857,058 | |||||||||||||||
Shares repurchased | (64,515,411 | ) | (1,328,070,785 | ) | (66,895,746 | ) | (991,593,891 | ) | |||||||||||
Purchase premiums and redemption fees | — | 2,889,096 | — | 3,225,794 | |||||||||||||||
Net increase (decrease) | (19,779,655 | ) | $ | (456,596,786 | ) | (25,898,372 | ) | $ | (329,044,107 | ) |
37
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 44,751,392 | $ | 920,854,601 | 50,766,722 | $ | 746,501,294 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 21,481,005 | 412,298,040 | 13,485,724 | 223,882,226 | |||||||||||||||
Shares repurchased | (100,173,580 | ) | (1,951,363,075 | ) | (7,304,133 | ) | (127,620,916 | ) | |||||||||||
Purchase premiums and redemption fees | — | 1,273,937 | — | 697,130 | |||||||||||||||
Net increase (decrease) | (33,941,183 | ) | $ | (616,936,497 | ) | 56,948,313 | $ | 843,459,734 | |||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class V: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 89,416,484 | $ | 1,733,477,556 | 2,027,531 | $ | 36,252,254 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 9,153,541 | 184,328,084 | 39,776 | 557,259 | |||||||||||||||
Shares repurchased | (36,097,525 | ) | (804,319,829 | ) | (24,279,304 | ) | (353,224,256 | ) | |||||||||||
Purchase premiums and redemption fees | — | 611,195 | — | — | |||||||||||||||
Net increase (decrease) | 62,472,500 | $ | 1,114,097,006 | (22,211,997 | ) | $ | (316,414,743 | ) | |||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 35,580,099 | $ | 780,535,719 | 49,525,885 | $ | 729,514,934 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 16,848,581 | 326,739,274 | 8,119,899 | 135,307,131 | |||||||||||||||
Shares repurchased | (19,260,319 | ) | (400,468,119 | ) | (3,976,582 | ) | (63,691,934 | ) | |||||||||||
Purchase premiums and redemption fees | — | 2,341,043 | — | 2,255,094 | |||||||||||||||
Net increase (decrease) | 33,168,361 | $ | 709,147,917 | 53,669,202 | $ | 803,385,225 |
38
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below: |
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Special Purpose Holding Fund | $ | 125,078 | $ | — | $ | — | $ | — | $ | 70,333 | $ | 45,402 | * |
* After the effect of return of capital distributions of $44,457 and $12,427 on April 5, 2005 and February 21, 2006, respectively.
39
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Markets Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Markets Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting O versight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
40
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
41
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
February 28, 2006 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 1.10 | % | $ | 1,000.00 | $ | 1,309.60 | $ | 6.30 | ||||||||||
2) Hypothetical | 1.10 | % | $ | 1,000.00 | $ | 1,019.34 | $ | 5.51 | |||||||||||
Class IV | |||||||||||||||||||
1 | ) Actual | 1.06 | % | $ | 1,000.00 | $ | 1,310.60 | $ | 6.07 | ||||||||||
2) Hypothetical | 1.06 | % | $ | 1,000.00 | $ | 1,019.54 | $ | 5.31 | |||||||||||
Class V | |||||||||||||||||||
1 | ) Actual | 1.04 | % | $ | 1,000.00 | $ | 1,310.30 | $ | 5.96 | ||||||||||
2) Hypothetical | 1.04 | % | $ | 1,000.00 | $ | 1,019.64 | $ | 5.21 | |||||||||||
Class VI | |||||||||||||||||||
1 | ) Actual | 1.01 | % | $ | 1,000.00 | $ | 1,310.60 | $ | 5.79 | ||||||||||
2) Hypothetical | 1.01 | % | $ | 1,000.00 | $ | 1,019.79 | $ | 5.06 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
42
GMO Emerging Markets Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $35,004,569 and recognized foreign source income of $332,523,381.
The Fund's distributions to shareholders include $1,259,609,085 from long-term capital gains.
For taxable, non-corporate shareholders, 38.62% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006 $0 and $113,412,132, respectively, or if determined to be different, the qualified short-term capital gains of such year.
43
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
44
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
45
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
46
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
47
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
Since its inception on April 11, 2005, the GMO Alternative Asset Opportunity Fund returned +6.5% for the fiscal year ended February 28, 2006, as compared to +5.1% for the Fund's benchmark, the GMO Alternative Asset Opportunity Index (50% JPMorgan U.S. 3-Month Cash Index / 50% Dow Jones AIG Commodities Index) for the same period. Consistent with the Fund's investment objectives and policies, during the period the Fund was exposed to commodities through futures and swaps.
The largest contributors to outperformance were Sugar, Natural Gas, and Gold. The largest detractors were Heating Oil, Wheat, and Soybean Oil.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* The GMO Alternative Asset Opportunity Index is a composite benchmark computed by GMO and comprised 50% JPMorgan U.S. 3-Month Cash Index and 50% Dow Jones AIG Commodity Index.
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Investment Concentration Summary (a)
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligation(s) | 73.9 | % | |||||
Short-Term Investment(s) | 14.8 | ||||||
Mutual Fund | 4.9 | ||||||
Futures | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | 0.0 | ||||||
Other | 6.3 | ||||||
100.0 | % |
(a) GMO Alternative Asset SPC Ltd. is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
1
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 8.2% | |||||||||||
U.S. Government — 8.2% | |||||||||||
15,000,000 | U.S. Treasury Note, 3.75%, due 03/31/07 (a) (c) | 14,834,595 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $15,001,887) | 14,834,595 | ||||||||||
MUTUAL FUNDS — 72.5% | |||||||||||
4,837,581 | GMO Short-Duration Collateral Fund (b) | 123,842,063 | |||||||||
8,155,414 | Merrimac Cash Series, Premium Class (c) | 8,155,414 | |||||||||
TOTAL MUTUAL FUNDS (COST $131,785,470) | 131,997,477 | ||||||||||
SHORT-TERM INVESTMENT(S) — 12.9% | |||||||||||
7,000,000 | Fannie Mae, 4.37%, due 03/27/06 (c) | 6,954,115 | |||||||||
1,600,000 | Fannie Mae, 4.30%, due 03/03/06 (c) | 1,598,089 | |||||||||
1,800,000 | Federal Farm Credit Bank, 4.38%, due 03/15/06 (c) | 1,795,401 | |||||||||
6,800,000 | Federal Farm Credit Bank, 4.38%, due 03/06/06 (c) | 6,790,899 | |||||||||
4,600,000 | Federal Home Loan Bank, 4.37%, due 03/01/06 (c) | 4,595,533 | |||||||||
1,800,000 | Freddie Mac, 4.40%, due 03/28/06 (c) | 1,792,520 | |||||||||
23,526,557 | |||||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $23,526,557) | 23,526,557 | ||||||||||
TOTAL INVESTMENTS — 93.6% (Cost $170,313,914) | 170,358,629 | ||||||||||
Other Assets and Liabilities (net) — 6.4% | 11,587,991 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 181,946,620 |
See accompanying notes to the financial statements.
2
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Futures Contracts (c)
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
63 | Gold 100 OZ | April 2006 | $ | 3,552,570 | $ | 8,027 | |||||||||||||
74 | Silver | May 2006 | 3,627,850 | 61,717 | |||||||||||||||
27 | Wheat | May 2006 | 514,350 | (122 | ) | ||||||||||||||
$ | 69,622 | ||||||||||||||||||
Sales | |||||||||||||||||||
60 | Cocoa | May 2006 | $ | 876,600 | $ | 18,974 | |||||||||||||
15 | Coffee "C" | May 2006 | 639,563 | (1,321 | ) | ||||||||||||||
206 | Corn | May 2006 | 2,459,125 | (75,447 | ) | ||||||||||||||
6 | Copper | May 2006 | 326,775 | 6,798 | |||||||||||||||
7 | Cotton No. 2 | May 2006 | 194,040 | (32 | ) | ||||||||||||||
19 | Heating Oil | April 2006 | 1,374,475 | (27,122 | ) | ||||||||||||||
103 | Lean Hogs | April 2006 | 2,532,770 | 20,204 | |||||||||||||||
6 | Live Cattle | April 2006 | 209,340 | 33 | |||||||||||||||
18 | Natural Gas | April 2006 | 1,208,520 | 140,925 | |||||||||||||||
19 | Gasoline NY Unleaded | April 2006 | 1,269,379 | 1,162 | |||||||||||||||
86 | Soybean | May 2006 | 2,554,200 | 4,000 | |||||||||||||||
95 | Soybean Meal | May 2006 | 1,672,950 | 55,307 | |||||||||||||||
85 | Soybean Oil | May 2006 | 1,222,470 | (66,683 | ) | ||||||||||||||
111 | Sugar (World) | May 2006 | 2,128,358 | 77,901 | |||||||||||||||
$ | 154,699 |
At February 28, 2006, GMO Alternative Asset SPC Ltd. had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
3
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments — (Continued)
February 28, 2006
Swap Agreements
Total Return Swaps (c)
Notional Amount | Expiration Date | Counterparty | Pay | Receive | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
5,648,766 | USD | 4/12/2006 | AIG | 3 month T-Bill | Return on DJ-AIG | ||||||||||||||||||
+ 0.36 | % | Commodity Total | |||||||||||||||||||||
Return Index | $ | (5,870 | ) | ||||||||||||||||||||
5,529,541 | USD | 4/12/2006 | AIG | 3 month T-Bill | Return on DJ-AIG | ||||||||||||||||||
+ 0.36 | % | Commodity Total | |||||||||||||||||||||
Return Index | (5,746 | ) | |||||||||||||||||||||
15,291,079 | USD | 4/12/2006 | AIG | 3 month T-Bill | Return on DJ-AIG | ||||||||||||||||||
+ 0.36 | % | Commodity Total | |||||||||||||||||||||
Return Index | (15,890 | ) | |||||||||||||||||||||
4,000,000 | USD | 4/12/2006 | AIG | 3 month T-Bill | Return on DJ-AIG | ||||||||||||||||||
+ 0.33 | % | Commodity Total | |||||||||||||||||||||
Return Index | (78,724 | ) | |||||||||||||||||||||
9,342,060 | USD | 4/12/2006 | AIG | 3 month T-Bill | Return on DJ-AIG | ||||||||||||||||||
+ 0.36 | % | Commodity Total | |||||||||||||||||||||
Return Index | (9,708 | ) | |||||||||||||||||||||
50,508,855 | USD | 4/12/2006 | AIG | 3 month T-Bill | Return on DJ-AIG | ||||||||||||||||||
+ 0.36 | % | Commodity Total | |||||||||||||||||||||
Return Index | (52,489 | ) | |||||||||||||||||||||
$ | (168,427 | ) |
Notes to Schedule of Investments:
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2).
(b) Affiliated issuer.
(c) All or a portion of this security is owned by GMO Alternative Asset SPC Ltd., which is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
4
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Statement of Assets and Liabilities — February 28, 2006
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Assets: | |||||||||||||||||||
Investments in unaffiliated issuers, at value (consolidated cost $46,683,858) (Note 2) | $ | 3,435,599 | $ | 43,080,967 | $ | — | $ | 46,516,566 | |||||||||||
Investments in affiliated issuer, at value (consolidated cost $123,630,056) (Note 2) | 171,709,678 | — | (47,867,615 | ) | 123,842,063 | ||||||||||||||
Cash | 6,952,582 | 4,719,815 | — | 11,672,397 | |||||||||||||||
Interest receivable | 1,781 | 284,249 | — | 286,030 | |||||||||||||||
Receivable for expenses reimbursed by Manager (Note 3) | 5,852 | 10,220 | — | 16,072 | |||||||||||||||
Total assets | 182,105,492 | 48,095,251 | (47,867,615 | ) | 182,333,128 | ||||||||||||||
Liabilities: | |||||||||||||||||||
Payable to affiliate for (Note 3): | |||||||||||||||||||
Management fee | 63,100 | — | — | 63,100 | |||||||||||||||
Shareholder service fee | 21,033 | — | — | 21,033 | |||||||||||||||
Trustees and Chief Compliance Officer fees | 365 | — | — | 365 | |||||||||||||||
Payable for open swap contracts (Note 2) | — | 168,427 | — | 168,427 | |||||||||||||||
Payable for variation margin on open futures contracts (Note 2) | — | 8,146 | — | 8,146 | |||||||||||||||
Accrued expenses | 74,374 | 51,063 | — | 125,437 | |||||||||||||||
Total liabilities | 158,872 | 227,636 | — | 386,508 | |||||||||||||||
Net assets | $ | 181,946,620 | $ | 47,867,615 | $ | (47,867,615 | ) | $ | 181,946,620 | ||||||||||
Net assets consist of: | |||||||||||||||||||
Net capital(1) | $ | 181,846,011 | $ | 181,846,011 | |||||||||||||||
Net unrealized appreciation | 100,609 | 100,609 | |||||||||||||||||
$ | 181,946,620 | $ | 181,946,620 | ||||||||||||||||
Shareholders capital | |||||||||||||||||||
Class III | $ | 181,946,620 | $ | 181,946,620 | |||||||||||||||
Shares outstanding | |||||||||||||||||||
Class III | 6,832,447 | 6,832,447 | |||||||||||||||||
Net asset value per share | |||||||||||||||||||
Class III | $ | 26.63 | $ | 26.63 |
(1) Net capital includes net investment income (loss) and net realized gain (loss) on investments.
See accompanying notes to the financial statements.
5
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Statement of Operations — For the Period from April 11, 2005
(commencement of operations) to February 28, 2006
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Investment Income: | |||||||||||||||||||
Dividend from affiliated issuers (Note 8) | $ | 3,623,033 | $ | — | $ | — | $ | 3,623,033 | |||||||||||
Interest | 33,157 | 1,339,241 | — | 1,372,398 | |||||||||||||||
Total income | 3,656,190 | 1,339,241 | — | 4,995,431 | |||||||||||||||
Expenses: | |||||||||||||||||||
Management fee (Note 3) | 603,360 | — | 603,360 | ||||||||||||||||
Shareholder service fee – Class III (Note 3) | 201,120 | — | 201,120 | ||||||||||||||||
Custodian and transfer agent fees | 14,829 | 68,155 | — | 82,984 | |||||||||||||||
Audit and tax fees | 70,014 | 22,806 | — | 92,820 | |||||||||||||||
Legal fees | 6,459 | 8,056 | — | 14,515 | |||||||||||||||
Trustees fees and related expenses (Note 3) | 7,726 | 7,015 | — | 14,741 | |||||||||||||||
Miscellaneous | 4,932 | 1,775 | — | 6,707 | |||||||||||||||
Total expenses | 908,440 | 107,807 | — | 1,016,247 | |||||||||||||||
Fees and expenses reimbursed by Manager (Note 3) | (95,131 | ) | (107,807 | ) | — | (202,938 | ) | ||||||||||||
Net expenses | 813,309 | — | — | 813,309 | |||||||||||||||
Net investment income | 2,842,881 | 1,339,241 | — | 4,182,122 | |||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||
Investments in unaffiliated issuer | — | (7 | ) | — | (7 | ) | |||||||||||||
Investments in affiliated issuer | 107,023 | — | — | 107,023 | |||||||||||||||
Closed futures contracts | — | 2,597,409 | — | 2,597,409 | |||||||||||||||
Closed swap contracts | — | 1,847,370 | — | 1,847,370 | |||||||||||||||
Net realized gain (loss) | 107,023 | 4,444,772 | — | 4,551,795 | |||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||
Investments | 100,609 | (167,262 | ) | 111,368 | 44,715 | ||||||||||||||
Open futures contracts | — | 224,321 | — | 224,321 | |||||||||||||||
Open swap contracts | — | (168,427 | ) | — | (168,427 | ) | |||||||||||||
Net unrealized gain (loss) | 100,609 | (111,368 | ) | 111,368 | 100,609 | ||||||||||||||
Net realized and unrealized gain (loss) | 207,632 | 4,333,404 | 111,368 | 4,652,404 | |||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,050,513 | $ | 5,672,645 | $ | 111,368 | $ | 8,834,526 |
See accompanying notes to the financial statements.
6
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Statement of Changes in Net Assets
Period from April 11, 2005 (commencement of operations) to February 28, 2006 | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 4,182,122 | |||||
Net realized gain (loss) | 4,551,795 | ||||||
Change in net unrealized appreciation (depreciation) | 100,609 | ||||||
Net increase (decrease) in net assets from operations | 8,834,526 | ||||||
Fund share transactions: (Note 7) | |||||||
Proceeds from sale of shares | |||||||
Class III | 173,438,589 | ||||||
Cost of shares repurchased | |||||||
Class III | (326,495 | ) | |||||
Net increase (decrease) in Fund share transactions | 173,112,094 | ||||||
Total increase (decrease) in net assets | 181,946,620 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period | $ | 181,946,620 |
See accompanying notes to the financial statements.
7
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Financial Highlights
(For a share outstanding throughout the period)
Period from April 11, 2005 (commencement of operations) to February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 25.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a) | 0.73 | † | |||||
Net realized and unrealized gain (loss) | 0.90 | ||||||
Total from investment operations | 1.63 | ||||||
Net asset value, end of period | $ | 26.63 | |||||
Total Return(b) | 6.52 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 181,947 | |||||
Net expenses to average daily net assets(c) | 0.61 | %* | |||||
Net investment income to average daily net assets(a) | 3.12 | %* | |||||
Portfolio turnover rate | 13 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.15 | %* |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) Total return would have been lower had certain expenses not been reimbursed during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 3).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements
February 28, 2006
1. Organization
GMO Alternative Asset Opportunity Fund (the "Fund"), which commenced operations on April 11, 2005, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return by seeking exposure to investment returns of commodity futures; commodity index options and options on futures; swap contracts and other commodity related derivatives; and non-commodity futures, options and swap contracts. Additionally, the Fund seeks exposure to high quality U.S. and foreign fixed income securities directly or indirectly through investments in GMO Short-Duration Collateral Fund ("underlying fund(s)").
The Fund's benchmark is a composite benchmark computed by GMO consisting of the Dow Jones-AIG Commodity Index and the JPMorgan 3-Month Cash Index in the following proportions: 50% (Dow Jones-AIG Commodity), and 50% (JPMorgan 3-Month Cash). The Manager does not seek to manage risk relative to the Fund's benchmark or match the Fund's portfolio composition to that of its benchmark.
Shares of the Fund are not publicly offered and are principally available only to other funds of the Trust and certain accredited investors.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect).
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
9
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
February 28, 2006
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the GMO Alternative Asset Opportunity Fund and its majority-owned investment in GMO Alternative Asset SPC Ltd. The consolidated financial statements include 100% of the assets and liabilities of GMO Alternative Asset SPC Ltd. All significant fund accounts and transactions have been eliminated in consolidation.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Foreign equity securities held by certain underlying fund(s) in which the Fund invests are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available, or whose values the Manager has determi ned to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 20.8% of net assets.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with a futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recogn ized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures
10
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
February 28, 2006
exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
11
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
February 28, 2006
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
Taxes
The Fund elected to be taxed as a partnership for federal income tax purposes. As a partnership, the Fund will not be subject to federal and state income tax. Instead, each shareholder is responsible for the tax liability or benefit related to his/her allocable share of taxable income or loss. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 174,678,802 | $ | 212,007 | $ | (4,532,180 | ) | $ | (4,320,173 | ) |
Distributions
The Fund does not intend to make any distributions to its shareholders but may do so in the sole discretion of the Trustees.
Security transactions and related investment income
Security transactions are accounted for on the trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
12
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets.
Additionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.45% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.45% of the average daily net assets.
13
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
February 28, 2006
The Fund incurs fees and expenses indirectly as a shareholder in the GMO Short-Duration Collateral Fund. For the period ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.002 | % | 0.000 | % | 0.010 | % | 0.012 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended February 28, 2006 was $1,483 and $1,102, respectively. No remuneration was paid by the Fund to any other officer of the Trust.
The Fund's investments in commodity-related derivatives are generally made through GMO Alternative Asset Opportunity SPC Ltd., a wholly-owned subsidiary organized as a Bermuda limited liability company, which GMO serves as investment manger but does not receive any additional management or other fees for such services.
4. Purchases and sales of securities
For the year ended February 28, 2006, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 15,003,516 | $ | — | |||||||
Investments (non-U.S. Government securities) | 142,623,033 | 19,100,000 |
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
14
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Consolidated Financial Statements — (Continued)
February 28, 2006
6. Principal shareholders
As of February 28, 2006, 65.0% of the outstanding shares of the Fund was held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Both of the shareholders are other funds of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 100.0% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from April 11, 2005 (commencement of operations) through February 28, 2006 | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 6,844,512 | $ | 173,438,589 | ||||||||
Shares repurchased | (12,065 | ) | (326,495 | ) | |||||||
Net increase (decrease) | 6,832,447 | $ | 173,112,094 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of an affiliated issuer during the period ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gain Distributions | Value, end of period | |||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | — | $ | 142,623,033 | $ | 19,100,000 | $ | 1,623,033 | $ | — | $ | 123,842,063 | |||||||||||||||
Totals | $ | — | $ | 142,623,033 | $ | 19,100,000 | $ | 1,623,033 | $ | — | $ | 123,842,063 |
15
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Alternative Asset Opportunity Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Alternative Asset Opportunity Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the period from April 11, 2005 (commencement of operations) to February 28, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statement s in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
16
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.62 | % | $ | 1,000.00 | $ | 990.00 | $ | 3.06 | |||||||||||
2) Hypothetical | 0.62 | % | $ | 1,000.00 | $ | 1,021.72 | $ | 3.11 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
17
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
18
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee3. | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
19
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
21
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Emerging Country Debt Share Fund returned +19.2% for the fiscal year ended February 28, 2006, as compared to +13.1% for the JPMorgan Emerging Markets Bond Index Global (EMBIG).
The Fund outperformed the benchmark during the fiscal year by 6.1%. EMBIG spreads over U.S. Treasuries tightened 93 basis points to 187 basis points (net of the effect of changes in the composition of the index's Argentina sub-component), while the yield on the 10-year U.S. Treasury bond rose by 17 basis points to 4.55%. The EMBIG return of +13.1% was driven by carry (the yield on the index averaged 7%) and capital gains from spread tightening, despite the 17 basis point increase in U.S. interest rates.
The biggest gainers of the fiscal year were Ivory Coast (+47.8%), Argentina (+25.2%), Venezuela (+23.8%) and Dominican Republic (+23.8%). Latin American countries outperformed those outside the region, +15.4% to +10.0%. The worst performing countries for the year were Bulgaria (+1.3%), Tunisia (+1.4%), and China (+2.9%).
Market selection added value; primarily from the Venezuela and Ivory Coast overweights and the Malaysia and China underweights. Overweighting Ukraine and underweighting Philippines detracted from value added. Security selection added 530 basis points of positive alpha in total. Positions in Brazil were the largest contributor, as credit default swaps and currency options added value. Bond selection was also highly positive in Russia, Turkey, and Mexico.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* JPMorgan EMBI Global + represents the JPMorgan EMBI prior to 8/95, JPMorgan EMBI+ through 12/31/99 and the JPMorgan EMBI Global thereafter. The Manager changed the benchmark due to the belief that the EMBIG is more diversified and representative of the universe of emerging country debt.
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligation(s) | 85.3 | % | |||||
Loan Participations | 6.8 | ||||||
Loan Assignments | 6.6 | ||||||
Call Options Purchased | 4.4 | ||||||
Swaps | 4.4 | ||||||
Mutual Funds | 0.9 | ||||||
Rights and Warrants | 0.7 | ||||||
Promissory Notes | 0.3 | ||||||
Put Options Purchased | 0.2 | ||||||
Short-Term Investment(s) | 0.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Futures | 0.0 | ||||||
Written Options | (1.6 | ) | |||||
Reverse Repurchase Agreements | (17.6 | ) | |||||
Other | 9.4 | ||||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
Brazil | 18.0 | % | |||||
Mexico | 16.2 | ||||||
Russia | 12.6 | ||||||
Venezuela | 10.5 | ||||||
Turkey | 10.3 | ||||||
Colombia | 4.0 | ||||||
Ukraine | 3.7 | ||||||
Philippines | 3.0 | ||||||
Uruguay | 2.3 | ||||||
Argentina | 2.1 | ||||||
Peru | 1.9 | ||||||
Qatar | 1.3 | ||||||
Indonesia | 1.3 | ||||||
Nigeria | 1.2 |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
1
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary** — (Continued) | % of Investments | ||||||
Ecuador | 1.1 | % | |||||
Algeria | 1.0 | ||||||
India | 0.9 | ||||||
Thailand | 0.9 | ||||||
Ivory Coast | 0.8 | ||||||
Vietnam | 0.7 | ||||||
Malaysia | 0.7 | ||||||
Jamaica | 0.6 | ||||||
Serbia | 0.6 | ||||||
Dominican Republic | 0.6 | ||||||
Chile | 0.5 | ||||||
Panama | 0.5 | ||||||
Poland | 0.5 | ||||||
Egypt | 0.4 | ||||||
Africa | 0.4 | ||||||
South Africa | 0.4 | ||||||
Bosnia | 0.3 | ||||||
Morocco | 0.3 | ||||||
El Salvador | 0.3 | ||||||
Costa Rica | 0.2 | ||||||
China | 0.2 | ||||||
Nicaragua | 0.2 | ||||||
Tunisia | 0.2 | ||||||
Belize | 0.1 | ||||||
Trinidad & Tobago | 0.1 | ||||||
Bulgaria | (0.1 | ) | |||||
Lebanon | (0.1 | ) | |||||
Romania | (0.1 | ) | |||||
South Korea | (0.6 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
2
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
MUTUAL FUND — 99.9% | |||||||||||
Affiliated Issuer(s) — 99.9% | |||||||||||
16,699,156 | GMO Emerging Country Debt Fund, Class III | 188,700,447 | |||||||||
TOTAL MUTUAL FUND (COST $178,513,394) | 188,700,447 | ||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $178,513,394) | 188,700,447 | ||||||||||
Other Assets and Liabilities (net) — 0.1% | 154,120 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 188,854,567 |
See accompanying notes to the financial statements.
3
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in affiliated issuers, at value (cost $178,513,394) (Notes 2 and 8) | $ | 188,700,447 | |||||
Cash | 248,096 | ||||||
Receivable for Fund shares sold | 72,641 | ||||||
Interest receivable | 290 | ||||||
Total assets | 189,021,474 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 148,096 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 209 | ||||||
Accrued expenses | 18,602 | ||||||
Total liabilities | 166,907 | ||||||
Net assets | $ | 188,854,567 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 177,339,237 | |||||
Accumulated net realized gain | 1,328,277 | ||||||
Net unrealized appreciation | 10,187,053 | ||||||
$ | 188,854,567 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 188,854,567 | |||||
Shares outstanding: | |||||||
Class III | 18,291,563 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.32 |
See accompanying notes to the financial statements.
4
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 16,837,804 | |||||
Interest | 18,388 | ||||||
Total investment income | 16,856,192 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 18,743 | ||||||
Audit and tax fees | 13,201 | ||||||
Legal fees | 3,157 | ||||||
Trustees fees and related expenses (Note 3) | 2,893 | ||||||
Registration fees | 20,611 | ||||||
Miscellaneous | 3,812 | ||||||
Total expenses | 62,417 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (19,728 | ) | |||||
Net expenses | 42,689 | ||||||
Net investment income (loss) | 16,813,503 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 4,574,761 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 7,262,517 | ||||||
Net realized gain (loss) | 11,837,278 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (714,732 | ) | |||||
Net realized and unrealized gain (loss) | 11,122,546 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 27,936,049 |
See accompanying notes to the financial statements.
5
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 16,813,503 | $ | 11,949,262 | |||||||
Net realized gain (loss) | 11,837,278 | 6,251,534 | |||||||||
Change in net unrealized appreciation (depreciation) | (714,732 | ) | 2,746,511 | ||||||||
Net increase (decrease) in net assets from operations | 27,936,049 | 20,947,307 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (18,779,578 | ) | (11,946,927 | ) | |||||||
Net realized gains | |||||||||||
Class III | (10,909,948 | ) | (3,945,279 | ) | |||||||
(29,689,526 | ) | (15,892,206 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 58,758,037 | 25,852,230 | |||||||||
Total increase (decrease) in net assets | 57,004,560 | 30,907,331 | |||||||||
Net assets: | |||||||||||
Beginning of period | 131,850,007 | 100,942,676 | |||||||||
End of period (including accumulated undistributed net investment income of $0 and $4,608, respectively) | $ | 188,854,567 | $ | 131,850,007 |
See accompanying notes to the financial statements.
6
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 10.54 | $ | 10.05 | $ | 9.56 | $ | 9.25 | $ | 8.90 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 1.18 | 1.13 | 1.10 | 0.83 | 1.03 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.71 | 0.86 | 1.73 | 0.57 | 0.51 | ||||||||||||||||||
Total from investment operations | 1.89 | 1.99 | 2.83 | 1.40 | 1.54 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (1.33 | ) | (1.12 | ) | (1.85 | ) | (1.09 | ) | (1.19 | ) | |||||||||||||
From net realized gains | (0.78 | ) | (0.38 | ) | (0.49 | ) | — | — | |||||||||||||||
Total distributions | (2.11 | ) | (1.50 | ) | (2.34 | ) | (1.09 | ) | (1.19 | ) | |||||||||||||
Net asset value, end of period | $ | 10.32 | $ | 10.54 | $ | 10.05 | $ | 9.56 | $ | 9.25 | |||||||||||||
Total Return(b) | 19.21 | % | 20.27 | % | 29.91 | % | 15.81 | % | 18.47 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 188,855 | $ | 131,850 | $ | 100,943 | $ | 66,140 | $ | 89,952 | |||||||||||||
Net expenses to average daily net assets(c) | 0.03 | % | 0.00 | %(d) | 0.00 | %(d) | 0.00 | %(d) | 0.00 | %(d) | |||||||||||||
Net investment income to average daily net assets(a) | 10.91 | % | 10.81 | % | 10.06 | % | 8.88 | % | 11.43 | % | |||||||||||||
Portfolio turnover rate | 13 | % | 14 | % | 20 | % | 30 | % | 14 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.06 | % | 0.08 | % | 0.08 | % | 0.06 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by GMO Emerging Country Debt Fund ("ECDF").
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in ECDF (See note 3).
(d) Net expenses to average daily net assets were less than 0.01%.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
7
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Emerging Country Debt Share Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in Class III Shares of GMO Emerging Country Debt Fund ("ECDF" or "underlying fund(s)"), a fund of the Trust. GMO also serves as investment manager to ECDF. ECDF pursues its objective by investing primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Eastern Europe. The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global (EMBIG). The financial statements of ECDF should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Shares of ECDF are valued at their net asset value. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value.
Certain investments in securities held by the underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements of the underlying fund(s). As of February 28, 2006, the total value of these securities represented 25.3% of net assets.
8
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $18,772,148 and $11,946,927, respectively and long-term capital gains – $10,917,378 and $3,945,279, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $1,508,752 of undistributed long-term capital gains. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 178,693,870 | $ | 10,006,577 | $ | — | $ | 10,006,577 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 1,961,467 | $ | (1,961,467 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
9
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in ECDF (See Note 3).
Purchases and redemptions of Fund shares
As of the date of this report, the Fund does not charge any purchase premium or redemption fee in connection with the purchase and sale of Fund shares. As a shareholder in ECDF, the Fund will indirectly bear ECDF's purchase premiums and redemption fees which are 0.50% and 0.25%, respectively. These fees are paid to and retained by ECDF. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the underlying fund may be waived in extraordinary circumstances if the underlying fund will not incur transaction costs. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in ECDF. Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in ECDF's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede ECDF's ability to repatriate amounts it receives. ECDF may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, ECDF may not be able to realize in an actual sale amounts approximating tho se used to value its holdings. Additionally, the investment risk associated with an investment in ECDF may be more pronounced to the extent that ECDF engages in derivative transactions.
ECDF owns loans and bonds representing significant exposure to the risk of default in many countries, but has the most sizable of such positions relating to Russia, Mexico and Brazil. The Fund's financial position would be substantially adversely affected in the case of a default by these countries on obligations held by ECDF, or on obligations issued by those countries generally. ECDF has purchased default protection in the form of credit default swap agreements with respect to debt associated with those countries, which may
10
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
offset some of the losses that ECDF might experience in the case of default on bonds issued by such countries; however ECDF as of February 28, 2006 has sold more of such default protection than it has purchased. However, it is important to note that (i) such protection would not cover losses due to defaults on loan assignments or participations, (ii) such protection will generally not be sufficient to cover all of ECDF's losses in the case of default, and (iii) due to the privately negotiated nature of such instruments, under some circumstances, the protection offered by such instruments may not be realized, even if ECDF incurs substantial losses due to weakening of the credit or virtual default by the countries.
3. Fees and other transactions with affiliates
The manager does not directly charge an advisory fee or shareholder service fee. GMO, in its capacity as Manager of ECDF, earns a management fee at the annual rate of 0.35% of ECDF's average daily net assets. Additionally, Class III shares of ECDF bear a shareholder service fee at the annual rate of 0.15% of ECDF Class III shares' average daily net assets.
Effective July 1, 2005, GMO no longer reimburses any Fund fees or expenses. Prior to July 1, 2005, GMO had been contractually obligated to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes).
The Fund incurs fees and expenses indirectly as a shareholder in ECDF. For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.419 | % | 0.149 | % | 0.217 | % | 0.785 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $1,687 and $1,017, respectively. No remuneration was paid to any other officer of the Trust.
11
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $74,077,468 and $20,429,958, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 100% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,335,883 | $ | 46,077,234 | 2,747,234 | $ | 29,345,812 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,010,030 | 29,689,525 | 1,545,795 | 15,892,206 | |||||||||||||||
Shares repurchased | (1,562,483 | ) | (17,008,722 | ) | (1,831,725 | ) | (19,385,788 | ) | |||||||||||
Net increase (decrease) | 5,783,430 | $ | 58,758,037 | 2,461,304 | $ | 25,852,230 |
12
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of this issuer during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 131,192,910 | $ | 74,077,468 | $ | 20,429,958 | $ | 16,837,804 | $ | 7,262,517 | $ | 188,700,447 |
8. Subsequent event
On April 11, 2006, the Fund received a redemption request that represented approximately 45% of the Fund's assets.
13
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Country Debt Share Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Share Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company A ccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
14
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.87 | % | $ | 1,000.00 | $ | 1,104.30 | $ | 4.54 | |||||||||||
2) Hypothetical | 0.87 | % | $ | 1,000.00 | $ | 1,020.48 | $ | 4.36 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
15
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $10,917,378 from long-term capital gains.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $1,546,326 or if determined to be different, the qualified interest income of such year.
16
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
17
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004) ; and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
18
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002;Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
19
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Special Purpose Holding Fund returned +124.8% for the fiscal year ended February 28, 2006, as compared to +3.7% for the JPMorgan U.S. 3-Month Cash Index.
The Fund outperformed the benchmark during the fiscal year by +121.1%. The returns on the Fund were positive as trust administrators released a portion of principal to bondholders and the Fund received litigation proceeds.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
February 28, 2006
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 86.9 | % | |||||
Other | 13.1 | ||||||
100.0 | % |
(a) GMO SPV I, LLC is a 74.9% owned subsidiary of GMO Special Purpose Holding Fund.
1
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Description | Value ($) | ||||||
DEBT OBLIGATIONS — 86.9% (a) | |||||||
Asset-Backed Securities — 86.9% | |||||||
Health Care Receivables — 86.9% | |||||||
Interest related to the Bankruptcy Estate of NPF VI Inc. Series 02-1 Class A (b) | 990,000 | ||||||
Interest related to the Bankruptcy Estate of NPF XII Inc Series 00-3 Class A (b) | 836,000 | ||||||
Interest related to the Bankruptcy Estate of NPF XII Inc Series 02-1 Class A (b) | 2,128,000 | ||||||
3,954,000 | |||||||
Total Asset-Backed Securities | 3,954,000 | ||||||
TOTAL DEBT OBLIGATIONS (COST $0) | 3,954,000 | ||||||
TOTAL INVESTMENTS — 86.9% (Cost $0) | 3,954,000 |
Other Assets and Liabilities (net) — 13.1% | 598,535 | ||||||
TOTAL NET ASSETS — 100.0% | $ | 4,552,535 |
Notes to Schedule of Investments:
(a) Owned by GMO SPV I, LLC. GMO SPV I, LLC is a 74.9% subsidiary of GMO Special Purpose Holding Fund.
(b) Security in default.
See accompanying notes to the financial statements.
2
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Statement of Assets and Liabilities — February 28, 2006
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Minority Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Investments in unaffiliated issuers, at value (cost $0) (Note 2) | $ | — | $ | 3,954,000 | $ | — | $ | — | $ | 3,954,000 | |||||||||||||
Investments in affiliated issuers, at value (cost $0) (Note 2) | 4,162,820 | — | — | (4,162,820 | ) | — | |||||||||||||||||
Cash | 464,389 | 1,696,848 | — | — | 2,161,237 | ||||||||||||||||||
Interest receivable | 1,009 | 1,053 | — | — | 2,062 | ||||||||||||||||||
Receivable for expenses reimbursed by Manager (Note 3) | 946 | 3,586 | — | — | 4,532 | ||||||||||||||||||
Total assets | 4,629,164 | 5,655,487 | — | (4,162,820 | ) | 6,121,831 | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Payable to affiliate for (Note 3): | |||||||||||||||||||||||
Trustees and Chief Compliance Officer fees | 294 | — | — | — | 294 | ||||||||||||||||||
Accrued expenses | 76,335 | 92,259 | — | — | 168,594 | ||||||||||||||||||
Minority interest | — | — | 1,400,408 | — | 1,400,408 | ||||||||||||||||||
Total liabilities | 76,629 | 92,259 | 1,400,408 | — | 1,569,296 | ||||||||||||||||||
Net assets | $ | 4,552,535 | $ | 5,563,228 | $ | (1,400,408 | ) | $ | (4,162,820 | ) | $ | 4,552,535 | |||||||||||
Shareholders' capital | |||||||||||||||||||||||
Net capital (1) | $ | 389,715 | $ | 1,609,228 | $ | (405,084 | ) | $ | (1,204,144 | ) | $ | 389,715 | |||||||||||
Net unrealized appreciation (depreciation) | 4,162,820 | 3,954,000 | (995,324 | ) | (2,958,676 | ) | 4,162,820 | ||||||||||||||||
Shareholders' capital | $ | 4,552,535 | $ | 5,563,228 | $ | (1,400,408 | ) | $ | (4,162,820 | ) | $ | 4,552,535 | |||||||||||
Shares outstanding | 554,071 | 554,071 | |||||||||||||||||||||
Net asset value per share | $ | 8.22 | $ | 8.22 |
(1) Net capital includes cumulative net investment gains/(losses) and net realized gains/(losses) on investments in Portfolio Funds.
See accompanying notes to the financial statements.
3
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Statement of Operations — Year Ended February 28, 2006
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Minority Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Investment Income: | |||||||||||||||||||||||
Interest | $ | 11,249 | $ | 14,726 | $ | — | $ | — | $ | 25,975 | |||||||||||||
Total income | 11,249 | 14,726 | — | — | 25,975 | ||||||||||||||||||
Expenses: | |||||||||||||||||||||||
Custodian and transfer agent fees | 644 | 27,535 | — | — | 28,179 | ||||||||||||||||||
Audit and tax fees | 33,414 | 4,552 | — | — | 37,966 | ||||||||||||||||||
Legal fees | 10,114 | 103,543 | — | — | 113,657 | ||||||||||||||||||
Trustees fees and related expenses (Note 3) | 4,432 | — | — | — | 4,432 | ||||||||||||||||||
Miscellaneous | 3,173 | 797 | — | — | 3,970 | ||||||||||||||||||
Total expenses | 51,777 | 136,427 | — | — | 188,204 | ||||||||||||||||||
Fees and expenses reimbursed by Manager (Note 3) | (47,261 | ) | (51,380 | ) | — | — | (98,641 | ) | |||||||||||||||
Net expenses | 4,516 | 85,047 | — | — | 89,563 | ||||||||||||||||||
Net income (loss) | 6,733 | (70,321 | ) | — | — | (63,588 | ) | ||||||||||||||||
Minority Interest | — | — | 17,702 | — | 17,702 | ||||||||||||||||||
Net investment income (loss) after minority interest | 6,733 | (70,321 | ) | 17,702 | — | (45,886 | ) | ||||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||||||
Investments in unaffiliated issuers | — | 6,496,465 | — | — | 6,496,465 | ||||||||||||||||||
Investments in affiliated issuers | — | — | — | — | — | ||||||||||||||||||
Realized gains distributions from affiliated issuers | 3,957,402 | — | — | (3,957,402 | ) | — | |||||||||||||||||
Net realized gain (loss) | 3,957,402 | 6,496,465 | — | (3,957,402 | ) | 6,496,465 | |||||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||||||
Investments | 734,427 | 87,940 | — | (734,427 | ) | 87,940 | |||||||||||||||||
Net unrealized gain (loss) | 734,427 | 87,940 | — | (734,427 | ) | 87,940 | |||||||||||||||||
Net realized and unrealized gain (loss) | 4,691,829 | 6,584,405 | — | (4,691,829 | ) | 6,584,405 | |||||||||||||||||
Minority interest in realized and unrealized gain (loss) | — | — | (1,839,957 | ) | — | (1,839,957 | ) | ||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 4,698,562 | $ | 6,514,084 | $ | (1,822,255 | ) | $ | (4,691,829 | ) | $ | 4,698,562 |
See accompanying notes to the financial statements.
4
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations (after minority interest): | |||||||||||
Net investment income (loss) | $ | (63,588 | ) | $ | 517,399 | ||||||
Net realized gain (loss) | 6,496,465 | (75,420,900 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 87,940 | 101,186,067 | |||||||||
Minority Interest | (1,822,255 | ) | (19,278,614 | ) | |||||||
Net increase (decrease) in net assets from operations | 4,698,562 | 7,003,952 | |||||||||
Distributions to shareholders from: | |||||||||||
Net Investment income | — | (6,893,402 | ) | ||||||||
Return of capital | — | (596,105 | ) | ||||||||
Cash distributions | (8,740,567 | ) | (9,580,120 | ) | |||||||
(8,740,567 | ) | (17,069,627 | ) | ||||||||
Fund share transactions (Note 7): | |||||||||||
Proceeds from sale of shares | — | — | |||||||||
Net asset value of shares issued to shareholders in payment of distributions declared | — | 7,489,507 | |||||||||
Cost of shares repurchased | — | (214,556,130 | ) | ||||||||
Net increase (decrease) in Fund share transactions | — | (207,066,623 | ) | ||||||||
Total increase (decrease) in net assets | (4,042,005 | ) | (217,132,298 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 8,594,540 | 225,726,838 | |||||||||
End of period | $ | 4,552,535 | $ | 8,594,540 |
See accompanying notes to the financial statements.
5
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Financial Highlights
(For a share outstanding throughout each period
Year Ended | Year Ended | Period from December 1, 2003 through | Year Ended | ||||||||||||||||
February 28, 2006 | February 28, 2005 | February 29, 2004(a) | November 30, 2003 | ||||||||||||||||
Net asset value, beginning of period | $ | 15.51 | $ | 24.11 | $ | 23.89 | $ | 23.77 | |||||||||||
Income from investment operations: | |||||||||||||||||||
Net investment income (loss)† | (0.08 | ) | 0.41 | 0.13 | 0.75 | ||||||||||||||
Net realized and unrealized gain (loss) | 8.57 | 9.08 | 0.09 | (0.63 | ) | ||||||||||||||
Total from investment operations | 8.49 | 9.49 | 0.22 | 0.12 | |||||||||||||||
From net investment income | — | (0.74 | ) | — | — | ||||||||||||||
From net realized gains | — | — | — | — | |||||||||||||||
From cash distributions | (15.78 | ) | (17.29 | ) | — | ||||||||||||||
From return of capital | — | (0.06 | ) | — | — | ||||||||||||||
Total distributions | (15.78 | ) | (18.09 | ) | — | — | |||||||||||||
Net asset value, end of period | $ | 8.22 | $ | 15.51 | $ | 24.11 | $ | 23.89 | |||||||||||
Total Return(c) | 124.75 | % | 36.35 | % | 0.92 | %** | 0.50 | % | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 4,553 | $ | 8,595 | $ | 225,727 | $ | 224,113 | |||||||||||
Net operating expenses to average daily net assets | 1.26 | % | (0.01 | )% | 0.08 | %* | 0.13 | % | |||||||||||
Interest expense to average daily net assets | — | — | 0.04 | %(e)* | — | (b)(f) | |||||||||||||
Total net expenses to average daily net assets | 1.26 | % | (0.01 | )% | 0.12 | %* | 0.13 | % | |||||||||||
Net investment income to average daily net assets | (0.65 | )% | 1.83 | % | 0.49 | %* | 3.11 | % | |||||||||||
Portfolio turnover rate | 0 | % | 0 | % | 4 | %** | 80 | % | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 1.39 | % | 0.67 | % | 0.11 | %* | 0.10 | % |
(a) The Fund changed its fiscal year end from November 30 to February 28.
(b) The Fund changed its fiscal year end from February 28 to November 30.
(c) The total return would have been lower had certain expenses not been reimbursed during the period shown.
(d) Net operating expenses as a percentage of average daily net assets was less than 0.01%.
(e) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses.
Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Interest expense as a percentage of average daily net assets was less than 0.01%.
† Computed using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Financial Highlights — (Continued)
(For a share outstanding throughout each period
Period from March 1, 2002 through | Year Ended February 28 | ||||||||||||||
November 30, 2002(b) | 2002 | 2001 | |||||||||||||
Net asset value, beginning of period | $ | 25.66 | $ | 26.14 | $ | 25.29 | |||||||||
Income from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.73 | 1.29 | 1.83 | ||||||||||||
Net realized and unrealized gain (loss) | (2.39 | ) | (0.33 | ) | 0.07 | ||||||||||
Total from investment operations | (1.66 | ) | 0.96 | 1.90 | |||||||||||
From net investment income | (0.15 | ) | (1.44 | ) | (1.05 | ) | |||||||||
From net realized gains | (0.08 | ) | — | — | |||||||||||
From cash distributions | — | — | — | ||||||||||||
From return of capital | — | — | — | ||||||||||||
Total distributions | (0.23 | ) | (1.44 | ) | (1.05 | ) | |||||||||
Net asset value, end of period | $ | 23.77 | $ | 25.66 | $ | 26.14 | |||||||||
Total Return(c) | (6.53 | )%** | 3.69 | % | 7.61 | % | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 281,715 | $ | 1,440,711 | $ | 1,520,173 | |||||||||
Net operating expenses to average daily net assets | 0.01 | %* | — | (d) | — | (d) | |||||||||
Interest expense to average daily net assets | 0.03 | %(e) | 0.05 | %(e) | 0.20 | %(e) | |||||||||
Total net expenses to average daily net assets | 0.04 | %* | 0.05 | % | 0.20 | % | |||||||||
Net investment income to average daily net assets | 3.76 | %* | 4.91 | % | 7.05 | % | |||||||||
Portfolio turnover rate | 39 | %** | 29 | % | 39 | % | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % |
See accompanying notes to the financial statements.
7
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to the Financial Statements
February 28, 2006
1. Organization
GMO Special Purpose Holding Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes.
Shares of the Fund are not publicly offered and are principally available only to other GMO Funds of the Trust and certain accredited investors. Presently, the Fund is closed to new investment.
On November 26, 2002, approximately 78% of the Fund's assets were transferred to a new fund, the GMO Short-Duration Collateral Fund ("SDCF"). The Fund retained certain defaulted bonds sponsored by National Century Financial Enterprises (the "NPF Securities") (through its investment in GMO SPV I, LLC ("SPV")) and generally retained other lower quality issues.
On January 23, 2004, the trustees of the Trust approved a transaction pursuant to which the Fund contributed its net assets, other than its interest in SPV, its claims resulting from its holdings of the NPF Securities, and a fixed amount of cash, such contribution representing $214,143,316 or 94.14% of the Fund's assets, to SDCF in exchange for SDCF shares. The transaction, which was structured as a tax-free reorganization, was consummated after the close of business on March 31, 2004 and the shares received by the Fund were then distributed to the shareholders. After distribution of the SDCF shares, the Fund changed its name to GMO Special Purpose Holding Fund and elected partnership status for Federal income tax purposes.
In April 2004, a plan of liquidation ("the Plan") was approved by the bankruptcy court with respect to National Century Financial Enterprises and the NPF Securities. Pursuant to the Plan, the Fund received a cash distribution, less expenses associated with the transaction and an interest in additional amounts recovered by the bankruptcy estate. The Fund, together with other creditors, are continuing to pursue various claims resulting from its holdings of the NPF Securities. The ultimate amount of losses and costs associated with the NPF Securities that may be recovered by the Fund (through its investment in SPV) is not known at this time.
GMO Special Purpose Holding Fund ("SPHF") has litigation pending against various entities related to the default of certain asset-backed securities previously held by SPHF. In July of 2005, SPHF entered into a settlement agreement with one defendant in the lawsuit and the Fund received $3,445,710 in conjunction with the settlement. The outcome of lawsuits against the remaining defendants is not predictable and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
8
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to the Financial Statements — (Continued)
February 28, 2006
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the GMO Special Purpose Holding Fund and its majority-owned investment in SPV. The consolidated financial statements include 100% of the assets and liabilities of SPV and the ownership interests of minority participants are recorded as "Minority Interest". All significant fund accounts and transactions have been eliminated in consolidation.
Portfolio valuation
Shares of investment funds are valued at their net asset value. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value using fair value prices supplied by an independent pricing service to the extent that such prices are available. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. The prices provided by the Manager may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements.
Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source).
Certain securities held by the Fund were valued solely on the basis of a price provided by the principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 28, 2006, the total value of these securities represented 100% of total investments.
9
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to the Financial Statements — (Continued)
February 28, 2006
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreements. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund di d not enter into any repurchase agreements.
Taxes
Effective April 1, 2004, the Fund elected to be taxed as a partnership for federal income tax purposes and, accordingly, the Fund is no longer a "regulated investment company" for federal income tax purposes. As a partnership the Fund will not be subject to federal and state income tax. Instead, each shareholder is responsible for the tax liability or benefit related to his/her allocable share of taxable income or loss. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements.
The Fund qualified as a regulated investment company until March 31, 2004, under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Through March 31, 2004, The Fund's policy was to declare and pay distributions from its net investment income annually, and from net realized short-term and long-term capital gains at least annually. All distributions were paid in shares of the Fund, at net asset value, unless the shareholder elected to receive cash distributions. Distributions to shareholders were recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions were determined in accordance with U.S. federal income tax regulations which may have differed from U.S. GAAP. Distributions in excess of tax basis earnings and profits, if any, were reported in the Fund's financial statements as a return of capital. For the Fund's tax year ended March 31, 2004, the Fund had a return of c apital distribution of $596,105.
Certain tax-related characteristics of the Fund as of March 31, 2004 became attributable to SDCF, effective April 1, 2004. Included in such tax characteristics was the Fund's capital loss carryover of $31,628,512. See Note 1 for additional information to the Fund's March 31, 2004 tax free reorganization with SDCF.
10
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to the Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 6,884,922 | $ | — | $ | (2,722,102 | ) | $ | (2,722,102 | ) |
SPV is also treated as a partnership for federal income tax purposes and subject to the same rules as the Fund with respect to federal income taxation of partnerships.
Distributions
The Fund will distribute proceeds and other cash receipts received from its underlying investments. Distributions made by the Fund, other than a distribution in partial or complete redemption of a shareholder's interest in the Fund, are reported in the Fund's financial statements as cash distributions.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Income is not recognized, nor are premium and discount amortized on securities for which collection in the ordinary course of business is not expected. Dividend income is recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date, if later. Non-cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
3. Fees and other transactions with affiliates
GMO does not charge the Fund any management or service fees for its services. In addition, effective until at least June 30, 2006, GMO has contractually agreed to reimburse all of the Fund's expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees of the Trust (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes). The costs incurred in connection with the Fund's pursuit of legal claims arising from the Fund's investment in the NPF securities are being treated as extraordinary expenses.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $3,138 and $28, respectively. No remuneration was paid to any other officer of the Trust.
11
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to the Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
There were no purchases or sales of securities, excluding short-term investments, for the year ended February 28, 2006.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the business of the Fund.
6. Principal shareholders
At February 28, 2006, 61.7% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 100% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Shares sold | — | — | |||||||||
Shares issued to shareholders in reinvestment of distributions | 320,338 | ||||||||||
Shares repurchased | — | (9,128,161 | ) | ||||||||
Net increase (decrease) | — | (8,807,823 | ) | ||||||||
Fund shares: | |||||||||||
Beginning of period | 554,071 | 9,361,894 | |||||||||
End of period | 554,071 | 554,071 |
12
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to the Financial Statements — (Continued)
February 28, 2006
8. Subsequent event
GMO Special Purpose Holding Fund ("SPHF") has litigation pending against various entities related to the default of certain asset-backed securities, NPF VI Trust and NPF XII Trust (the "NPF Trusts"), previously held by SPHF. In April 2006, SPHF entered into a settlement agreement with J.P. Morgan Chase Bank, the indenture trustee for the NPF Trusts, in which SPHF received $19,236,857 in connection with the settlement.
13
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Special Purpose Holding Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Special Purpose Holding Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accou nting Oversight Board (United Sates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
14
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.49 | % | $ | 1,000.00 | $ | 1,341.30 | $ | 8.65 | |||||||||||
2) Hypothetical | 1.49 | % | $ | 1,000.00 | $ | 1,017.41 | $ | 7.45 |
* Expenses are calculated using the annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
15
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
16
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | 3Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
17
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
18
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
19
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO International Equity Allocation Fund returned +21.2% for the fiscal year ended February 28, 2006, as compared to +20.6% for the MSCI ACWI (All Country World Index) ex-U.S. Index. Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was exposed to international equity securities through its investment in underlying GMO mutual funds.
Implementation detracted 1.1%, as the GMO International Growth Equity Fund and the GMO International Value funds underperformed their respective benchmarks.
Asset allocation added nearly 1.7%. The Fund's overweight to emerging equities was the main contributor to the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .17% on the purchase and .17% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 91.2 | % | |||||
Short-Term Investment(s) | 6.5 | ||||||
Preferred Stocks | 4.1 | ||||||
Debt Obligation(s) | 0.4 | ||||||
Futures | 0.1 | ||||||
Investment Funds | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | 0.0 | ||||||
Other | (2.5 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
Japan | 21.9 | % | |||||
United Kingdom | 17.4 | ||||||
France | 7.0 | ||||||
South Korea | 5.1 | ||||||
Netherlands | 4.9 | ||||||
Germany | 4.7 | ||||||
Brazil | 3.9 | ||||||
Taiwan | 3.7 | ||||||
Canada | 3.3 | ||||||
Italy | 3.2 | ||||||
Switzerland | 2.9 | ||||||
Australia | 2.8 | ||||||
Finland | 2.6 | ||||||
Spain | 1.9 | ||||||
China | 1.5 | ||||||
Belgium | 1.4 | ||||||
Mexico | 1.3 | ||||||
South Africa | 1.3 | ||||||
Norway | 1.2 | ||||||
Hong Kong | 1.0 | ||||||
Sweden | 0.9 | ||||||
Austria | 0.8 | ||||||
Ireland | 0.7 | ||||||
Russia | 0.7 | ||||||
Denmark | 0.6 | ||||||
India | 0.6 | ||||||
Singapore | 0.6 | ||||||
Malaysia | 0.4 | ||||||
United States | 0.4 | ||||||
Israel | 0.3 | ||||||
Thailand | 0.3 | ||||||
Poland | 0.2 | ||||||
Turkey | 0.2 | ||||||
Chile | 0.1 | ||||||
Greece | 0.1 | ||||||
Philippines | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets.
2
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuer(s) — 100.0% | |||||||||||
846,865 | GMO Emerging Countries Fund, Class III | 16,259,817 | |||||||||
5,756,309 | GMO Emerging Markets Fund, Class VI | 129,229,135 | |||||||||
8,523,669 | GMO International Growth Equity Fund, Class III | 254,857,704 | |||||||||
7,869,569 | GMO International Intrinsic Value Fund, Class IV | 256,390,561 | |||||||||
188,008 | GMO International Small Companies Fund, Class III | 2,806,956 | |||||||||
TOTAL MUTUAL FUNDS (COST $500,329,004) | 659,544,173 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
11,441 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $11,442 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $11,670. | 11,441 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $11,441) | 11,441 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $500,340,445) | 659,555,614 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (35,357 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 659,520,257 |
Notes to Schedule of Investments:
As of February 28, 2006, 84.8% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
3
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in affiliated issuers, at value (cost $500,329,004) (Notes 2 and 8) | $ | 659,544,173 | |||||
Investments in unaffiliated issuers, at value (cost $11,441) (Note 2) | 11,441 | ||||||
Receivable for Fund shares sold | 26,003 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 8,735 | ||||||
Total assets | 659,590,352 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 26,002 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 970 | ||||||
Accrued expenses | 43,123 | ||||||
Total liabilities | 70,095 | ||||||
Net assets | $ | 659,520,257 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 471,658,241 | |||||
Accumulated net realized gain | 28,646,847 | ||||||
Net unrealized appreciation | 159,215,169 | ||||||
$ | 659,520,257 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 659,520,257 | |||||
Shares outstanding: | |||||||
Class III | 38,490,599 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.13 |
See accompanying notes to the financial statements.
4
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 6,537,289 | |||||
Interest | 404 | ||||||
Total investment income | 6,537,693 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 47,286 | ||||||
Audit and tax fees | 22,800 | ||||||
Legal fees | 9,010 | ||||||
Trustees fees and related expenses (Note 3) | 10,848 | ||||||
Registration fees | 12,813 | ||||||
Miscellaneous | 9,921 | ||||||
Total expenses | 112,678 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (96,218 | ) | |||||
Net expenses | 16,460 | ||||||
Net investment income (loss) | 6,521,233 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 11,594,407 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 39,806,651 | ||||||
Net realized gain (loss) | 51,401,058 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 60,422,264 | ||||||
Net realized and unrealized gain (loss) | 111,823,322 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 118,344,555 |
See accompanying notes to the financial statements.
5
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 6,521,233 | $ | 8,737,061 | |||||||
Net realized gain (loss) | 51,401,058 | 26,888,838 | |||||||||
Change in net unrealized appreciation (depreciation) | 60,422,264 | 60,533,545 | |||||||||
Net increase (decrease) in net assets from operations | 118,344,555 | 96,159,444 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (17,722,273 | ) | (13,316,966 | ) | |||||||
Net realized gains | |||||||||||
Class III | (24,911,633 | ) | (5,216,511 | ) | |||||||
(42,633,906 | ) | (18,533,477 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 94,760,352 | 154,841,820 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 22,825 | 281,874 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 94,783,177 | 155,123,694 | |||||||||
Total increase (decrease) in net assets | 170,493,826 | 232,749,661 | |||||||||
Net assets: | |||||||||||
Beginning of period | 489,026,431 | 256,276,770 | |||||||||
End of period | $ | 659,520,257 | $ | 489,026,431 |
See accompanying notes to the financial statements.
6
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.19 | $ | 12.83 | $ | 8.23 | $ | 9.02 | $ | 9.67 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.18 | 0.29 | 0.25 | 0.36 | 0.25 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 2.90 | 2.65 | 4.60 | (0.83 | ) | (0.66 | ) | ||||||||||||||||
Total from investment operations | 3.08 | 2.94 | 4.85 | (0.47 | ) | (0.41 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.47 | ) | (0.42 | ) | (0.25 | ) | (0.32 | ) | (0.24 | ) | |||||||||||||
From net realized gains | (0.67 | ) | (0.16 | ) | — | — | — | ||||||||||||||||
Total distributions | (1.14 | ) | (0.58 | ) | (0.25 | ) | (0.32 | ) | (0.24 | ) | |||||||||||||
Net asset value, end of period | $ | 17.13 | $ | 15.19 | $ | 12.83 | $ | 8.23 | $ | 9.02 | |||||||||||||
Total Return(b) | 21.15 | %(c) | 23.25 | %(c) | 60.41 | %(c) | (5.58 | )% | (4.26 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 659,520 | $ | 489,026 | $ | 256,277 | $ | 103,768 | $ | 65,712 | |||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||
Net investment income to average daily net assets(a) | 1.15 | % | 2.18 | % | 2.35 | % | 4.11 | % | 2.83 | % | |||||||||||||
Portfolio turnover rate | 7 | % | 15 | % | 43 | % | 19 | % | 50 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | % | 0.03 | % | 0.05 | % | 0.05 | % | 0.05 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts: | $ | 0.00 | (f)† | $ | 0.01 | † | $ | 0.02 | † | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 3).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
7
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO International Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" and makes investments in other funds of the Trust ("underlying fund(s)"). The Fund seeks total return greater than the return of the MSCI ACWI (All Country World Index) ex-U.S. Index through investment to varying extents in shares of the underlying fund(s).
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of underlying fund(s) are valued at their asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investment will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deeme d unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close, but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
8
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $18,337,640 and $13,316,966, respectively and long-term capital gains – $24,296,266 and $5,216,511, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $29,384,523 of undistributed long-term capital gains. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 501,078,119 | $ | 158,525,903 | $ | (48,408 | ) | $ | 158,477,495 |
9
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 11,201,040 | $ | (11,201,040 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares are each 0.17% of the amount invested. The redemption fee is only applicable to shares acquired on or after June 30, 2003. The Fund's purchase premium or redemption fee are approximately equal to the weighted average of the purchase premiums and redemptions fees, if any, of the underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee for the Fund may be adjusted to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, th e purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur
10
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $228 and $275,721 in purchase premiums and $22,597 and $6,153 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Addi tionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). The Manager does not directly charge a management fee or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense, transfer taxes and expenses indirectly incurred by investments in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
11
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.624 | % | 0.109 | % | 0.733 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $6,479 and $3,740, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $137,267,997 and $38,761,824, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $237,736,373 and $237,736,373, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 25.9% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares were held by three related parties comprised of certain GMO employee accounts.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
12
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 5,248,587 | $ | 78,942,946 | 12,788,854 | $ | 161,936,882 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,550,396 | 39,686,743 | 1,172,649 | 16,727,131 | |||||||||||||||
Shares repurchased | (1,499,797 | ) | (23,869,337 | ) | (1,742,829 | ) | (23,822,193 | ) | |||||||||||
Purchase premiums and redemption fees | — | 22,825 | — | 281,874 | |||||||||||||||
Net increase (decrease) | 6,299,186 | $ | 94,783,177 | 12,218,674 | $ | 155,123,694 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Countries Fund, Class III | $ | 11,981,142 | $ | 1,659,104 | $ | 46,986 | $ | 268,433 | $ | 1,390,671 | $ | 16,259,817 | |||||||||||||||
GMO Emerging Markets Fund, Class VI | 88,609,723 | 32,581,342 | 12,573,616 | 2,441,725 | 14,975,218 | 129,229,135 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | — | 247,320,334 | 2,550,000 | 298,087 | 7,029,875 | 254,857,704 | |||||||||||||||||||||
GMO International Growth Fund, Class III | 190,312,376 | 38,096,880 | 241,099,114 | 508,236 | 3,819,967 | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 187,917,565 | 52,745,228 | 11,026,144 | 2,905,405 | 10,927,079 | 256,390,561 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 10,200,522 | 2,601,480 | 9,202,336 | 115,403 | 1,663,841 | 2,806,956 | |||||||||||||||||||||
Totals | $ | 489,021,328 | $ | 375,004,368 | $ | 276,498,196 | $ | 6,537,289 | $ | 39,806,651 | $ | 659,544,173 |
13
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO International Equity Allocation Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Equity Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Compa ny Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
14
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.74 | % | $ | 1,000.00 | $ | 1,157.80 | $ | 3.96 | |||||||||||
2) Hypothetical | 0.74 | % | $ | 1,000.00 | $ | 1,021.12 | $ | 3.71 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
15
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $24,296,266 from long-term capital gains.
For taxable, non-corporate shareholders, 58.05% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $6,095,890 and $112,881, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
16
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
17
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003) | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
18
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
19
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Global Balanced Asset Allocation Fund returned +11.1% for the fiscal year ended February 28, 2006, as compared to +8.4% for the Fund's benchmark, the GMO Global Balanced Index (48.75% S&P 500 Index / 16.25% MSCI ACWI [All Country World Index] ex-U.S. Index / 35% Lehman Brothers U.S. Aggregate Index). Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was exposed to global equity and fixed income securities through its investment in underlying GMO mutual funds.
Implementation was negative, detracting 0.8% from returns as the GMO U.S. Core Equity, GMO U.S. Quality Equity, GMO International Intrinsic Value, and GMO International Growth Equity Funds underperformed their respective benchmarks.
Asset allocation added nearly 3.4%. The Fund's overweight to emerging equities and currency hedged international equities drove the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .08% on the purchase and .08% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* The GMO Global Balanced Index is a composite benchmark computed by GMO and comprised 48.75% S&P 500 Index, 16.25% MSCI ACWI (All Country World Index) ex-U.S. Index and 35% Lehman Brothers U.S. Aggregate Index.
** The GMO Global Balanced Index +: MSCI ACWI (All Country World Index) prior to 7/02 and GMO Global Balanced Index thereafter.
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 63.6 | % | |||||
Debt Obligation(s) | 28.8 | ||||||
Short-Term Investment(s) | 7.4 | ||||||
Preferred Stocks | 2.2 | ||||||
Mutual Funds | 0.4 | ||||||
Call Options Purchased | 0.1 | ||||||
Loan Assignments | 0.1 | ||||||
Loan Participations | 0.1 | ||||||
Private Equity Securities | 0.1 | ||||||
Put Options Purchased | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Forward Start Options | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Written Options | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | (0.3 | ) | |||||
Reverse Repurchase Agreements | (0.5 | ) | |||||
Other | (2.1 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
United States | 53.9 | % | |||||
Euro Region*** | 13.6 | ||||||
Japan | 8.5 | ||||||
Canada | 4.6 | ||||||
Sweden | 4.1 | ||||||
United Kingdom | 3.8 | ||||||
South Korea | 3.1 | ||||||
Brazil | 2.3 | ||||||
Taiwan | 2.3 | ||||||
China | 0.9 | ||||||
Mexico | 0.8 | ||||||
South Africa | 0.8 | ||||||
Hong Kong | 0.4 | ||||||
Norway | 0.4 | ||||||
Russia | 0.4 | ||||||
Austria | 0.3 | ||||||
India | 0.3 | ||||||
Denmark | 0.2 | ||||||
Israel | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Singapore | 0.2 | ||||||
Thailand | 0.2 | ||||||
Cayman Islands | 0.1 | ||||||
Philippines | 0.1 | ||||||
Poland | 0.1 | ||||||
Turkey | 0.1 | ||||||
Switzerland | (0.5 | ) | |||||
Australia | (1.4 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
2
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuer(s) — 100.0% | |||||||||||
23,145,852 | GMO Alpha Only Fund, Class III | 239,791,023 | |||||||||
2,042,883 | GMO Alternative Asset Opportunity Fund, Class III | 54,401,971 | |||||||||
27,719,452 | GMO Core Plus Bond Fund, Class IV | 286,341,943 | |||||||||
6,717,028 | GMO Currency Hedged International Bond Fund, Class III | 60,721,936 | |||||||||
7,662,296 | GMO Currency Hedged International Equity Fund, Class III | 69,497,027 | |||||||||
6,211,308 | GMO Domestic Bond Fund, Class VI | 60,995,048 | |||||||||
983,316 | GMO Emerging Countries Fund, Class III | 18,879,661 | |||||||||
933,721 | GMO Emerging Country Debt Fund, Class IV | 10,551,044 | |||||||||
7,763,640 | GMO Emerging Markets Fund, Class VI | 174,293,709 | |||||||||
3,535,893 | GMO Inflation Indexed Bond Fund, Class III | 39,248,409 | |||||||||
2,453,474 | GMO International Bond Fund, Class III | 23,479,744 | |||||||||
4,930,464 | GMO International Growth Equity Fund, Class III | 147,420,878 | |||||||||
4,488,406 | GMO International Intrinsic Value Fund, Class IV | 146,232,252 | |||||||||
517,573 | GMO International Small Companies Fund, Class III | 7,727,372 | |||||||||
370,123 | GMO Short-Duration Investment Fund, Class III | 3,264,489 | |||||||||
21,803,440 | GMO U.S. Core Equity Fund, Class VI | 315,495,777 | |||||||||
7,362,067 | GMO U.S. Quality Equity Fund, Class IV | 153,278,225 | |||||||||
64,881 | GMO U.S. Value Fund, Class III | 665,029 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,676,889,796) | 1,812,285,537 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
11,733 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a market value of $11,734 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $11,968. | 11,733 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $11,733) | 11,733 |
See accompanying notes to the financial statements.
3
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Value ($) | |||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,676,901,529) | 1,812,297,270 | ||||||
Other Assets and Liabilities (net) — 0.0% | (105,822 | ) | |||||
TOTAL NET ASSETS — 100.0% | $ | 1,812,191,448 |
Notes to Schedule of Investments:
As of February 28, 2006, 31.4% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor.
See accompanying notes to the financial statements.
4
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $11,733) (Note 2) | $ | 11,733 | |||||
Investments in affiliated issuers, at value (cost $1,676,889,796) (Notes 2 and 8) | 1,812,285,537 | ||||||
Receivable for Fund shares sold | 22,939,491 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 37,369 | ||||||
Miscellaneous receivable | 18,367 | ||||||
Total assets | 1,835,292,497 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 22,858,555 | ||||||
Payable for Fund shares repurchased | 120,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 3,301 | ||||||
Accrued expenses | 119,193 | ||||||
Total liabilities | 23,101,049 | ||||||
Net assets | $ | 1,812,191,448 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,633,186,377 | |||||
Accumulated undistributed net investment income | 1,362,675 | ||||||
Accumulated net realized gain | 42,246,655 | ||||||
Net unrealized appreciation | 135,395,741 | ||||||
$ | 1,812,191,448 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,812,191,448 | |||||
Shares outstanding: | |||||||
Class III | 154,116,992 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.76 |
See accompanying notes to the financial statements.
5
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 43,233,069 | |||||
Interest | 34,527 | ||||||
Total investment income | 43,267,596 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 53,906 | ||||||
Audit and tax fees | 20,957 | ||||||
Legal fees | 21,296 | ||||||
Trustees fees and related expenses (Note 3) | 24,078 | ||||||
Registration fees | 70,730 | ||||||
Miscellaneous | 23,372 | ||||||
Total expenses | 214,339 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (176,149 | ) | |||||
Net expenses | 38,190 | ||||||
Net investment income (loss) | 43,229,406 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 30,479,014 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 55,604,485 | ||||||
Net realized gain (loss) | 86,083,499 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 26,009,769 | ||||||
Net realized and unrealized gain (loss) | 112,093,268 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 155,322,674 |
See accompanying notes to the financial statements.
6
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 43,229,406 | $ | 17,661,800 | |||||||
Net realized gain (loss) | 86,083,499 | 39,731,226 | |||||||||
Change in net unrealized appreciation (depreciation) | 26,009,769 | 40,552,791 | |||||||||
Net increase (decrease) in net assets from operations | 155,322,674 | 97,945,817 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (51,560,906 | ) | (24,420,472 | ) | |||||||
Net realized gains | |||||||||||
Class III | (52,999,421 | ) | (20,083,566 | ) | |||||||
(104,560,327 | ) | (44,504,038 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 730,598,623 | 522,541,342 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 592,545 | 447,679 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 731,191,168 | 522,989,021 | |||||||||
Total increase (decrease) in net assets | 781,953,515 | 576,430,800 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,030,237,933 | 453,807,133 | |||||||||
End of period (including accumulated undistributed net investment income of $1,362,675 and $1,061,860, respectively) | $ | 1,812,191,448 | $ | 1,030,237,933 |
See accompanying notes to the financial statements.
7
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.33 | $ | 10.74 | $ | 8.13 | $ | 8.64 | $ | 8.99 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a) | 0.36 | † | 0.27 | † | 0.18 | 0.20 | 0.23 | ||||||||||||||||
Net realized and unrealized gain (loss) | 0.86 | 0.90 | 2.68 | (0.28 | ) | (0.20 | ) | ||||||||||||||||
Total from investment operations | 1.22 | 1.17 | 2.86 | (0.08 | ) | 0.03 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.37 | ) | (0.32 | ) | (0.23 | ) | (0.43 | ) | (0.38 | ) | |||||||||||||
From net realized gains | (0.42 | ) | (0.26 | ) | (0.02 | ) | — | — | |||||||||||||||
Total distributions | (0.79 | ) | (0.58 | ) | (0.25 | ) | (0.43 | ) | (0.38 | ) | |||||||||||||
Net asset value, end of period | $ | 11.76 | $ | 11.33 | $ | 10.74 | $ | 8.13 | $ | 8.64 | |||||||||||||
Total Return(b) | 11.05 | %(c) | 11.07 | %(c) | 35.53 | %(c) | (1.06 | )% | 0.49 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,812,191 | $ | 1,030,238 | $ | 453,807 | $ | 304,145 | $ | 7,318 | |||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||
Net investment income to average daily net assets(a) | 3.17 | % | 2.53 | % | 2.19 | % | 4.01 | % | 2.66 | % | |||||||||||||
Portfolio turnover rate | 16 | % | 10 | % | 59 | % | 61 | % | 25 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.02 | % | 0.03 | % | 0.05 | % | 0.31 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | — | $ | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown.
(c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(e) Net expenses to average daily net assets were less than 0.01%.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
8
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Global Balanced Asset Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" and makes investments in other funds of the Trust ("underlying fund(s)"). The Fund seeks total return greater than the return of the GMO Global Balanced Index through investments to varying extents in the underlying fund(s). The GMO Global Balanced Index is a composite benchmark computed by GMO consisting of (i) the S&P 500 Index (a U.S. large capitalization stock index, independently maintained and published by Standard & Poor's Corporation); (ii) the MSCI ACWI (All Country World Index) ex-U.S. Index (an international (excluding U.S. and including emerging markets) equity index, independently maintained and published by Morgan Stanley Capital International); (iii) the Lehman Brothers U.S. Aggregate Index (an independently maintained and published index comprised of U.S. fixed rate debt issues, having a maturity of at least one year and rated investment grade or higher by Moody's In vestors Service, Standard & Poor's or Fitch IBCA, Inc.) in the following proportions: 48.75% (S&P 500), 16.25% (MSCI ACWI), and 35% (Lehman Brothers). The GMO Global Balanced Index reflects investment of all applicable dividends, capital gains, and interest. The Fund pursues its objective by investing in the least expensive class of the underlying fund(s) that is currently operational.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect).
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Shares of underlying fund(s) and other mutual funds are valued at their net asset value. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing
9
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close, but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Certain investments in securities held by the underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or underlying fund(s). As of February 28, 2006, the total value of these securities represented 1.0% of net assets.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
10
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $51,560,906 and $31,726,069, respectively and long-term capital gains – $52,999,421 and $12,777,969, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $4,004,551 and $42,470,076 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to partnership interest tax allocations and losses on wash sale transactions.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $1,276 and $1,276 expiring in 2008 and 2010, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,679,764,265 | $ | 141,555,376 | $ | (9,022,371 | ) | $ | 132,533,005 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 8,632,315 | $ | (8,632,315 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
11
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.08% of the amount invested or redeemed. The redemption fee is only applicable to shares acquired on or after June 30, 2003. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee for the Fund may be adjusted to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $562,037 and $444,839 in purchase premiums and $30,508 and $2,840 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Addi tionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
12
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). The Manager does not directly charge a management fee or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense, transfer taxes, and expenses indirectly incurred by investments in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.426 | % | 0.108 | % | 0.012 | % | 0.546 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $15,005 and $10,154, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $948,172,382 and $222,682,310, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $596,961,743 and $596,961,743, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's
13
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related parties
As of February 28, 2006, 25.6% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
As of February 28, 2006, 0.3% of the Fund's shares were held by thirteen related parties comprised of certain GMO employee accounts.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 59,476,732 | $ | 689,148,423 | 47,326,709 | $ | 506,574,167 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 8,489,047 | 96,761,248 | 3,584,010 | 39,497,603 | |||||||||||||||
Shares repurchased | (4,818,243 | ) | (55,311,048 | ) | (2,189,911 | ) | (23,530,428 | ) | |||||||||||
Purchase premium and redemption fees | — | 592,545 | — | 447,679 | |||||||||||||||
Net increase (decrease) | 63,147,536 | $ | 731,191,168 | 48,720,808 | $ | 522,989,021 |
14
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class III | $ | 32,963,379 | $ | 208,780,939 | $ | 90,298 | $ | 7,265,726 | $ | — | $ | 239,791,023 | |||||||||||||||
GMO Alternative Asset Opportunity Fund, Class III | — | 52,128,089 | 26,435 | — | — | 54,401,971 | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class III | 127,328,898 | 58,754,887 | 187,302,955 | 143,143 | — | — | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class IV | — | 293,282,055 | 3,012,991 | 8,848,508 | — | 286,341,943 | |||||||||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | 71,877,970 | 20,092,419 | 27,976,325 | 6,562,252 | 775,898 | 60,721,936 | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 45,196,546 | 37,263,077 | 17,502,806 | 4,962,748 | 5,875,911 | 69,497,027 | |||||||||||||||||||||
GMO Domestic Bond Fund, Class III | 102,330,133 | 3,419,813 | 107,018,243 | 10,475 | 1,172,088 | — | |||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | — | 61,733,996 | 44,411 | 1,256,742 | — | 60,995,048 | |||||||||||||||||||||
GMO Emerging Countries Fund, Class III | 11,466,947 | 4,772,441 | 257,992 | 302,678 | 1,526,888 | 18,879,661 | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 9,414,586 | 1,661,980 | 755,305 | 1,103,721 | 478,351 | 10,551,044 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 84,567,353 | 73,489,052 | 6,903,857 | 2,781,608 | 17,468,606 | 174,293,709 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 28,364,806 | 37,366,729 | 26,004,775 | 693,451 | 176,901 | 39,248,409 | |||||||||||||||||||||
GMO International Bond Fund, Class III | 21,786,870 | 5,110,464 | 1,206,462 | 643,098 | 12,407 | 23,479,744 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | — | 149,531,354 | 7,833,488 | 172,850 | 4,076,369 | 147,420,878 |
15
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO International Growth Fund, Class III | $ | 87,262,780 | $ | 25,489,391 | $ | 118,826,523 | $ | 238,847 | $ | 1,795,205 | $ | — | |||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 86,427,234 | 62,320,267 | 16,523,111 | 1,632,106 | 5,983,780 | 146,232,252 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 19,084,299 | 4,202,691 | 14,002,188 | 230,285 | 3,345,207 | 7,727,372 | |||||||||||||||||||||
GMO Real Estate Fund, Class III | 22,680,730 | 7,654,180 | 28,314,523 | 449,530 | 6,016,947 | — | |||||||||||||||||||||
GMO Short-Duration Investment Fund, Class III | 3,145,592 | 102,874 | 1,644 | 102,874 | — | 3,264,489 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | — | 317,840,153 | 3,908,042 | 2,422,433 | 6,713,787 | 315,495,777 | |||||||||||||||||||||
GMO U.S. Core Fund, Class VI | 195,163,591 | 52,276,721 | 250,956,004 | 2,117,106 | — | — | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 80,387,878 | 66,970,332 | 64,422 | 1,279,251 | 186,140 | 153,278,225 | |||||||||||||||||||||
GMO U.S. Value Fund, Class III | — | 876,628 | 221,809 | 7,258 | — | 665,029 | |||||||||||||||||||||
GMO Value Fund, Class III | 857,087 | 13,593 | 889,444 | 6,379 | — | — | |||||||||||||||||||||
Totals | $ | 1,030,306,679 | $ | 1,545,134,125 | $ | 819,644,053 | $ | 43,233,069 | $ | 55,604,485 | $ | 1,812,285,537 |
16
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Global Balanced Asset Allocation Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Balanced Asset Allocation Fund (the "Fund") at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
17
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.56 | % | $ | 1,000.00 | $ | 1,074.40 | $ | 2.88 | |||||||||||
2) Hypothetical | 0.56 | % | $ | 1,000.00 | $ | 1,022.02 | $ | 2.81 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
18
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $52,999,421 from long-term capital gains.
For taxable, non-corporate shareholders, 30.91% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 9.77% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $11,041,235 or if determined to be different, the qualified interest income of such year.
19
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
20
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
21
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
22
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
23
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Global (U.S.+) Equity Allocation Fund returned +13.9% for the fiscal year ended February 28, 2006, as compared to +11.4% for the Fund's benchmark the GMO Global Equity Index (75% S&P 500 Index / 25% MSCI ACWI [All Country World Index] ex-U.S. Index). Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was exposed to global equity and fixed income securities through its investment in underlying GMO mutual funds.
Implementation was negative, detracting approximately 1.6%.
Asset allocation added nearly 4.1%. The Fund's underweight to U.S. equities and overweight to international equities, particularly emerging market equities, were the drivers of the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .10% on the purchase and .10% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* The GMO Global Equity Index is a composite benchmark computed by GMO and comprised 75% S&P 500 Index and 25% MSCI ACWI (All Country World Index) ex-U.S. Index.
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 91.0 | % | |||||
Short-Term Investment(s) | 8.5 | ||||||
Preferred Stocks | 2.6 | ||||||
Debt Obligation(s) | 1.7 | ||||||
Private Equity Securities | 0.1 | ||||||
Call Options Purchased | 0.0 | ||||||
Convertible Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Loan Assignments | 0.0 | ||||||
Loan Participations | 0.0 | ||||||
Mutual Fund | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Written Options | 0.0 | ||||||
Futures | (0.1 | ) | |||||
Forward Currency Contracts | (0.1 | ) | |||||
Reverse Repurchase Agreements | (0.2 | ) | |||||
Other | (3.5 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
United States | 50.6 | % | |||||
Japan | 9.9 | ||||||
United Kingdom | 7.9 | ||||||
South Korea | 3.4 | ||||||
France | 3.2 | ||||||
Brazil | 2.6 | ||||||
Taiwan | 2.5 | ||||||
Netherlands | 2.3 | ||||||
Germany | 2.1 | ||||||
Canada | 1.5 | ||||||
Italy | 1.4 | ||||||
Australia | 1.3 | ||||||
Switzerland | 1.3 | ||||||
Finland | 1.2 | ||||||
China | 1.0 | ||||||
Mexico | 0.9 | ||||||
South Africa | 0.9 | ||||||
Spain | 0.8 | ||||||
Belgium | 0.6 | ||||||
Hong Kong | 0.5 | ||||||
Norway | 0.5 | ||||||
Austria | 0.4 | ||||||
India | 0.4 | ||||||
Russia | 0.4 | ||||||
Sweden | 0.4 | ||||||
Denmark | 0.3 | ||||||
Ireland | 0.3 | ||||||
Malaysia | 0.3 | ||||||
Singapore | 0.3 | ||||||
Israel | 0.2 | ||||||
Thailand | 0.2 | ||||||
Turkey | 0.2 | ||||||
Philippines | 0.1 | ||||||
Poland | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets.
2
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
AFFILIATED ISSUERS — 100.0% | |||||||||||
Mutual Funds — 100.0% | |||||||||||
2,067,843 | GMO Alpha Only Fund, Class III | 21,422,854 | |||||||||
1,534,401 | GMO Currency Hedged International Equity Fund, Class III | 13,917,020 | |||||||||
324,134 | GMO Emerging Countries Fund, Class III | 6,223,371 | |||||||||
1,712,727 | GMO Emerging Markets Fund, Class VI | 38,450,725 | |||||||||
243,136 | GMO Inflation Indexed Bond Fund, Class III | 2,698,811 | |||||||||
1,421,227 | GMO International Growth Equity Fund, Class III | 42,494,690 | |||||||||
1,324,493 | GMO International Intrinsic Value Fund, Class IV | 43,151,981 | |||||||||
83,579 | GMO International Small Companies Fund, Class III | 1,247,841 | |||||||||
15,369 | GMO Short-Duration Investment Fund, Class III | 135,556 | |||||||||
8,712,646 | GMO U.S. Core Equity Fund, Class VI | 126,071,991 | |||||||||
2,515 | GMO U.S. Growth Fund, Class III | 45,689 | |||||||||
1,348,550 | GMO U.S. Quality Equity Fund, Class IV | 28,076,814 | |||||||||
44,377 | GMO U.S. Value Fund, Class III | 454,865 | |||||||||
145,799 | GMO Emerging Country Debt Fund, Class IV | 1,647,525 | |||||||||
326,039,733 | |||||||||||
Private Investment Fund — 0.0% | |||||||||||
175 | GMO SPV I, LLC | 740 | |||||||||
TOTAL AFFILIATED ISSUERS (COST $270,200,213) | 326,040,473 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
9,510 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $9,511 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $9,701. | 9,510 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $9,510) | 9,510 |
See accompanying notes to the financial statements.
3
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Value ($) | |||||||
TOTAL INVESTMENTS — 100.0% (Cost $270,209,723) | 326,049,983 | ||||||
Other Assets and Liabilities (net) — 0.0% | (18,416 | ) | |||||
TOTAL NET ASSETS — 100.0% | $ | 326,031,567 |
Notes to Schedule of Investments:
As of February 28, 2006, 39.8% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
4
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $9,510) (Note 2) | $ | 9,510 | |||||
Investments in affiliated issuers, at value (cost $270,200,213) (Notes 2 and 8) | 326,040,473 | ||||||
Receivable for Fund shares sold | 1,520 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 6,653 | ||||||
Total assets | 326,058,156 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 409 | ||||||
Accrued expenses | 26,180 | ||||||
Total liabilities | 26,589 | ||||||
Net assets | $ | 326,031,567 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 256,901,300 | |||||
Accumulated undistributed net investment income | 51,723 | ||||||
Accumulated net realized gain | 13,238,284 | ||||||
Net unrealized appreciation | 55,840,260 | ||||||
$ | 326,031,567 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 326,031,567 | |||||
Shares outstanding: | |||||||
Class III | 27,420,863 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.89 |
See accompanying notes to the financial statements.
5
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 6,238,406 | |||||
Interest | 8,305 | ||||||
Total investment income | 6,246,711 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 37,180 | ||||||
Audit and tax fees | 21,180 | ||||||
Legal fees | 7,883 | ||||||
Trustees fees and related expenses (Note 3) | 5,985 | ||||||
Registration fees | 5,383 | ||||||
Miscellaneous | 5,615 | ||||||
Total expenses | 83,226 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (74,104 | ) | |||||
Net expenses | 9,122 | ||||||
Net investment income (loss) | 6,237,589 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 18,638,091 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 15,194,818 | ||||||
Net realized gain (loss) | 33,832,909 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (94,267 | ) | |||||
Net realized and unrealized gain (loss) | 33,738,642 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 39,976,231 |
See accompanying notes to the financial statements.
6
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 6,237,589 | $ | 5,507,879 | |||||||
Net realized gain (loss) | 33,832,909 | 16,196,803 | |||||||||
Change in net unrealized appreciation (depreciation) | (94,267 | ) | 19,014,524 | ||||||||
Net increase (decrease) in net assets from operations | 39,976,231 | 40,719,206 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (8,578,882 | ) | (7,147,138 | ) | |||||||
Net realized gains | |||||||||||
Class III | (23,838,281 | ) | (10,998,619 | ) | |||||||
(32,417,163 | ) | (18,145,757 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (17,370,663 | ) | 90,283,380 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 23,772 | 106,660 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | (17,346,891 | ) | 90,390,040 | ||||||||
Total increase (decrease) in net assets | (9,787,823 | ) | 112,963,489 | ||||||||
Net assets: | |||||||||||
Beginning of period | 335,819,390 | 222,855,901 | |||||||||
End of period (including accumulated undistributed net investment income of $51,723 and $0, respectively) | $ | 326,031,567 | $ | 335,819,390 |
See accompanying notes to the financial statements.
7
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 11.63 | $ | 10.86 | $ | 7.51 | $ | 8.66 | $ | 8.92 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a) | 0.23 | † | 0.23 | † | 0.14 | 0.15 | 0.23 | ||||||||||||||||
Net realized and unrealized gain (loss) | 1.32 | 1.23 | 3.55 | (1.07 | ) | (0.14 | ) | ||||||||||||||||
Total from investment operations | 1.55 | 1.46 | 3.69 | (0.92 | ) | 0.09 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.34 | ) | (0.27 | ) | (0.21 | ) | (0.23 | ) | (0.13 | ) | |||||||||||||
From net realized gains | (0.95 | ) | (0.42 | ) | (0.13 | ) | — | (0.22 | ) | ||||||||||||||
Total distributions | (1.29 | ) | (0.69 | ) | (0.34 | ) | (0.23 | ) | (0.35 | ) | |||||||||||||
Net asset value, end of period | $ | 11.89 | $ | 11.63 | $ | 10.86 | $ | 7.51 | $ | 8.66 | |||||||||||||
Total Return(b) | 13.91 | %(c) | 13.70 | %(c) | 49.63 | %(c) | (10.84 | )% | 1.12 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 326,032 | $ | 335,819 | $ | 222,856 | $ | 79,736 | $ | 40,124 | |||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||
Net investment income to average daily net assets(a) | 1.99 | % | 2.11 | % | 1.99 | % | 3.06 | % | 2.73 | % | |||||||||||||
Portfolio turnover rate | 20 | % | 17 | % | 73 | % | 30 | % | 13 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | % | 0.04 | % | 0.05 | % | 0.07 | % | 0.07 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.01 | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown.
(c) Calculations exclude purchase premiums and redemption fees which are borne by the shareholders.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
8
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" and makes investments in other funds of the Trust ("underlying fund(s)"). The Fund seeks total return greater than that of the GMO Global Equity Index through investments to varying extents in the underlying fund(s). The GMO Global Equity Index, a composite index computed by the Manager, consists of (i) the S&P 500 Index (an index of large capitalization U.S. stocks, independently maintained and published by Standard & Poor's) and (ii) the MSCI ACWI (All Country World Index) ex-U.S. Index (an international (excluding U.S. and including emerging markets) equity index, independently maintained and published by Morgan Stanley Capital International) in the following proportions: 75% (S&P 500 Index) and 25% (MSCI ACWI (All Country World Index) ex-U.S. Index).
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect).
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of underlying fund(s) and other mutual funds are valued at their net asset value. For other assets, and in cases
9
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 0.2% of net assets.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
10
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $8,857,253 and $11,543,007, respectively and long-term capital gains – $23,559,910 and $6,602,750, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $51,713 and $13,403,121 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 270,374,554 | $ | 55,801,633 | $ | (126,204 | ) | $ | 55,675,429 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 2,393,016 | $ | (2,393,016 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
11
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Purchase and redemption of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.10% of the amount invested or redeemed. For the period June 30, 2004 to June 29, 2005, the premium on cash purchases and fee on redemptions of Fund shares were 0.15% and 0.14%, respectively. The redemption fee is only applicable to shares acquired on or after June 30, 2003. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee for the Fund may be adjusted to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occur ring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $10,757 and $105,459 in purchase premiums and $13,015 and $1,201 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Addi tionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
12
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). The Manager does not directly charge an advisory fee or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense, transfer taxes and expenses indirectly incurred by investments in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.477 | % | 0.091 | % | 0.007 | % | 0.575 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $3,534 and $1,852, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $61,937,521 and $90,270,650, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $165,538,494 and $165,538,494, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's
13
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 33.7% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, less than 0.1% of the Fund's shares were held by two related parties comprised of certain GMO employee accounts.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 820,653 | $ | 9,603,497 | 7,760,948 | $ | 83,476,617 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,486,440 | 28,419,617 | 1,354,357 | 15,196,295 | |||||||||||||||
Shares repurchased | (4,753,170 | ) | (55,393,777 | ) | (777,061 | ) | (8,389,532 | ) | |||||||||||
Purchase premiums and redemption fees | — | 23,772 | — | 106,660 | |||||||||||||||
Net increase (decrease) | (1,446,077 | ) | $ | (17,346,891 | ) | 8,338,244 | $ | 90,390,040 |
14
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class III | $ | 4,261,184 | $ | 18,158,700 | $ | 878,950 | $ | 630,198 | $ | — | $ | 21,422,854 | |||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | 6,866,604 | 178,133 | 7,183,780 | 164,186 | 13,946 | — | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | 14,004,042 | 3,846,876 | 5,023,547 | 1,010,292 | 1,336,583 | 13,917,020 | |||||||||||||||||||||
GMO Emerging Countries Fund, Class III | 5,157,459 | 635,015 | 563,758 | 102,742 | 532,273 | 6,223,371 | |||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 2,681,246 | 263,425 | 1,416,867 | 173,440 | 89,985 | 1,647,525 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 34,241,582 | 5,019,366 | 6,584,838 | 703,692 | 4,315,674 | 38,450,725 | |||||||||||||||||||||
GMO Growth Fund, Class III | 123,851 | 3,247 | 126,334 | 467 | 2,780 | — | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 2,712,770 | 2,174,700 | 2,122,449 | 132,298 | 39,597 | 2,698,811 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | — | 45,325,993 | 4,579,381 | 50,088 | 1,181,248 | 42,494,690 | |||||||||||||||||||||
GMO International Growth Fund, Class III | 46,704,145 | 2,441,153 | 51,349,486 | 93,781 | 704,872 | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 46,508,288 | 4,868,754 | 12,796,264 | 492,277 | 1,878,978 | 43,151,981 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 8,458,729 | 717,213 | 7,554,351 | 44,062 | 673,151 | 1,247,841 | |||||||||||||||||||||
GMO Real Estate Fund, Class III | 7,195,261 | 1,783,814 | 8,491,790 | 124,801 | 1,659,012 | — | |||||||||||||||||||||
GMO Short-Duration Investment Fund, Class III | 147,457 | 4,281 | 17,049 | 4,281 | — | 135,556 | |||||||||||||||||||||
GMO SPV I, LLC | 1,355 | — | — | — | 570 | 740 | * | ||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | — | 126,956,480 | 1,250,000 | 972,553 | 2,717,019 | 126,071,991 | |||||||||||||||||||||
GMO U.S. Core Fund, Class VI | 129,975,587 | 9,141,270 | 140,612,856 | 1,243,961 | — | — |
15
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO U.S. Growth Fund, Class III | $ | — | $ | 115,384 | $ | 70,000 | $ | 539 | $ | 2,939 | $ | 45,689 | |||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | 25,966,395 | 5,078,618 | 4,030,450 | 282,427 | 46,191 | 28,076,814 | |||||||||||||||||||||
GMO U.S. Value Fund, Class III | — | 758,054 | 310,000 | 6,782 | — | 454,865 | |||||||||||||||||||||
GMO Value Fund, Class III | 824,736 | 5,539 | 846,994 | 5,539 | — | — | |||||||||||||||||||||
Totals | $ | 335,830,691 | $ | 227,476,015 | $ | 255,809,144 | $ | 6,238,406 | $ | 15,194,818 | $ | 326,040,473 |
* After effect of the return of capital distributions of $504 and $407 on April 4, 2005 and February 21, 2006, respectively.
16
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Global (U.S.+) Equity Allocation Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global (U.S.+) Equity Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Comp any Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
17
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.58 | % | $ | 1,000.00 | $ | 1,103.20 | $ | 3.02 | |||||||||||
2) Hypothetical | 0.58 | % | $ | 1,000.00 | $ | 1,021.92 | $ | 2.91 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
18
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $23,559,910 from long-term capital gains.
For taxable, non-corporate shareholders, 56.49% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 20.98% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $1,521,036 and $278,371, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
19
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
20
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
21
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
22
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
23
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Benchmark-Free Allocation Fund returned +16.5% for the period ended February 28, 2006, as compared to +4.3% for the CPI Index. During the period, the Fund was exposed to a range of asset classes through its investment in underlying GMO mutual funds.
Implementation was positive, as the underlying GMO mutual funds outperformed their respective benchmarks by approximately 0.3%.
Asset allocation contributed +16.1%. The Fund's overweight to international equities, particularly emerging equities, and currency hedged international equities drove the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .28% on the purchase and .25% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 58.7 | % | |||||
Debt Obligation(s) | 29.5 | ||||||
Short-Term Investment(s) | 7.3 | ||||||
Preferred Stocks | 4.8 | ||||||
Mutual Fund | 0.4 | ||||||
Loan Assignments | 0.2 | ||||||
Loan Participations | 0.2 | ||||||
Private Equity Securities | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Investment Funds | 0.1 | ||||||
Put Options Purchased | 0.1 | ||||||
Swaps | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Futures | (0.6 | ) | |||||
Reverse Repurchase Agreements | (1.1 | ) | |||||
Other | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
United States | 28.6 | % | |||||
Euro Region*** | 22.6 | ||||||
South Korea | 8.0 | ||||||
Japan | 6.3 | ||||||
Brazil | 6.0 | ||||||
Taiwan | 5.8 | ||||||
Canada | 5.0 | ||||||
Sweden | 4.4 | ||||||
United Kingdom | 3.8 | ||||||
China | 2.4 | ||||||
Mexico | 2.1 | ||||||
South Africa | 2.0 | ||||||
Russia | 1.0 | ||||||
India | 0.9 | ||||||
Malaysia | 0.6 | ||||||
Israel | 0.5 | ||||||
Thailand | 0.4 | ||||||
Hong Kong | 0.3 | ||||||
Norway | 0.3 | ||||||
Poland | 0.3 | ||||||
Turkey | 0.3 | ||||||
Austria | 0.2 | ||||||
Philippines | 0.2 | ||||||
Singapore | 0.2 | ||||||
Denmark | 0.2 | ||||||
Argentina | 0.1 | ||||||
Chile | 0.1 | ||||||
Switzerland | (0.9 | ) | |||||
Australia | (1.7 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
2
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuer(s) — 100.0% | |||||||||||
28,827,018 | GMO Alpha Only Fund, Class III | 298,647,908 | |||||||||
2,398,943 | GMO Alternative Asset Opportunity Fund, Class III | 63,883,855 | |||||||||
4,089,796 | GMO Core Plus Bond Fund, Class IV | 42,247,589 | |||||||||
20,715,099 | GMO Currency Hedged International Bond Fund, Class III | 187,264,495 | |||||||||
8,565,347 | GMO Currency Hedged International Equity Fund, Class III | 77,687,695 | |||||||||
2,180,619 | GMO Emerging Country Debt Fund, Class IV | 24,640,997 | |||||||||
13,597,568 | GMO Emerging Markets Fund, Class VI | 305,265,395 | |||||||||
4,786,210 | GMO Inflation Indexed Bond Fund, Class III | 53,126,931 | |||||||||
1,129,474 | GMO International Growth Equity Fund, Class III | 33,771,273 | |||||||||
1,066,203 | GMO International Intrinsic Value Fund, Class IV | 34,736,907 | |||||||||
1,600,814 | GMO International Small Companies Fund, Class III | 23,900,156 | |||||||||
3,001,258 | GMO U.S. Quality Equity Fund, Class IV | 62,486,196 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,098,345,449) | 1,207,659,397 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
11,847 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $11,848 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $12,084. | 11,847 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $11,847) | 11,847 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,098,357,296) | 1,207,671,244 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (46,523 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,207,624,721 |
Notes to Schedule of Investments:
As of February 28, 2006, 40.0% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
3
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $11,847) (Note 2) | $ | 11,847 | |||||
Investments in affiliated issuers, at value (cost $1,098,345,449) (Notes 2 and 8) | 1,207,659,397 | ||||||
Receivable for Fund shares sold | 31,412 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 11,827 | ||||||
Miscellaneous receivable | 89 | ||||||
Total assets | 1,207,714,572 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 31,500 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 1,699 | ||||||
Accrued expenses | 56,652 | ||||||
Total liabilities | 89,851 | ||||||
Net assets | $ | 1,207,624,721 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,035,924,306 | |||||
Accumulated undistributed net investment income | 69,541 | ||||||
Accumulated net realized gain | 62,316,926 | ||||||
Net unrealized appreciation | 109,313,948 | ||||||
$ | 1,207,624,721 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,207,624,721 | |||||
Shares outstanding: | |||||||
Class III | 43,500,729 | ||||||
Net asset value per share: | |||||||
Class III | $ | 27.76 |
See accompanying notes to the financial statements.
4
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 51,971,866 | |||||
Interest | 5,103 | ||||||
Total investment income | 51,976,969 | ||||||
Expenses: | |||||||
Chief Compliance Officer (Note 3) | 7,072 | ||||||
Custodian, fund accounting agent and transfer agent fees | 48,648 | ||||||
Audit and tax fees | 22,659 | ||||||
Legal fees | 17,310 | ||||||
Trustees fees and related expenses (Note 3) | 20,958 | ||||||
Registration fees | 9,516 | ||||||
Printing expense | 8,284 | ||||||
Miscellaneous | 4,504 | ||||||
Total expenses | 138,951 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (106,847 | ) | |||||
Net expenses | 32,104 | ||||||
Net investment income (loss) | 51,944,865 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 33,145,036 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 68,233,188 | ||||||
Net realized gain (loss) | 101,378,224 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 21,287,396 | ||||||
Net realized and unrealized gain (loss) | 122,665,620 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 174,610,485 |
See accompanying notes to the financial statements.
5
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 51,944,865 | $ | 30,875,154 | |||||||
Net realized gain (loss) | 101,378,224 | 62,056,996 | |||||||||
Change in net unrealized appreciation (depreciation) | 21,287,396 | 63,161,953 | |||||||||
Net increase (decrease) in net assets from operations | 174,610,485 | 156,094,103 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (61,779,932 | ) | (37,871,765 | ) | |||||||
Net realized gains | |||||||||||
Class III | (57,743,585 | ) | (28,936,618 | ) | |||||||
(119,523,517 | ) | (66,808,383 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 84,329,738 | 689,182,292 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 109,413 | 2,140,230 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 84,439,151 | 691,322,522 | |||||||||
Total increase (decrease) in net assets | 139,526,119 | 780,608,242 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,068,098,602 | 287,490,360 | |||||||||
End of period (including accumulated undistributed net investment income of $69,541 and $0, respectively) | $ | 1,207,624,721 | $ | 1,068,098,602 |
See accompanying notes to the financial statements.
6
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||
2006 | 2005 | 2004(a) | |||||||||||||
Net asset value, beginning of period | $ | 26.50 | $ | 24.28 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)(b) | 1.26 | † | 0.98 | † | 0.61 | ||||||||||
Net realized and unrealized gain (loss) | 2.93 | 3.00 | 4.53 | ||||||||||||
Total from investment operations | 4.19 | 3.98 | 5.14 | ||||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (1.51 | ) | (0.99 | ) | (0.75 | ) | |||||||||
From net realized gains | (1.42 | ) | (0.77 | ) | (0.11 | ) | |||||||||
Total distributions | (2.93 | ) | (1.76 | ) | (0.86 | ) | |||||||||
Net asset value, end of period | $ | 27.76 | $ | 26.50 | $ | 24.28 | |||||||||
Total Return(c) | 16.50 | % | 16.74 | % | 25.92 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 1,207,625 | $ | 1,068,099 | $ | 287,490 | |||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | % | 0.00 | % | 0.00 | %* | |||||||||
Net investment income to average daily net assets(b) | 4.64 | % | 3.92 | % | 5.05 | %* | |||||||||
Portfolio turnover rate | 47 | % | 50 | % | 24 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.02 | % | 0.07 | %* | |||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.07 | $ | 0.13 |
(a) Period from July 23, 2003 (commencement of operations) through February 29, 2004.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholders.
(d) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) Purchase premiums and redemptions fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Benchmark-Free Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" and makes investments in other funds of the Trust ("underlying fund(s)"). The Fund seeks positive return regardless of market direction. The Fund will not seek to control risk relative to a particular securities market index or benchmark.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect).
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Shares of underlying fund(s) are valued at their net asset value. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that
8
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 7.6% of net assets.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions were as follows: ordinary income – $66,921,938 and $60,088,474, respectively and long-term capital gains – $52,601,579 and $6,719,909, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consists of $3,199,420 and $62,936,356 of undistributed ordinary income and undistributed long-term capital gains, respectively. The
9
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
temporary differences between book and tax basis distributable earnings are primarily due to partnership interest tax allocations and losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,102,106,616 | $ | 114,527,179 | $ | (8,962,551 | ) | $ | 105,564,628 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 9,904,608 | $ | (9,904,608 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
10
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Purchase and redemption of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were 0.28% and 0.25%, of the amount invested or redeemed, respectively. For the period June 20, 2004 to June 29, 2005, the premium on cash purchases and fee on redemptions of Fund shares were 0.36% and 0.32%, respectively. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemptions fees, if any, of the underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee for the Fund may be adjusted to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or red emption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $23,654 and $2,103,988 in purchase premiums and $85,759 and $36,242 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Addi tionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). The Manager does not directly charge a management or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses
11
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
(including taxes), securities lending fees and expenses, interest expense, transfer taxes and expenses indirectly incurred by investments in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.527 | % | 0.121 | % | 0.064 | % | 0.712 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $12,713 and $7,072, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $615,167,407 and $530,108,273, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $29,618,095 and $29,618,095, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholder and related parties
As of February 28, 2006, 13.7% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
12
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, 1.8% of the Fund's shares were held by eighteen related parties comprised of certain GMO employee accounts, and 97.4% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 302,694 | $ | 8,228,184 | 27,019,490 | $ | 652,106,084 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,145,312 | 110,385,444 | 2,333,898 | 59,349,385 | |||||||||||||||
Shares repurchased | (1,246,919 | ) | (34,283,890 | ) | (895,813 | ) | (22,273,177 | ) | |||||||||||
Purchase premiums and redemption fees | — | 109,413 | — | 2,140,230 | |||||||||||||||
Net increase (decrease) | 3,201,087 | $ | 84,439,151 | 28,457,575 | $ | 691,322,522 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class III | $ | — | $ | 300,234,063 | $ | 83,919 | $ | 9,168,499 | $ | — | $ | 298,647,908 | |||||||||||||||
GMO Alternative Asset Opportunity Fund, Class III | — | 60,000,000 | 29,054 | — | — | 63,883,855 | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class III | — | 41,631,907 | 41,751,819 | 31,908 | — | — | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class IV | — | 42,841,070 | 78,491 | 1,369,251 | — | 42,247,589 | |||||||||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | 269,724,169 | 32,518,117 | 105,934,385 | 21,916,831 | 2,541,940 | 187,264,495 |
13
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | $ | 85,231,973 | $ | 18,013,706 | $ | 32,032,239 | $ | 5,539,490 | $ | 8,459,216 | $ | 77,687,695 | |||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 92,884,914 | 3,883,686 | 73,278,618 | 2,464,782 | 1,418,903 | 24,640,997 | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 259,580,754 | 44,519,969 | 50,922,103 | 6,239,156 | 38,280,814 | 305,265,395 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | 224,758,112 | 10,000,563 | 179,825,347 | 3,760,262 | 1,697,301 | 53,126,931 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | — | 32,530,552 | 12,813 | 37,117 | 875,341 | 33,771,273 | |||||||||||||||||||||
GMO International Growth Fund, Class III | 16,000,551 | 11,938,255 | 29,618,095 | 62,677 | 471,087 | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 16,247,098 | 15,008,318 | 20,936 | 364,520 | 1,367,846 | 34,736,907 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 103,740,259 | 13,862,642 | 87,578,259 | 741,902 | 13,120,740 | 23,900,156 | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | — | 59,254,471 | 12,109 | 275,471 | — | 62,486,196 | |||||||||||||||||||||
Totals | $ | 1,068,167,830 | $ | 686,237,319 | $ | 601,178,187 | $ | 51,971,866 | $ | 68,233,188 | $ | 1,207,659,397 |
14
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Benchmark-Free Allocation Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Benchmark-Free Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Acco unting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
15
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.72 | % | $ | 1,000.00 | $ | 1,107.90 | $ | 3.76 | |||||||||||
2) Hypothetical | 0.72 | % | $ | 1,000.00 | $ | 1,021.22 | $ | 3.61 |
* Expenses are calculated using the Class's annualized expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
16
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $52,601,579 from long-term capital gains.
For taxable, non-corporate shareholders, 15.44% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 3.31% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $11,503,423 and $3,609,983, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
17
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
18
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
19
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
21
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
Since its inception on June 16, 2005, the GMO World Opportunities Equity Allocation Fund returned +15.9% for the fiscal year ended February 28, 2006, as compared to +14.2% for the Fund's benchmark, the MSCI World Index. Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was fully exposed to global equity and fixed income securities through its investment in underlying GMO mutual funds.
Implementation was negative, detracting approximately 2.9% with most of the underperformance coming from the GMO U.S. Core Equity, GMO International Intrinsic Value, and GMO International Growth Equity Funds, which underperformed their respective benchmarks.
Asset allocation added nearly 4.6%. The Fund's underweight to U.S. equities and overweight to international equities, particularly emerging market equities, were the drivers of the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .04% on the purchase and .04% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 94.4 | % | |||||
Short-Term Investment(s) | 8.0 | ||||||
Preferred Stocks | 0.9 | ||||||
Debt Obligation(s) | 0.1 | ||||||
Futures | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Private Equity Securities | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Other | (3.4 | ) | |||||
100.0 | % | ||||||
Country Summary** | % of Investments | ||||||
United States | 31.4 | % | |||||
Japan | 16.5 | ||||||
United Kingdom | 13.1 | ||||||
France | 5.3 | ||||||
Netherlands | 3.7 | ||||||
Germany | 3.5 | ||||||
Canada | 2.5 | ||||||
Italy | 2.4 | ||||||
Switzerland | 2.2 | ||||||
Australia | 2.1 | ||||||
Finland | 1.9 | ||||||
South Korea | 1.6 | ||||||
Spain | 1.4 | ||||||
Taiwan | 1.2 | ||||||
Belgium | 1.1 | ||||||
Brazil | 0.9 | ||||||
Norway | 0.9 | ||||||
South Africa | 0.9 | ||||||
Hong Kong | 0.8 | ||||||
China | 0.7 | ||||||
Sweden | 0.7 | ||||||
Austria | 0.6 |
1
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
India | 0.6 | % | |||||
Russia | 0.6 | ||||||
Ireland | 0.6 | ||||||
Mexico | 0.5 | ||||||
Singapore | 0.5 | ||||||
Denmark | 0.4 | ||||||
Israel | 0.3 | ||||||
Malaysia | 0.3 | ||||||
Thailand | 0.2 | ||||||
Argentina | 0.1 | ||||||
Chile | 0.1 | ||||||
Greece | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Poland | 0.1 | ||||||
Turkey | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets.
2
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuer(s) — 100.0% | |||||||||||
158,126 | GMO Alpha Only Fund, Class III | 1,638,184 | |||||||||
3,813,164 | GMO Currency Hedged International Equity Fund, Class III | 34,585,400 | |||||||||
3,228,906 | GMO Emerging Markets Quality Fund, Class VI | 33,548,336 | |||||||||
3,429,157 | GMO International Growth Equity Fund, Class III | 102,531,806 | |||||||||
3,146,989 | GMO International Intrinsic Value Fund, Class IV | 102,528,906 | |||||||||
45,523 | GMO International Small Companies Fund, Class III | 679,653 | |||||||||
6,736,026 | GMO U.S. Core Equity Fund, Class VI | 97,470,295 | |||||||||
1,645,560 | GMO U.S. Quality Equity Fund, Class IV | 34,260,556 | |||||||||
TOTAL MUTUAL FUNDS (COST $390,728,383) | 407,243,136 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
20,155 | Citigroup Cash Reserve Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $20,157 and an effective yield of 3.01%, collateralized by a U.S.Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $20,558. | 20,155 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $20,155) | 20,155 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $390,748,538) | 407,263,291 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (33,184 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 407,230,107 |
Notes to Schedule of Investments:
As of February 28, 2006, 59.1% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
3
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $20,155) (Note 2) | $ | 20,155 | |||||
Investments in affiliated issuers, at value (cost $390,728,383) (Notes 2 and 8) | 407,243,136 | ||||||
Receivable for Fund shares sold | 57,804,000 | ||||||
Interest receivable | 10 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 16,604 | ||||||
Total assets | 465,083,905 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 57,804,000 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 554 | ||||||
Accrued expenses | 49,244 | ||||||
Total liabilities | 57,853,798 | ||||||
Net assets | $ | 407,230,107 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 387,441,964 | |||||
Accumulated undistributed net investment income | 22,190 | ||||||
Accumulated net realized gain | 3,251,200 | ||||||
Net unrealized appreciation | 16,514,753 | ||||||
$ | 407,230,107 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 407,230,107 | |||||
Shares outstanding: | |||||||
Class III | 18,108,635 | ||||||
Net asset value per share: | |||||||
Class III | $ | 22.49 |
See accompanying notes to the financial statements.
4
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Period from June 16, 2005 (commencement of
operations) through February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 2,765,039 | |||||
Interest | 18,290 | ||||||
Total investment income | 2,783,329 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 12,496 | ||||||
Audit and tax fees | 20,108 | ||||||
Legal fees | 3,816 | ||||||
Trustees fees and related expenses (Note 3) | 3,063 | ||||||
Registration fees | 28,633 | ||||||
Miscellaneous | 3,030 | ||||||
Total expenses | 71,146 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (66,959 | ) | |||||
Net expenses | 4,187 | ||||||
Net investment income (loss) | 2,779,142 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 9,997 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 6,155,978 | ||||||
Net realized gain (loss) | 6,165,975 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 16,514,753 | ||||||
Net realized and unrealized gain (loss) | 22,680,728 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 25,459,870 |
See accompanying notes to the financial statements.
5
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from June 16, 2005 (commencement of operations) through February 28, 2006 | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 2,779,142 | |||||
Net realized gain (loss) | 6,165,975 | ||||||
Change in net unrealized appreciation (depreciation) | 16,514,753 | ||||||
Net increase (decrease) in net assets from operations | 25,459,870 | ||||||
Distributions to shareholders from: | |||||||
Net investment income | |||||||
Class III | (3,995,989 | ) | |||||
Net realized gains | |||||||
Class III | (1,675,738 | ) | |||||
(5,671,727 | ) | ||||||
Net share transactions (Note 7): | |||||||
Class III | 387,323,355 | ||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||
Class III | 118,609 | ||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 387,441,964 | ||||||
Total increase (decrease) in net assets | 407,230,107 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $22,190) | $ | 407,230,107 |
See accompanying notes to the financial statements.
6
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from June 16, 2005 (commencement of operations) through February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 20.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a) | 0.37 | † | |||||
Net realized and unrealized gain (loss) | 2.78 | ||||||
Total from investment operations | 3.15 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.46 | ) | |||||
From net realized gains | (0.20 | ) | |||||
Total distributions | (0.66 | ) | |||||
Net asset value, end of period | $ | 22.49 | |||||
Total Return(b) | 15.90 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 407,230 | |||||
Net expenses to average daily net assets(c) | 0.00 | %*(d) | |||||
Net investment income to average daily net assets | 2.42 | %* | |||||
Portfolio turnover rate | 5 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | |||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total return would have been lower had certain expenses not been reimbursed and/or waived during the period shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholders.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
(d) Net expenses to average daily net assets were less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO World Opportunities Equity Allocation Fund (the "Fund"), which commenced operations on June 16, 2005, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" and makes investments in other funds of the Trust ("underlying fund(s)"). The Fund seeks total return greater than the return of the MSCI World Index, the Fund's benchmark. The MSCI World Index is a global developed markets equity index that is independently maintained and published by Morgan Stanley Capital International.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Shares of underlying fund(s) are valued at their net asset value. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of informa tion or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close, but before the close of the NYSE. As a
8
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulation, which may differ from U.S. GAAP. During the period ended February 28, 2006, the tax basis of distributions paid were as follows: ordinary income – $4,442,853 and long-term capital gains – $1,228,874.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $22,190 and $3,251,200 of undistributed ordinary income and undistributed long-term capital gains, respectively.
9
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 390,748,538 | $ | 16,592,767 | $ | (78,014 | ) | $ | 16,514,753 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 1,239,037 | $ | (1,239,037 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.04% of the amount invested or redeemed. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the
10
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee for the Fund may be adjusted to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the period ended February 28, 2006, the Fund received $118,609 in purchase premiums and $0 in redemption fees, respectively. Th ere is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Addi tionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). The Manager does not directly charge a management fee or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense, transfer taxes, and expenses indirectly incurred by investments in the underlying fund(s).
11
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the period ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.473 | % | 0.102 | % | 0.575 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended February 28, 2006, was $1,093 and $1,124, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $399,318,627 and $8,600,242, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the period ended February 28, 2006 were $82,121,832 and $82,121,832, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 76.3% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
12
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from June 16, 2005 (commencement of operations) through February 28, 2006 | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 17,845,201 | $ | 381,651,629 | ||||||||
Shares issued to shareholders in reinvestment of distributions | 263,434 | 5,671,726 | |||||||||
Purchase premiums and redemption fees | — | 118,609 | |||||||||
Net increase (decrease) | 18,108,635 | $ | 387,441,964 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class III | $ | — | $ | 1,654,388 | $ | — | $ | 56,462 | $ | — | $ | 1,638,184 | |||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | — | 33,978,671 | — | 1,419,068 | 1,265,569 | 34,585,400 | |||||||||||||||||||||
GMO Emerging Markets Quality Fund, Class VI | — | 30,284,384 | — | 175,464 | 35,011 | 33,548,336 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class III | — | 103,630,959 | 3,250,000 | 57,751 | 1,361,963 | 102,531,806 | |||||||||||||||||||||
GMO International Growth Fund, Class III | — | 41,081,013 | 43,426,672 | 23,023 | 173,043 | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | — | 99,689,532 | 3,500,000 | 497,727 | 1,658,058 | 102,528,906 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 741,461 | — | 14,472 | 191,470 | 679,653 |
13
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Real Estate Fund, Class III | $ | — | $ | 2,277,886 | $ | 1,849,242 | $ | 40,921 | $ | 550,262 | $ | — | |||||||||||||||
GMO U.S. Core Equity Fund, Class VI | — | 96,869,953 | — | 319,618 | 910,827 | 97,470,295 | |||||||||||||||||||||
GMO U.S. Core Fund, Class VI | — | 38,080,888 | 38,696,160 | 58,950 | — | — | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | — | 33,151,324 | — | 101,583 | 9,775 | 34,260,556 | |||||||||||||||||||||
Totals | $ | — | $ | 481,440,459 | $ | 90,722,074 | $ | 2,765,039 | $ | 6,155,978 | $ | 407,243,136 |
14
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO World Opportunities Equity Allocation Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO World Opportunities Equity Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the period June 16, 2005 (commencement of operations) to February 28, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statem ents in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
15
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.58 | % | $ | 1,000.00 | $ | 1,074.60 | $ | 2.98 | |||||||||||
2) Hypothetical | 0.58 | % | $ | 1,000.00 | $ | 1,021.92 | $ | 2.91 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
16
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $1,228,874 from long-term capital gains.
For taxable, non-corporate shareholders, 47.02% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 10.64% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $1,140,455 and $446,863, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
17
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
18
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
19
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
21
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
Since its inception on May 31, 2005, the GMO Strategic Balanced Allocation Fund returned +14.4% for the fiscal year ended February 28, 2006, as compared to +12.1% for the Fund's benchmark, the GMO Strategic Balanced Index (75% MSCI World Index / 25% Lehman Brothers U.S. Aggregate Index) for the same period. Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was exposed to global equity and fixed income securities through its investment in underlying GMO mutual funds.
Implementation was negative, detracting 1.4%. The primary drivers of the underperformance were negative relative returns from the GMO U.S. Core Equity, GMO U.S. Quality Equity, GMO International Intrinsic Value, and GMO International Growth Equity Funds.
Asset allocation added 3.7%. The Fund's underweight to U.S. equities and overweight to international equities, particularly emerging market equities, were the drivers of the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .06% on the purchase and .06% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
* The GMO Strategic Balanced Index is a composite benchmark computed by GMO and comprised 75% MSCI World Index and 25% Lehman Brothers U.S. Aggregate Index.
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 69.1 | % | |||||
Debt Obligation(s) | 26.5 | ||||||
Short-Term Investment(s) | 5.9 | ||||||
Preferred Stocks | 1.0 | ||||||
Mutual Funds | 0.2 | ||||||
Call Options Purchased | 0.1 | ||||||
Loan Assignments | 0.1 | ||||||
Loan Participations | 0.1 | ||||||
Futures | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Put Options Purchased | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Written Options | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Reverse Repurchase Agreements | (0.6 | ) | |||||
Other | (2.4 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country/Region Summary** | % of Investments | ||||||
United States | 35.0 | % | |||||
Euro Region*** | 20.4 | ||||||
Japan | 15.9 | ||||||
United Kingdom | 7.0 | ||||||
Canada | 5.4 | ||||||
Sweden | 4.4 | ||||||
South Korea | 2.0 | ||||||
Taiwan | 1.5 | ||||||
Brazil | 1.1 | ||||||
South Africa | 1.1 | ||||||
China | 0.8 | ||||||
Russia | 0.8 | ||||||
India | 0.7 | ||||||
Norway | 0.7 | ||||||
Hong Kong | 0.6 | ||||||
Mexico | 0.6 | ||||||
Austria | 0.5 | ||||||
Denmark | 0.4 | ||||||
Singapore | 0.4 | ||||||
Israel | 0.3 | ||||||
Malaysia | 0.3 | ||||||
Chile | 0.2 | ||||||
Poland | 0.2 | ||||||
Switzerland | 0.2 | ||||||
Thailand | 0.2 | ||||||
Argentina | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Turkey | 0.1 | ||||||
Australia | (1.0 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets. The table includes values of derivative contracts.
*** The "Euro Region" is comprised of Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands and Spain.
2
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuer(s) — 100.0% | |||||||||||
5,601,677 | GMO Core Plus Bond Fund, Class IV | 57,865,320 | |||||||||
1,020,921 | GMO Currency Hedged International Bond Fund, Class III | 9,229,127 | |||||||||
110,865 | GMO Currency Hedged International Equity Fund, Class III | 1,005,543 | |||||||||
751,752 | GMO Domestic Bond Fund, Class VI | 7,382,206 | |||||||||
95,982 | GMO Emerging Country Debt Fund, Class IV | 1,084,598 | |||||||||
3,258,673 | GMO Emerging Markets Quality Fund, Class VI | 33,857,607 | |||||||||
923,895 | GMO Inflation Indexed Bond Fund, Class III | 10,255,231 | |||||||||
1,242,468 | GMO International Bond Fund, Class III | 11,890,420 | |||||||||
2,800,500 | GMO International Growth Equity Fund, Class III | 83,734,942 | |||||||||
2,556,557 | GMO International Intrinsic Value Fund, Class IV | 83,292,632 | |||||||||
79,541 | GMO International Small Companies Fund, Class III | 1,187,543 | |||||||||
2,386,884 | GMO U.S. Core Equity Fund, Class VI | 34,538,207 | |||||||||
1,501,328 | GMO U.S. Quality Equity Fund, Class IV | 31,257,649 | |||||||||
TOTAL MUTUAL FUNDS (COST $353,328,349) | 366,581,025 | ||||||||||
SHORT-TERM INVESTMENT(S) — 0.0% | |||||||||||
60,549 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $60,554 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturity date of 02/15/36 and a market value, including accrued interest, of $61,760. | 60,549 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $60,549) | 60,549 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $353,388,898) | 366,641,574 | ||||||||||
Other Assets and Liabilities (net) — 0.0% | (19,245 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 366,622,329 |
As of February 28, 2006, 48.0% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
See accompanying notes to the financial statements.
3
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $60,549) (Note 2) | $ | 60,549 | |||||
Investments in affiliated issuers, at value (cost $353,328,349) (Notes 2 and 8) | 366,581,025 | ||||||
Receivable for Fund shares sold | 25,192,440 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 26,796 | ||||||
Miscellaneous receivable | 7,565 | ||||||
Total assets | 391,868,375 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 12,510,000 | ||||||
Payable for Fund shares repurchased | 12,668,475 | ||||||
Payable to affiliate for (Note 3): | |||||||
Trustees and Chief Compliance Officer fees | 1,011 | ||||||
Accrued expenses | 66,560 | ||||||
Total liabilities | 25,246,046 | ||||||
Net assets | $ | 366,622,329 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 348,768,164 | |||||
Accumulated undistributed net investment income | 41,901 | ||||||
Accumulated net realized gain | 4,559,588 | ||||||
Net unrealized appreciation | 13,252,676 | ||||||
$ | 366,622,329 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 366,622,329 | |||||
Shares outstanding: | |||||||
Class III | 16,386,112 | ||||||
Net asset value per share: | |||||||
Class III | $ | 22.37 |
See accompanying notes to the financial statements.
4
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Period from May 31, 2005
(commencement of operations) through February 28, 2006
Investment Income: | |||||||
Dividends from affiliated issuers (Note 8) | $ | 4,702,121 | |||||
Interest | 34,820 | ||||||
Total investment income | 4,736,941 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 24,804 | ||||||
Audit and tax fees | 20,112 | ||||||
Legal fees | 6,062 | ||||||
Trustees fees and related expenses (Note 3) | 4,400 | ||||||
Registration fees | 40,384 | ||||||
Miscellaneous | 4,814 | ||||||
Total expenses | 100,576 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (94,382 | ) | |||||
Net expenses | 6,194 | ||||||
Net investment income (loss) | 4,730,747 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (999,088 | ) | |||||
Realized gains distributions from affiliated issuers (Note 8) | 6,786,824 | ||||||
Net realized gain (loss) | 5,787,736 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 13,252,676 | ||||||
Net realized and unrealized gain (loss) | 19,040,412 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 23,771,159 |
See accompanying notes to the financial statements.
5
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from May 31, 2005 (commencement of operations) through February 28, 2006 | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 4,730,747 | |||||
Net realized gain (loss) | 5,787,736 | ||||||
Change in net unrealized appreciation (depreciation) | 13,252,676 | ||||||
Net increase (decrease) in net assets from operations | 23,771,159 | ||||||
Distributions to shareholders from: | |||||||
Net investment income | |||||||
Class III | (6,503,776 | ) | |||||
Net realized gains | |||||||
Class III | (316,251 | ) | |||||
(6,820,027 | ) | ||||||
Net share transactions (Note 7): | |||||||
Class III | 349,524,197 | ||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||
Class III | 147,000 | ||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 349,671,197 | ||||||
Total increase (decrease) in net assets | 366,622,329 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $41,901) | $ | 366,622,329 |
See accompanying notes to the financial statements.
6
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from May 31, 2005 (commencement of operations) through February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 20.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)(a)† | 0.52 | ||||||
Net realized and unrealized gain (loss) | 2.34 | ||||||
Total from investment operations | 2.86 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.47 | ) | |||||
From net realized gains | (0.02 | ) | |||||
Total distributions | (0.49 | ) | |||||
Net asset value, end of period | $ | 22.37 | |||||
Total Return(b) | 14.42 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 366,622 | |||||
Net expenses to average daily net assets(c)(d) | 0.00 | %* | |||||
Net investment income to average daily net assets(a) | 3.22 | %* | |||||
Portfolio turnover rate | 10 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | |||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total return would have been lower had certain expenses not been reimbursed and/or waived during the period shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investments in underlying fund(s) (See Note 3).
(d) Net expenses to average daily net assets were less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Strategic Balanced Allocation Fund (the "Fund"), which commenced operations on May 31, 2005, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" and makes investments in other funds of the Trust ("underlying fund(s)"). The Fund seeks total return greater than the return of the GMO Strategic Balanced Index through investments to varying extent in the underlying fund(s). The GMO Strategic Balanced Index is a composite benchmark computed by GMO consisting of (i) the MSCI World Index (a global developed markets equity index that is independently maintained and published by Morgan Stanley Capital International) and (ii) the Lehman Brothers U.S. Aggregate Bond Index (an independently maintained and published index comprised of U.S. fixed rate debt issues having a maturity of at least one year and rated investment grade or higher by Moody's Investors Service, Standard & Poor's or Fitch IBCA, Inc.) in the following proportions: 75% (MSCI World), and 25% (Lehman Brothers). The GMO Strategic Balanced Index reflects investment of all appli cable dividends, capital gains, and interest. The Fund pursues its objective by investing in the least expensive class of the underlying fund(s) that is currently operational.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares
8
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
of underlying fund(s) are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling to ols by a third party vendor to the extent that these fair value prices are available.
Certain investments in securities held by the Fund or underlying fund(s) are valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the Fund or the underlying fund(s). As of February 28, 2006, the total value of these securities represented 7.3% of net assets.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
9
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the period ended February 28, 2006, the tax basis of distributions paid were as follows: ordinary income – $6,503,776 and long-term capital gains – $316,251.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $199,042 and $4,537,652 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 347,911,937 | $ | 26,922,313 | $ | (8,192,676 | ) | $ | 18,729,637 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatment of mutual fund distributions received. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 1,814,930 | $ | (911,897 | ) | $ | (903,033 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying fund(s) are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature
10
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Purchases and redemptions of Fund shares
As of the date of this report, the premiums on cash purchases and fee on redemptions of Fund shares were each 0.06% of the amount invested or redeemed. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the underlying fund(s) in which the Fund was invested. The level of purchase premium and redemption fee in an amount approximately equal to the fee for the Fund may be adjusted to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or rede mption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the period ended February 28, 2006, the Fund received $143,850 in purchase premiums and $3,150 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Addi tionally, the investment risks associated with an investment in the underlying fund(s) may be more pronounced to the extent that the underlying fund(s) engage in derivative transactions.
3. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among designated underlying fund(s). The Manager does not directly charge a management fee or shareholder service fee, but receives management and shareholder service fees from the underlying fund(s) in which the Fund invests.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the Chief Compliance Officer
11
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense, transfer taxes, and expenses indirectly incurred by investments in the underlying fund(s)).
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the period ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.417 | % | 0.105 | % | 0.012 | % | 0.534 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended February 28, 2006 was $1,419 and $1,794, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 28, 2006 aggregated $355,288,121 and $19,392,340, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $57,002,682 and $57,002,682, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 54.6% of the outstanding shares of the Fund was held by three shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund.
12
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
As of February 28, 2006, 100% of the Fund's shares was held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from May 31, 2005 (commencement of operations) through February 28, 2006 | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 17,293,712 | $ | 369,830,731 | ||||||||
Shares issued to shareholders in reinvestment of distributions | 295,550 | 6,375,003 | |||||||||
Shares repurchased | (1,203,150 | ) | (26,681,537 | ) | |||||||
Purchase premiums and redemption fees | — | 147,000 | |||||||||
Net increase (decrease) | 16,386,112 | $ | 349,671,197 |
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of these affiliated issuers during the period ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Core Plus Bond Fund, Class III | $ | — | $ | 7,564,725 | $ | 7,491,746 | $ | 5,725 | $ | — | $ | — | |||||||||||||||
GMO Core Plus Bond Fund, Class IV | — | 58,775,016 | — | 1,578,884 | — | 57,865,320 | |||||||||||||||||||||
GMO Currency Hedged International Bond Fund, Class III | — | 13,633,071 | 3,450,000 | 958,919 | 122,292 | 9,229,127 | |||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | — | 1,000,000 | — | — | — | 1,005,543 | |||||||||||||||||||||
GMO Domestic Bond Fund, Class III | — | 2,803,279 | 2,773,691 | — | 12,279 | — |
13
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | $ | — | $ | 8,037,621 | $ | 530,000 | $ | 161,669 | $ | — | $ | 7,382,206 | |||||||||||||||
GMO Emerging Country Debt Fund, Class IV | — | 1,728,417 | 600,995 | 125,049 | 48,824 | 1,084,598 | |||||||||||||||||||||
GMO Emerging Markets Quality Fund, Class VI | — | 30,099,761 | 1,700,000 | 331,537 | 69,595 | 33,857,607 | |||||||||||||||||||||
GMO Inflation Indexed Bond Fund, Class III | — | 10,381,862 | — | 109,426 | 16,137 | 10,255,231 | |||||||||||||||||||||
GMO International Bond Fund, Class III | — | 12,750,132 | 300,000 | 127,584 | 2,461 | 11,890,420 | |||||||||||||||||||||
GMO International Growth Equity, Class III | — | 84,133,700 | 3,040,000 | 80,160 | 1,890,429 | 83,734,942 | |||||||||||||||||||||
GMO International Growth Fund, Class III | — | 39,007,992 | 40,268,111 | 29,564 | 222,206 | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | — | 81,004,331 | 3,040,000 | 687,383 | 2,280,525 | 83,292,632 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | — | 2,299,818 | 900,000 | 40,310 | 486,765 | 1,187,543 | |||||||||||||||||||||
GMO Real Estate Fund, Class III | — | 4,548,420 | 3,647,345 | 81,025 | 1,044,368 | — | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | — | 35,477,189 | 1,204,000 | 200,405 | 582,211 | 34,538,207 | |||||||||||||||||||||
GMO U.S. Core Fund, Class VI | — | 16,642,629 | 16,734,572 | 23,875 | — | — | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class IV | — | 30,869,933 | 750,000 | 160,606 | 8,732 | 31,257,649 | |||||||||||||||||||||
Totals | $ | — | $ | 440,757,896 | $ | 86,430,460 | $ | 4,702,121 | $ | 6,786,824 | $ | 366,581,025 |
9. Subsequent event
As of April 1, 2006, the Fund changed its name to GMO Strategic Opportunities Allocation Fund.
14
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Strategic Balanced Allocation Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Strategic Balanced Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the period from May 31, 2005 (commencement of operations) to February 28, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
15
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.54 | % | $ | 1,000.00 | $ | 1,086.60 | $ | 2.79 | |||||||||||
2) Hypothetical | 0.54 | % | $ | 1,000.00 | $ | 1,022.12 | $ | 2.71 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
16
GMO Strategic Balanced Allocation Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $316,251 from long-term capital gains.
For taxable, non-corporate shareholders, 34.17% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 5.84% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 $2,322,498 or if determined to be different, the qualified interest income of such year.
17
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
18
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
19
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
20
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
21
GMO Alpha Only Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Alpha Only Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Team within the Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Alpha Only Fund returned +4.6% for the fiscal year ended February 28, 2006, as compared to +3.3% for the Citigroup 3-Month Treasury Bill Index. Consistent with the Fund's investment objectives and policies, during the fiscal year the Fund was exposed to global equity securities through its investment in underlying GMO mutual funds.
Implementation was negative, as the underlying GMO mutual funds underperformed their respective benchmarks by 2.0%.
Asset allocation added approximately 3.3%. The portfolio's allocation to international and emerging equities drove the outperformance.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .09% on the purchase and .09% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Alpha Only Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 84.4 | % | |||||
Short-Term Investment(s) | 15.6 | ||||||
Preferred Stocks | 2.1 | ||||||
Debt Obligation(s) | 0.2 | ||||||
Private Equity Securities | 0.1 | ||||||
Convertible Securities | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.0 | ||||||
Forward Currency Contracts | (0.4 | ) | |||||
Futures | (2.3 | ) | |||||
Other | 0.3 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying fund(s)").
1
GMO Alpha Only Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Country Summary** | % of Investments | ||||||
United States | 38.9 | % | |||||
Japan | 13.5 | ||||||
United Kingdom | 10.7 | ||||||
France | 4.3 | ||||||
South Korea | 3.1 | ||||||
Netherlands | 3.0 | ||||||
Germany | 2.9 | ||||||
Brazil | 2.4 | ||||||
Taiwan | 2.3 | ||||||
Canada | 2.1 | ||||||
Italy | 2.0 | ||||||
Switzerland | 1.8 | ||||||
Australia | 1.7 | ||||||
Finland | 1.6 | ||||||
Spain | 1.1 | ||||||
Belgium | 0.9 | ||||||
China | 0.9 | ||||||
Mexico | 0.8 | ||||||
South Africa | 0.8 | ||||||
Norway | 0.7 | ||||||
Hong Kong | 0.6 | ||||||
Sweden | 0.6 | ||||||
Austria | 0.5 | ||||||
Denmark | 0.4 | ||||||
Ireland | 0.4 | ||||||
Russia | 0.4 | ||||||
Singapore | 0.4 | ||||||
India | 0.3 | ||||||
Israel | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Thailand | 0.2 | ||||||
Philippines | 0.1 | ||||||
Poland | 0.1 | ||||||
Turkey | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in underlying fund(s). The table excludes short-term investment(s) and any investment in underlying fund(s) that is less than 3% of invested assets.
2
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 90.8% | |||||||||||
United States — 90.8% | |||||||||||
Affiliated Issuer(s) | |||||||||||
7,100,412 | GMO Emerging Markets Fund, Class III | 159,688,267 | |||||||||
10,679,589 | GMO International Growth Equity Fund, Class III | 319,319,726 | |||||||||
9,799,353 | GMO International Intrinsic Value Fund, Class III | 319,360,923 | |||||||||
23,621,033 | GMO U.S. Core Equity Fund, Class III | 342,268,774 | |||||||||
8,893,996 | GMO U.S. Quality Equity Fund, Class III | 185,084,052 | |||||||||
1,325,721,742 | |||||||||||
TOTAL MUTUAL FUNDS (COST $1,249,170,502) | 1,325,721,742 | ||||||||||
COMMON STOCKS — 0.0% | |||||||||||
Italy — 0.0% | |||||||||||
12,500 | Grassetto SPA * (a) (b) | 149 | |||||||||
TOTAL COMMON STOCKS (COST $7,040) | 149 | ||||||||||
SHORT-TERM INVESTMENT(S) — 8.8% | |||||||||||
70,600,000 | Rabobank Time Deposit, 4.53%, due 03/01/06 | 70,600,000 | |||||||||
58,685,000 | U.S. Treasury Bill, 4.64%, due 08/24/06 (c) (d) | 57,394,634 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $127,988,192) | 127,994,634 | ||||||||||
TOTAL INVESTMENTS — 99.6% (Cost $1,377,165,734) | 1,453,716,525 | ||||||||||
Other Assets and Liabilities (net) — 0.4% | 6,444,836 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,460,161,361 |
See accompanying notes to the financial statements.
3
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
5/26/06 | AUD | 49,306,243 | $ | 36,546,034 | $ | (260,677 | ) | ||||||||||||
5/26/06 | CHF | 63,340,841 | 48,705,334 | 41,880 | |||||||||||||||
5/26/06 | DKK | 28,940,170 | 4,646,330 | (16,473 | ) | ||||||||||||||
5/26/06 | EUR | 190,211,565 | 227,917,521 | (166,913 | ) | ||||||||||||||
5/26/06 | GBP | 97,459,428 | 171,087,183 | (1,521,303 | ) | ||||||||||||||
5/26/06 | HKD | 88,901,412 | 11,474,728 | 49 | |||||||||||||||
5/26/06 | JPY | 20,689,223,359 | 180,765,976 | (3,901,625 | ) | ||||||||||||||
5/26/06 | NOK | 30,377,373 | 4,526,263 | (8,821 | ) | ||||||||||||||
5/26/06 | NZD | 2,128,989 | 1,401,183 | 10,937 | |||||||||||||||
5/26/06 | SEK | 124,877,308 | 15,884,229 | 109,012 | |||||||||||||||
5/26/06 | SGD | 8,164,568 | 5,047,672 | (37,576 | ) | ||||||||||||||
$ | (5,751,510 | ) |
Futures contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
1,380 | CAC 40 | March 2006 | $ | 82,312,478 | $ | (675,257 | ) | ||||||||||||
352 | DAX | March 2006 | 60,886,746 | (4,521,052 | ) | ||||||||||||||
2,080 | FTSE 100 | March 2006 | 210,319,397 | (7,375,083 | ) | ||||||||||||||
145 | HANG SENG | March 2006 | 14,802,041 | (243,165 | ) | ||||||||||||||
237 | IBEX 35 | March 2006 | 33,252,098 | (916,276 | ) | ||||||||||||||
1,621 | OMXS 30 | March 2006 | 20,363,009 | 39,913 | |||||||||||||||
334 | Russell 2000 | March 2006 | 122,244,000 | (5,598,034 | ) | ||||||||||||||
1,510 | S&P 500 | March 2006 | 484,106,000 | (2,583,990 | ) | ||||||||||||||
148 | S&P/MIB | March 2006 | 33,268,674 | (2,172,562 | ) | ||||||||||||||
512 | SPI 200 | March 2006 | 46,797,696 | (2,789,491 | ) | ||||||||||||||
1,543 | TOPIX | March 2006 | 221,009,373 | (7,273,530 | ) | ||||||||||||||
$ | (34,108,527 | ) |
See accompanying notes to the financial statements.
4
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) Bankrupt issuer.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Rate shown represents yield-to-maturity.
(d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
As of February 28, 2006, 46.6% of the Net Assets of the Fund, through investments in the underlying fund(s), was valued using fair value prices based on tools by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar | JPY - Japanese Yen | ||||||
CHF - Swiss Franc | NOK - Norwegian Krone | ||||||
DKK - Danish Krone | NZD - New Zealand Dollar | ||||||
EUR - Euro | SEK - Swedish Krona | ||||||
GBP - British Pound | SGD - Singapore Dollar | ||||||
HKD - Hong Kong Dollar | |||||||
See accompanying notes to the financial statements.
5
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $127,995,232) (Note 2) | $ | 127,994,783 | |||||
Investments in affiliated issuers, at value (cost $1,249,170,502) (Notes 2 and 8) | 1,325,721,742 | ||||||
Cash | 40,001 | ||||||
Foreign currency, at value (cost $587) (Note 2) | 590 | ||||||
Receivable for Fund shares sold | 51,667 | ||||||
Interest receivable | 8,884 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 161,878 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 12,354,720 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 645,633 | ||||||
Total assets | 1,466,979,898 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 539,046 | ||||||
Shareholder service fee | 161,714 | ||||||
Trustees and Chief Compliance Officer fees | 2,205 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 5,913,388 | ||||||
Accrued expenses | 202,184 | ||||||
Total liabilities | 6,818,537 | ||||||
Net assets | $ | 1,460,161,361 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,467,231,545 | |||||
Accumulated undistributed net investment income | 12,822,573 | ||||||
Accumulated net realized loss | (56,583,515 | ) | |||||
Net unrealized appreciation | 36,690,758 | ||||||
$ | 1,460,161,361 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,460,161,361 | |||||
Shares outstanding: | |||||||
Class III | 140,901,127 | ||||||
Net asset value per share: | |||||||
Class III | $ | 10.36 |
See accompanying notes to the financial statements.
6
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Interest | $ | 3,025,123 | |||||
Dividends from affiliated issuers (Note 8) | 10,143,791 | ||||||
Total investment income | 13,168,914 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 4,061,865 | ||||||
Shareholder service fee – Class III (Note 3) | 1,218,559 | ||||||
Custodian and fund accounting agent fees | 129,166 | ||||||
Transfer agent fees | 28,386 | ||||||
Audit and tax fees | 41,795 | ||||||
Legal fees | 23,406 | ||||||
Trustees fees and related expenses (Note 3) | 14,599 | ||||||
Registration fees | 119,571 | ||||||
Miscellaneous | 20,018 | ||||||
Total expenses | 5,657,365 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (224,837 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (3,514,000 | ) | |||||
Shareholder service fee waived – Class III (Note 3) | (1,094,422 | ) | |||||
Net expenses | 824,106 | ||||||
Net investment income (loss) | 12,344,808 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 29,073,836 | ||||||
Realized gains distributions from affiliated issuers (Note 8) | 45,815,348 | ||||||
Closed futures contracts | (108,406,918 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 35,971,604 | ||||||
Net realized gain (loss) | 2,453,870 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 53,612,136 | ||||||
Open futures contracts | (31,306,514 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (4,641,607 | ) | |||||
Net unrealized gain (loss) | 17,664,015 | ||||||
Net realized and unrealized gain (loss) | 20,117,885 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 32,462,693 |
See accompanying notes to the financial statements.
7
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 12,344,808 | $ | 2,150,898 | |||||||
Net realized gain (loss) | 2,453,870 | (8,006,672 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 17,664,015 | 9,821,663 | |||||||||
Net increase (decrease) in net assets from operations | 32,462,693 | 3,965,889 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (44,049,884 | ) | — | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 1,290,587,348 | 100,566,657 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||||||
Class III | 1,673,529 | 114,581 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 1,292,260,877 | 100,681,238 | |||||||||
Total increase (decrease) in net assets | 1,280,673,686 | 104,647,127 | |||||||||
Net assets: | |||||||||||
Beginning of period | 179,487,675 | 74,840,548 | |||||||||
End of period (including accumulated undistributed net investment income of $12,822,573 and distributions in excess of net investment income of $1,185,487, respectively) | $ | 1,460,161,361 | $ | 179,487,675 |
See accompanying notes to the financial statements.
8
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 10.26 | $ | 9.99 | $ | 9.63 | $ | 9.23 | $ | 8.73 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(a)† | 0.16 | 0.19 | 0.17 | 0.20 | 0.17 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 0.31 | 0.08 | 0.19 | 0.49 | 0.96 | ||||||||||||||||||
Total from investment operations | 0.47 | 0.27 | 0.36 | 0.69 | 1.13 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.37 | ) | — | — | (0.29 | ) | (0.63 | ) | |||||||||||||||
Total distributions | (0.37 | ) | — | — | (0.29 | ) | (0.63 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.36 | $ | 10.26 | $ | 9.99 | $ | 9.63 | $ | 9.23 | |||||||||||||
Total Return(b) | 4.63 | % | 2.70 | % | 3.74 | % | 7.61 | % | 13.32 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,460,161 | $ | 179,488 | $ | 74,841 | $ | 26,329 | $ | 16,628 | |||||||||||||
Net expenses to average daily net assets(c) | 0.10 | % | 0.18 | % | 0.26 | % | 0.64 | % | 0.37 | % | |||||||||||||
Net investment income to average daily net assets(a) | 1.52 | % | 1.94 | % | 1.72 | % | 2.06 | % | 1.88 | % | |||||||||||||
Portfolio turnover rate | 40 | % | 19 | % | 11 | % | 111 | % | 22 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.59 | % | 0.62 | % | 0.72 | % | 0.94 | % | 0.78 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 0.01 | $ | 0.01 | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying fund(s) in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in underlying fund(s) (See Note 3).
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
9
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Alpha Only Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return. The Fund pursues its objective by investing primarily in shares of domestic equity, international equity and fixed income funds of the Trust ("underlying fund(s)") or in securities of the type invested in by the underlying fund(s). The Fund typically hedges the corresponding market exposure resulting from such investments by investing in futures, swap contracts, forward currency contracts and other derivatives. To the extent the Fund's hedges are effective, the performance of the Fund is not expected to correlate with the movements of markets generally but rather will reflect the Manager's outperformance or underperformance relative to such markets generally. The Fund's benchmark is the Citigroup 3-Month Treasury Bill Index.
The financial statements of the underlying fund(s) in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of the underlying fund(s) and other mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good
10
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the underlying fund(s) are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument
11
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liab ilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as
12
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
13
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $44,049,884 and $0, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $7,125,063 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions.
As of February 28, 2006, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $523,745, $6,598,186, $2,024,420 and $23,713,990 expiring in 2007, 2012, 2013 and 2014, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Code related to share ownership activity.
As of February 28, 2006, the Fund elected to defer to March 1, 2006 post-October capital losses of $31,744,372.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,377,319,184 | $ | 76,404,232 | $ | (6,891 | ) | $ | 76,397,341 |
14
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 45,713,136 | $ | (44,191,901 | ) | $ | (1,571,235 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying fund(s). Because the underlying fund(s) have varied expense and fee levels and the Fund may own different proportions of underlying fund(s) at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 3).
Purchases and redemptions of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.09% of the amount invested or redeemed. For the period June 30, 2004 to June 29, 2005, the premium on cash purchases and fee on redemptions of Fund shares were 0.11% each. The redemption fee is only applicable to shares acquired on or after June 30, 2003 and is subject to adjustment based upon purchase premiums and redemption fees of the underlying fund(s) in which the Fund invests and the estimated transaction costs of investing directly in securities. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the underlying fund(s) in which the Fund was invested and the estimated transaction costs of investing in securities. The level of purchase premium and redemption fee for the Fund may be adjusted to account for
15
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
changes in the Fund's investments (i.e. changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2006 and February 28, 2005, the Fund received $1,425,013 and $114,247 in purchase premiums and $248,516 and $334 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions.
Investment risks
The Fund is subject to the investment risks associated with an investment in the underlying fund(s), some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. As described in Note 1, the Fund invests in certain underlying fund(s). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of the underlying fund(s).
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, and the following expenses: fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes (collectively, "fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees and fund expenses (as defined above), incurred indirectly by the Fund through investment in the underlying fund(s), exceed 0.50% of the Fund's average daily net assets. Because GMO will not reimburse expenses incurred indirectly by the Fund to t he extent they exceed 0.50% of the Fund's average daily net assets, and because the amount of fees and
16
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses (as defined above)) incurred indirectly by the Fund through its investment in the underlying fund(s) may exceed 0.50% of the Fund's average daily net assets.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying fund(s). For the year ended February 28, 2006, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.450 | % | 0.135 | % | 0.585 | % |
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $8,975 and $7,567, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchase and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $1,385,404,072 and $301,207,339, respectively. Cost of purchases and proceeds from sale of securities for in-kind transactions for the year ended February 28, 2006 were $370,263,424 and $370,263,424, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
17
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
6. Principal shareholders and related parties
As of February 28, 2006, 78.8% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Two of the shareholders are other funds of the Trust. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 2.7% of the Fund's shares were held by six related parties comprised of certain GMO employee accounts, and 97.1% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 157,546,087 | $ | 1,649,310,656 | 10,298,449 | $ | 103,560,173 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,211,361 | 43,039,715 | — | — | |||||||||||||||
Shares repurchased | (38,346,631 | ) | (401,763,023 | ) | (302,412 | ) | (2,993,516 | ) | |||||||||||
Purchase premiums and redemption fees | — | 1,673,529 | — | 114,581 | |||||||||||||||
Net increase (decrease) | 123,410,817 | $ | 1,292,260,877 | 9,996,037 | $ | 100,681,238 |
18
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
8. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of affiliated issuers during the year ended February 28, 2006 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Realized Gains Distributions | Value, end of period | |||||||||||||||||||||
GMO Emerging Markets Fund, Class III | $ | 16,878,480 | $ | 163,692,003 | $ | 44,000,000 | $ | 2,159,533 | $ | 14,632,471 | $ | 159,688,267 | |||||||||||||||
GMO International Growth Equity Fund, Class III | — | 374,837,107 | 66,000,000 | 336,397 | 7,933,350 | 319,319,726 | |||||||||||||||||||||
GMO International Growth Fund, Class III | 29,239,694 | 146,475,459 | 186,267,361 | 252,516 | 1,897,943 | — | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class III | 30,052,195 | 327,552,440 | 66,000,000 | 2,886,285 | 10,344,877 | 319,360,923 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 5,549,424 | 1,800,000 | 7,008,682 | — | — | — | |||||||||||||||||||||
GMO Real Estate Fund, Class III | 3,717,233 | 16,428,595 | 17,198,657 | 358,449 | 4,820,147 | — | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class III | — | 406,580,003 | 67,000,000 | 2,143,814 | 6,056,469 | 342,268,774 | |||||||||||||||||||||
GMO U.S. Core Fund, Class III | 47,493,750 | 132,752,995 | 183,996,063 | 702,995 | — | — | |||||||||||||||||||||
GMO U.S. Quality Equity Fund, Class III | 25,915,830 | 185,548,894 | 34,000,000 | 1,303,802 | 130,091 | 185,084,052 | |||||||||||||||||||||
Totals | $ | 158,846,606 | $ | 1,755,667,496 | $ | 671,470,763 | $ | 10,143,791 | $ | 45,815,348 | $ | 1,325,721,742 |
19
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Alpha Only Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Alpha Only Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversig ht Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
20
GMO Alpha Only Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.68 | % | $ | 1,000.00 | $ | 1,021.40 | $ | 3.41 | |||||||||||
2) Hypothetical | 0.68 | % | $ | 1,000.00 | $ | 1,021.42 | $ | 3.41 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
21
GMO Alpha Only Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
For taxable, non-corporate shareholders, 30.53% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 5.62% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 $1,202,562 or if determined to be different, the qualified interest income of such year.
22
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
23
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
24
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
25
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
26
GMO Real Estate Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Real Estate Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The GMO Real Estate Fund returned +28.9% for the fiscal year ended February 28, 2006, as compared to +30.7% for the MSCI U.S. REIT Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in REIT stocks throughout the period.
During the period, overall sector selection was negative due largely to an overweight position in Regional Mall and an underweight in Storage. This negative performance was partially offset by an underweight in Manufactured Housing.
Stock selection was also negative for the fiscal year. Selections among Office-CBD and Office-Suburban both hindered overall relative performance. Stock selection in Regional Mall, Industrial, and Diversified/Miscellaneous were all positive for the period.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Real Estate Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Real Estate Investments | 81.3 | % | |||||
Short-Term Investment(s) | 11.9 | ||||||
Other | 6.8 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of REIT Investments | ||||||
Apartments | 18.0 | % | |||||
Office Suburban | 15.5 | ||||||
Shopping Centers | 13.1 | ||||||
Regional Malls | 9.7 | ||||||
Office Central Business District | 8.1 | ||||||
Diversified | 7.7 | ||||||
Industrial | 6.4 | ||||||
Health Care | 5.7 | ||||||
Storage | 5.6 | ||||||
Hotels | 5.2 | ||||||
Triple Net | 3.6 | ||||||
Manufactured Housing | 1.0 | ||||||
Outlets | 0.4 | ||||||
100.0 | % |
1
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
REAL ESTATE INVESTMENTS — 81.3% | |||||||||||
REAL ESTATE INVESTMENT TRUSTS — 81.3% | |||||||||||
Apartments — 14.6% | |||||||||||
5,100 | Apartment Investment & Management Co., Class A (a) | 225,981 | |||||||||
31,600 | Archstone-Smith Trust | 1,497,840 | |||||||||
9,800 | Avalonbay Communities, Inc. (a) | 1,009,400 | |||||||||
3,100 | BRE Properties-Class A | 168,547 | |||||||||
3,500 | Camden Property Trust | 230,475 | |||||||||
41,300 | Equity Residential Properties Trust | 1,870,064 | |||||||||
3,300 | Essex Property Trust, Inc. (a) | 328,845 | |||||||||
3,300 | GMH Communities Trust | 54,846 | |||||||||
2,000 | Home Properties of NY, Inc. (a) | 98,720 | |||||||||
4,700 | Investors Real Estate Trust | 44,462 | |||||||||
1,300 | Mid-America Apartment Communities, Inc. | 70,590 | |||||||||
3,600 | Post Properties | 159,840 | |||||||||
1,800 | Town & Country Trust (a) | 72,522 | |||||||||
7,800 | United Dominion Realty Trust, Inc. | 208,650 | |||||||||
6,040,782 | |||||||||||
Diversified — 6.3% | |||||||||||
2,800 | Colonial Properties Trust (a) | 135,380 | |||||||||
9,100 | Cousins Properties, Inc. | 279,097 | |||||||||
5,700 | Crescent Real Estate Equities | 119,985 | |||||||||
5,400 | Glenborough Realty Trust, Inc. (a) | 104,490 | |||||||||
2,300 | Pennslyvania Real Estate Investment Trust | 92,920 | |||||||||
19,200 | Vornado Realty Trust | 1,708,608 | |||||||||
4,400 | Washington Real Estate Investment Trust | 147,048 | |||||||||
2,587,528 | |||||||||||
Health Care — 4.7% | |||||||||||
19,600 | Health Care Property Investors, Inc. (a) | 538,412 | |||||||||
6,600 | Health Care, Inc. | 240,570 | |||||||||
5,500 | Healthcare Realty Trust, Inc. | 205,205 | |||||||||
9,500 | Nationwide Health Properties | 213,940 |
See accompanying notes to the financial statements.
2
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Health Care — continued | |||||||||||
9,700 | Omega Healthcare Investors, Inc. | 125,518 | |||||||||
10,700 | Senior Housing Properties Trust | 191,851 | |||||||||
2,200 | Universal Health Realty Income Trust | 77,550 | |||||||||
10,800 | Ventas, Inc. | 334,800 | |||||||||
1,927,846 | |||||||||||
Hotels — 4.2% | |||||||||||
5,100 | Equity Inns, Inc. | 78,948 | |||||||||
3,800 | Felcor Lodging Trust, Inc. | 75,430 | |||||||||
4,900 | Highland Hospitality Corp. | 60,368 | |||||||||
10,000 | Hospitality Properties Trust | 445,000 | |||||||||
30,600 | Host Marriott Corp. (a) | 594,558 | |||||||||
3,800 | Innkeepers USA Trust | 66,614 | |||||||||
2,900 | Lasalle Hotel Properties | 115,855 | |||||||||
6,700 | Meristar Hospitality Corp. * | 69,077 | |||||||||
4,900 | Strategic Hotel Capital | 105,840 | |||||||||
4,900 | Sunstone Hotel Investors, Inc. | 143,864 | |||||||||
1,755,554 | |||||||||||
Industrial — 5.2% | |||||||||||
8,400 | AMB Property Corp. | 450,660 | |||||||||
1,800 | Centerpoint Properties Corp. | 89,730 | |||||||||
1,800 | Eastgroup Properties, Inc. | 82,710 | |||||||||
4,700 | First Industrial Realty Trust | 181,326 | |||||||||
25,638 | Prologis | 1,346,508 | |||||||||
2,150,934 | |||||||||||
Manufactured Housing — 0.8% | |||||||||||
4,500 | Affordable Residential Communities (a) | 42,570 | |||||||||
3,700 | Equity Lifestyle Properties, Inc. | 176,453 | |||||||||
3,500 | Sun Communities, Inc. (a) | 121,170 | |||||||||
340,193 |
See accompanying notes to the financial statements.
3
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Office Central Business District — 6.6% | |||||||||||
11,600 | American Financial Realty Trust (a) | 137,112 | |||||||||
4,300 | BioMed Realty Trust, Inc. | 119,024 | |||||||||
9,900 | Boston Properties, Inc. | 838,233 | |||||||||
40,300 | Equity Office Properties Trust | 1,267,435 | |||||||||
4,100 | Maguire Properties, Inc. | 138,744 | |||||||||
2,300 | SL Green Realty Corp. | 199,893 | |||||||||
800 | Trizec Properties, Inc. | 19,416 | |||||||||
2,719,857 | |||||||||||
Office Suburban — 12.6% | |||||||||||
3,400 | Alexandria Real Estate Equity, Inc. | 299,268 | |||||||||
8,900 | Arden Realty Group, Inc. | 403,704 | |||||||||
2,300 | Bedford Property Investors | 61,686 | |||||||||
10,589 | Brandywine Reality Trust | 310,999 | |||||||||
11,000 | CarrAmerica Realty Corp. | 456,060 | |||||||||
4,900 | Corporate Office Properties | 203,448 | |||||||||
20,900 | Duke Realty Investments | 733,590 | |||||||||
6,900 | Highwood Properties, Inc. | 223,215 | |||||||||
43,100 | HRPT Properties Trust | 462,032 | |||||||||
4,200 | Kilroy Realty Corp. | 314,244 | |||||||||
14,100 | Liberty Property Trust | 631,398 | |||||||||
10,600 | Mack-Cali Realty Corp. | 475,940 | |||||||||
2,000 | Parkway Properties, Inc. | 88,080 | |||||||||
2,500 | PS Business Parks, Inc. | 132,975 | |||||||||
10,500 | Reckson Associates Realty Corp. | 429,450 | |||||||||
5,226,089 | |||||||||||
Outlets — 0.3% | |||||||||||
3,700 | Tanger Factory Outlet Centers, Inc. | 119,510 | |||||||||
Regional Malls — 7.9% | |||||||||||
5,600 | CBL & Associates Properties, Inc. (a) | 238,560 | |||||||||
16,900 | General Growth Properties (a) | 851,591 | |||||||||
2,000 | Glimcher Realty Trust | 53,360 |
See accompanying notes to the financial statements.
4
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Regional Malls — continued | |||||||||||
2,400 | Macerich Co. | 172,920 | |||||||||
2,500 | Mills Corp. (a) | 98,825 | |||||||||
20,900 | Simon Property Group, Inc. | 1,734,073 | |||||||||
2,800 | Taubman Centers, Inc. | 111,272 | |||||||||
3,260,601 | |||||||||||
Shopping Centers — 10.7% | |||||||||||
2,300 | Acadia Reality Trust | 50,439 | |||||||||
11,600 | Developers Diversified Realty Corp. | 582,204 | |||||||||
12,200 | Equity One, Inc. | 274,500 | |||||||||
5,100 | Federal Reality Investment Trust | 355,419 | |||||||||
6,100 | Heritage Property Investment Trust | 233,996 | |||||||||
30,200 | Kimco Realty Corp. | 1,085,086 | |||||||||
16,200 | New Plan Excel Realty Trust | 405,810 | |||||||||
4,900 | Pan Pacific Retail Property, Inc. | 339,129 | |||||||||
2,500 | Ramco-Gershenson Properties | 72,650 | |||||||||
7,700 | Regency Centers Corp. | 496,650 | |||||||||
2,300 | Saul Centers, Inc. | 89,217 | |||||||||
2,900 | Urstadt Biddle Properties, Inc. | 49,358 | |||||||||
9,500 | Weingarten Realty | 374,110 | |||||||||
4,408,568 | |||||||||||
Storage — 4.5% | |||||||||||
5,100 | Extra Space Storage, Inc. | 76,500 | |||||||||
15,700 | Public Storage, Inc. | 1,224,914 | |||||||||
4,800 | Shurgard Storage Centers, Inc. | 307,824 | |||||||||
2,300 | Sovran Self Storage (a) | 119,600 | |||||||||
6,300 | U-Store-It Trust | 140,301 | |||||||||
1,869,139 | |||||||||||
Triple Net — 2.9% | |||||||||||
9,600 | Commercial Net Lease Realty (a) | 218,400 | |||||||||
4,800 | Entertainment Properties Trust | 198,480 | |||||||||
5,700 | Getty Reality Corp. | 161,595 |
See accompanying notes to the financial statements.
5
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
Triple Net — continued | |||||||||||
6,500 | Lexington Corporate Properties Trust | 138,580 | |||||||||
14,800 | Realty Income Corp. | 341,140 | |||||||||
8,000 | Spirit Finance Corp. | 96,400 | |||||||||
4,400 | Trustreet Properties, Inc. | 63,800 | |||||||||
1,218,395 | |||||||||||
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $29,785,654) | 33,624,996 | ||||||||||
TOTAL REAL ESTATE INVESTMENTS (COST $29,785,654) | 33,624,996 | ||||||||||
SHORT-TERM INVESTMENT(S) — 11.9% | |||||||||||
125,904 | American Beacon Money Market Fund (b) | 125,904 | |||||||||
409,189 | BGI Institutional Money Market Fund (b) | 409,189 | |||||||||
1,227,789 | Citigroup Global Markets Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $1,227,892 and an effective yield of 3.01%, collateralized by a U.S. Treasury Bond with a rate of 4.50%, maturitiy date of 02/15/36 and a market value, including accrued interest, of $1,252,345. | 1,227,789 | |||||||||
188,857 | Fortis Bank Eurodollar Term Fixed Rate Yankee Certificate of Deposit, 4.53%, due 03/23/06 (b) | 188,857 | |||||||||
629,521 | Goldman Sachs Group Inc. Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $629,601 and an effective yield of 4.60%, collateralized by various corporate debt obligations with an aggregate market value of $642,111. (b) | 629,521 | |||||||||
566,569 | Merrill Lynch & Co. Tri Party Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $566,641 and an effective yield of 4.55%, collateralized by various U.S. government obligations with an aggregate market value of $581,222. (b) | 566,569 | |||||||||
125,904 | Merrimac Cash Series-Premium Class (b) | 125,904 | |||||||||
459,073 | Morgan Stanley & Co. Repurchase Agreement, dated 02/28/06, due 03/01/06, with a maturity value of $459,131 and an effective yield of 4.55%, collateralized by various U.S. government obligations with an aggregate market value of $468,258. (b) | 459,073 | |||||||||
251,808 | Rabobank Nederland Eurodollar Overnight Time Deposit, 4.52%, due 03/01/06 (b) | 251,808 |
See accompanying notes to the financial statements.
6
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENT(S) — continued | |||||||||||
188,856 | Royal Bank of Scotland Eurodollar Term Fixed Rate Yankee Certificate of Deposit, 4.55%, due 03/31/06 (b) | 188,856 | |||||||||
387,022 | Svenska Handlesbanken Eurodollar Overnight Time Deposit, 4.57%, due 03/01/06 (b) | 387,022 | |||||||||
377,713 | National Australia Bank Eurodollar Overnight Time Deposit, 4.56%, due 03/01/06 (b) | 377,713 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $4,938,205) | 4,938,205 | ||||||||||
TOTAL INVESTMENTS — 93.2% (Cost $34,723,859) | 38,563,201 | ||||||||||
Other Assets and Liabilities (net) — 6.8% | 2,827,855 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 41,391,056 |
Notes to Schedule of Investments:
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) All or a portion of this security represents investment of security lending collateral (Note 2).
See accompanying notes to the financial statements.
7
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $3,580,224 (cost $34,723,859) (Note 2) | $ | 38,563,201 | |||||
Receivable for investments sold | 6,558,000 | ||||||
Dividends and interest receivable | 32,466 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 15,848 | ||||||
Total assets | 45,169,515 | ||||||
Liabilities: | |||||||
Collateral on securities loaned (Note 2) | 3,710,416 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 19,454 | ||||||
Shareholder service fee | 5,404 | ||||||
Trustees and Chief Compliance Officer fees | 250 | ||||||
Accrued expenses | 42,935 | ||||||
Total liabilities | 3,778,459 | ||||||
Net assets | $ | 41,391,056 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 32,119,032 | |||||
Accumulated undistributed net investment income | 179,132 | ||||||
Accumulated net realized gain | 5,253,550 | ||||||
Net unrealized appreciation | 3,839,342 | ||||||
$ | 41,391,056 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 41,391,056 | |||||
Shares outstanding: | |||||||
Class III | 3,373,385 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.27 |
See accompanying notes to the financial statements.
8
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends | $ | 9,397,955 | |||||
Interest (including securities lending income of $16,233) | 171,435 | ||||||
Total investment income | 9,569,390 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 1,177,304 | ||||||
Shareholder service fee – Class III (Note 3) | 327,029 | ||||||
Custodian, fund accounting agent and transfer agent fees | 38,759 | ||||||
Audit and tax fees | 44,131 | ||||||
Legal fees | 5,666 | ||||||
Trustees fees and related expenses (Note 3) | 4,998 | ||||||
Registration fees | 1,472 | ||||||
Miscellaneous | 6,223 | ||||||
Total expenses | 1,605,582 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (93,870 | ) | |||||
Fees and expenses waived by Manager (Note 3) | (457,840 | ) | |||||
Net expenses | 1,053,872 | ||||||
Net investment income (loss) | 8,515,518 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 79,362,313 | ||||||
Net realized gain (loss) | 79,362,313 | ||||||
Change in net unrealized appreciation (depreciation) on investments | (33,161,588 | ) | |||||
Net realized and unrealized gain (loss) | 46,200,725 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 54,716,243 |
See accompanying notes to the financial statements.
9
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 8,515,518 | $ | 11,218,155 | |||||||
Net realized gain (loss) | 79,362,313 | 49,872,213 | |||||||||
Change in net unrealized appreciation (depreciation) | (33,161,588 | ) | (944,523 | ) | |||||||
Net increase (decrease) in net assets from operations | 54,716,243 | 60,145,845 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (5,491,758 | ) | (19,209,916 | ) | |||||||
Net realized gains | |||||||||||
Class III | (75,846,588 | ) | (30,227,807 | ) | |||||||
(81,338,346 | ) | (49,437,723 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | (167,824,324 | ) | 33,671,365 | ||||||||
Total increase (decrease) in net assets | (194,446,427 | ) | 44,379,487 | ||||||||
Net assets: | |||||||||||
Beginning of period | 235,837,483 | 191,457,996 | |||||||||
End of period (including accumulated undistributed net investment income of $179,132 and $0, respectively) | $ | 41,391,056 | $ | 235,837,483 |
See accompanying notes to the financial statements.
10
GMO Real Estate Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 14.54 | $ | 14.65 | $ | 10.49 | $ | 11.17 | $ | 10.31 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.61 | 0.59 | 0.58 | 0.50 | 0.56 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 3.24 | 1.55 | 4.01 | (0.71 | ) | 0.84 | |||||||||||||||||
Total from investment operations | 3.85 | 2.14 | 4.59 | (0.21 | ) | 1.40 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.40 | ) | (0.87 | ) | (0.43 | ) | (0.47 | ) | (0.54 | ) | |||||||||||||
From net realized gains | (5.72 | ) | (1.38 | ) | — | — | — | ||||||||||||||||
Total distributions | (6.12 | ) | (2.25 | ) | (0.43 | ) | (0.47 | ) | (0.54 | ) | |||||||||||||
Net asset value, end of period | $ | 12.27 | $ | 14.54 | $ | 14.65 | $ | 10.49 | $ | 11.17 | |||||||||||||
Total Return(a) | 28.89 | % | 16.01 | % | 44.56 | % | (2.16 | )% | 13.73 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 41,391 | $ | 235,837 | $ | 191,458 | $ | 142,256 | $ | 192,606 | |||||||||||||
Net expenses to average daily net assets | 0.48 | % | 0.48 | % | 0.52 | % | 0.69 | % | 0.69 | % | |||||||||||||
Net investment income to average daily net assets | 3.91 | % | 4.13 | % | 4.61 | % | 4.47 | % | 5.18 | % | |||||||||||||
Portfolio turnover rate | 52 | % | 134 | % | 56 | % | 61 | % | 6 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.25 | % | 0.25 | % | 0.24 | % | 0.04 | % | 0.05 | % |
† Calculated using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown.
See accompanying notes to the financial statements.
11
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Real Estate Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in primarily real estate investment trusts ("REITs") and other real estate related companies. REITs are managed vehicles that invest in real estate, or real estate-related investments. The Fund's benchmark is the MSCI U.S. REIT Index.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or
12
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts a re generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for o pen repurchase agreements entered into by the Fund as of February 28, 2006.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $3,580,224, collateralized by cash in the amount of $3,710,416, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect
13
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $9,818,297 and $25,338,802, respectively and long-term capital gains – $71,520,049 and $24,098,921, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $4,989,506 and $491,255 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions.
At February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 34,771,937 | $ | 3,942,983 | $ | (151,719 | ) | $ | 3,791,264 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (2,844,628 | ) | $ | 2,844,628 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
14
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds.
Investment risks
There are certain additional risks involved in investing in REITs rather than a more diversified portfolio of investments. Since the Fund's investments are concentrated in real-estate related securities, the value of its shares can be expected to change in light of factors affecting the real estate industry, including local or regional economic conditions, changes in zoning laws, changes in real estate value and property taxes, and changes in interest rates. The value of the Fund's shares may fluctuate more widely than the value of shares of a portfolio that invests in a broader range of industries.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. For the year ended February 28, 2006, GMO waived 0.21% of the Fund's management fee. GMO has temporarily agreed to waive 0.21% of the Fund's management fee until such time as it notifies shareholders that it is discontinuing the waiver. This waiver is in addition to the Manager's contractual agreement to reimburse the Fund with respect to certain Fund expenses through June 30, 2006 as described below. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.54% of the average daily net assets.
15
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $2,570 and $1,511, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $106,978,267 and $348,991,354, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 81.3% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 12.9% of the Fund's shares were held by eleven related parties comprised of certain GMO employee accounts, and 64.0% of the Fund's shares were held by accounts for which the Manager has investment discretion.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,850,336 | $ | 43,674,507 | 18,990,769 | $ | 259,781,790 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 6,089,368 | 80,126,509 | 3,374,325 | 45,470,152 | |||||||||||||||
Shares repurchased | (21,782,410 | ) | (291,625,340 | ) | (19,221,933 | ) | (271,580,577 | ) | |||||||||||
Net increase (decrease) | (12,842,706 | ) | $ | (167,824,324 | ) | 3,143,161 | $ | 33,671,365 |
16
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Real Estate Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Real Estate Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversi ght Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
17
GMO Real Estate Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.48 | % | $ | 1,000.00 | $ | 1,111.60 | $ | 2.51 | ||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.41 | $ | 2.41 |
* Expenses are calculated using the Class's annualized expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
18
GMO Real Estate Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
The Fund's distributions to shareholders include $71,520,049 from long-term capital gains.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $119,720 and $4,326,540, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
19
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
20
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
21
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
22
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
23
GMO Emerging Countries Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO Emerging Countries Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Emerging Countries Fund returned +36.4% for the fiscal year ended February 28, 2006, as compared to +37.9% for the S&P/IFC Investable Composite Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in emerging markets equities throughout the fiscal year.
Country selection detracted 1.1% from performance during the period. The Fund's overweights in Brazil and Korea contributed positively to performance. The Fund's underweight in Russia and overweight in Taiwan detracted from performance.
Stock selection detracted 0.4% during the fiscal year. Stock selection was particularly successful in Brazil, China, Korea, and Taiwan. Stock selection in Mexico and South Africa detracted from performance.
For the period, the value and the momentum models outperformed while the macroeconomic and the reversal models underperformed.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class M shares will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 82.7 | % | |||||
Preferred Stocks | 15.3 | ||||||
Debt Obligation(s) | 1.9 | ||||||
Rights and Warrants | 0.0 | ||||||
Swaps | 0.1 | ||||||
Short-Term Investment(s) | 4.2 | ||||||
Other | (4.2 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Investments* | ||||||
South Korea | 25.5 | % | |||||
Taiwan | 16.4 | ||||||
Brazil | 14.3 | ||||||
China | 7.7 | ||||||
South Africa | 7.6 | ||||||
Russia | 6.1 | ||||||
Mexico | 6.0 | ||||||
India | 2.6 | ||||||
Israel | 2.5 | ||||||
Malaysia | 2.2 | ||||||
United States | 1.9 | ||||||
Turkey | 1.7 | ||||||
Thailand | 1.4 | ||||||
Chile | 1.2 | ||||||
Poland | 1.1 | ||||||
Indonesia | 0.5 | ||||||
Philippines | 0.5 | ||||||
Argentina | 0.4 | ||||||
Hungary | 0.3 | ||||||
Venezuela | 0.1 | ||||||
Czech Republic | 0.0 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
1
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Investments* | ||||||
Financials | 23.8 | % | |||||
Information Technology | 19.7 | ||||||
Energy | 17.3 | ||||||
Telecommunication Services | 9.9 | ||||||
Materials | 8.8 | ||||||
Consumer Discretionary | 6.3 | ||||||
Industrials | 5.5 | ||||||
Utilities | 4.0 | ||||||
Consumer Staples | 3.6 | ||||||
Health Care | 1.1 | ||||||
100.0 | % |
* The table excludes short-term investment(s).
2
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) |
COMMON STOCKS — 82.7% | |||||||||||
Argentina — 0.4% | |||||||||||
20,600 | IRSA Inversiones y Representaciones SA GDR * | 263,062 | |||||||||
6,401 | Telecom Argentina SA ADR * | 80,589 | |||||||||
7,493 | Tenaris SA ADR | 1,200,004 | |||||||||
45,247 | Transportadora de Gas del Sur ADR * (a) | 228,950 | |||||||||
1,772,605 | |||||||||||
Brazil — 4.6% | |||||||||||
8,569,000 | Aes Tiete SA | 215,890 | |||||||||
241,480 | Banco do Brasil SA | 6,253,348 | |||||||||
44,400 | Companhia de Concessoes Rodoviarias | 419,223 | |||||||||
23,164,428 | Companhia Saneamento Basico SAO PA | 1,866,463 | |||||||||
54,738 | Companhia Siderurgica Nacional SA | 1,648,198 | |||||||||
10,700 | Compania Vale do Rio Doce | 526,308 | |||||||||
44,057,200 | Electrobras (Centro) | 933,428 | |||||||||
22,500 | Petroleo Brasileiro SA (Petrobras) | 514,952 | |||||||||
11,800 | Petroleo Brasileiro SA (Petrobras) ADR | 1,032,972 | |||||||||
80,023 | Souza Cruz SA (Registered) | 1,320,087 | |||||||||
57,715 | Tele Centro Oeste Celular Participacoes SA | 883,323 | |||||||||
31,000 | Unibanco-Uniao de Bancos Brasileiros SA GDR | 2,726,450 | |||||||||
18,340,642 | |||||||||||
Chile — 1.2% | |||||||||||
22,328 | Banco De Chile ADR | 979,306 | |||||||||
10,900 | Banco Santander Chile SA ADR | 517,641 | |||||||||
15,200 | Compania Cervecerias Unidas ADR | 413,440 | |||||||||
42,500 | Compania de Telecommunicaciones de Chile ADR | 365,500 | |||||||||
15,800 | Empresa Nacional de Electricidad SA ADR | 499,280 | |||||||||
107,100 | Enersis SA ADR | 1,314,117 | |||||||||
18,200 | Lan Airlines SA | 743,470 | |||||||||
15,896 | Quinenco SA ADR | 195,521 | |||||||||
5,028,275 |
See accompanying notes to the financial statements.
3
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
China — 7.7% | |||||||||||
1,172,000 | Aluminum Corp of China Ltd | 1,194,328 | |||||||||
808,000 | Bank of Communications Co Ltd * | 484,629 | |||||||||
1,560,000 | China Construction Bank Class H 144A * | 728,934 | |||||||||
8,500 | China Finance Online Co ADR * | 50,150 | |||||||||
288,240 | China International Marine Containers Co Ltd Class B | 285,479 | |||||||||
1,595,364 | China Mobile Ltd | 7,708,229 | |||||||||
12,872 | China Mobile Ltd ADR | 311,889 | |||||||||
5,397,883 | China Petroleum & Chemical Corp Class H | 3,211,427 | |||||||||
488,000 | China Resources Enterprise Ltd | 1,067,248 | |||||||||
61,500 | China Telecom Corp Ltd ADR (a) | 2,256,435 | |||||||||
2,601,400 | China Telecom Corp Ltd Class H | 950,606 | |||||||||
912,000 | CNOOC Ltd | 755,789 | |||||||||
5,800 | CNOOC Ltd ADR | 480,704 | |||||||||
535,000 | Foxconn International Holdings 144A * | 920,284 | |||||||||
2,222,100 | Guangdong Investments Ltd | 1,006,460 | |||||||||
944,000 | Huaneng Power International Inc Class H | 631,958 | |||||||||
8,513,553 | PetroChina Co Ltd Class H | 8,279,477 | |||||||||
236,000 | Shanghai Industrial Holdings Ltd | 505,238 | |||||||||
594,000 | Zhejiang Southeast Electric Power Co Class B | 238,669 | |||||||||
31,067,933 | |||||||||||
Czech Republic — 0.0% | |||||||||||
2,679 | CEZ AS | 93,186 | |||||||||
425 | Komercni Banka AS | 60,342 | |||||||||
1,600 | Unipetrol * | 18,987 | |||||||||
172,515 | |||||||||||
Hungary — 0.3% | |||||||||||
600 | Egis Rt | 87,351 | |||||||||
500 | Gedeon Richter Right | 101,890 | |||||||||
5,000 | MOL Magyar Olaj es Gazipari Rt (New Shares) | 516,389 | |||||||||
14,400 | OTP Bank | 537,579 | |||||||||
1,243,209 |
See accompanying notes to the financial statements.
4
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
India — 2.6% | |||||||||||
41,400 | Bharti Televentures * | 336,317 | |||||||||
21,400 | HCL Technologies Ltd | 293,441 | |||||||||
24,100 | HDFC Bank | 396,390 | |||||||||
36,300 | Hindalco Industries Ltd GDR | 125,322 | |||||||||
12,000 | Hindalco Industries Ltd GDR 144A (London International Exchange) | 41,400 | |||||||||
73,000 | Hindalco Industries Ltd GDR 144A (Luxembourg Exchange) | 251,850 | |||||||||
21,250 | Hindalco Industries Ltd GDR 144A (OTC) | 12,750 | |||||||||
143,900 | ICICI Bank Ltd | 1,985,424 | |||||||||
2,100 | ICICI Banking Ltd ADR | 64,491 | |||||||||
5,200 | Infosys Technologies Inc | 330,605 | |||||||||
82,757 | Mahanagar Telephone Nigam | 265,165 | |||||||||
78,600 | Oil & Natural Gas Corp Ltd | 2,014,381 | |||||||||
115,931 | Satyam Computer Services Ltd | 2,012,577 | |||||||||
11,500 | Satyam Computer Services Ltd ADR | 473,225 | |||||||||
11,100 | State Bank of India | 219,192 | |||||||||
23,494 | State Bank of India Ltd GDR | 1,126,718 | |||||||||
10,500 | Tata Consultancy Services Ltd | 402,155 | |||||||||
10,351,403 | |||||||||||
Indonesia — 0.5% | |||||||||||
18 | Astra International Tbk PT | 19 | |||||||||
282,600 | Bank Central Asia Tbk PT | 110,265 | |||||||||
534,000 | Bank Rakyat Indonesia | 188,200 | |||||||||
103,000 | Gudang Garam Tbk PT | 122,515 | |||||||||
7,562,120 | Matahari Putra Prima Tbk PT | 646,671 | |||||||||
176,000 | Perusahan Gas Negara PT | 183,619 | |||||||||
988,000 | PT Bank Mandiri Persero Tbk PT | 173,325 | |||||||||
1,522,000 | Ramayana Lestari Sentosa Tbk PT | 120,408 | |||||||||
914,224 | Telekomunikasi Indonesia Tbk PT | 604,911 | |||||||||
2,149,933 | |||||||||||
Israel — 2.4% | |||||||||||
323,700 | Bank Hapoalim B.M. | 1,481,429 | |||||||||
604,100 | Bank Leumi Le | 2,179,756 |
See accompanying notes to the financial statements.
5
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Israel — continued | |||||||||||
49,600 | Check Point Software Technologies Ltd * | 1,054,496 | |||||||||
0 | IDB Development Corp Ltd | 3 | |||||||||
159,400 | Israel Chemicals Ltd | 595,411 | |||||||||
400 | Teva Pharmaceutical Industries | 16,825 | |||||||||
98,600 | Teva Pharmaceutical Industries ADR | 4,140,214 | |||||||||
1,200 | The Israel Corp Ltd | 400,684 | |||||||||
9,868,818 | |||||||||||
Malaysia — 2.2% | |||||||||||
1,287,000 | Bumiputra-Commerce Holdings Berhad | 2,007,062 | |||||||||
138,000 | Genting Berhad | 886,747 | |||||||||
316,000 | Hong Leong Bank Berhad | 433,426 | |||||||||
227,000 | IOI Corp Berhad | 843,572 | |||||||||
101,000 | Kuala Lumpur Kepong Berhad | 252,660 | |||||||||
533,090 | Malakoff Berhad | 1,261,005 | |||||||||
237,478 | Maxis Communications Berhad | 555,852 | |||||||||
387,640 | MISC Berhad | 1,011,224 | |||||||||
318,000 | Proton Holdings Berhad | 474,509 | |||||||||
316,585 | Public Bank Berhad | 570,552 | |||||||||
230,090 | Sime Darby Berhad | 383,758 | |||||||||
8,680,367 | |||||||||||
Mexico — 6.0% | |||||||||||
278,800 | Alfa SA de CV Class A | 1,480,102 | |||||||||
119,700 | America Movil SA de CV Class L ADR | 4,157,180 | |||||||||
723,771 | Cemex SA de CV CPO | 4,480,125 | |||||||||
31,427 | Fomento Economico Mexicano SA de CV | 271,517 | |||||||||
1,287,600 | Grupo Financiero Banorte SA de CV | 3,141,867 | |||||||||
725,340 | Grupo Mexico SA Class B | 1,859,225 | |||||||||
196,700 | Organizacion Soriana SA de CV Class B * | 871,301 | |||||||||
319,800 | Telefonos de Mexico SA de CV Class L ADR | 7,160,322 | |||||||||
216,000 | Wal-Mart de Mexico SA de CV Class V | 616,966 | |||||||||
24,038,605 |
See accompanying notes to the financial statements.
6
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Philippines — 0.5% | |||||||||||
4,454,754 | Ayala Land Inc | 966,009 | |||||||||
158,400 | Equitable PCI Bank | 196,558 | |||||||||
245,421 | Ginebra San Miguel Inc | 93,650 | |||||||||
15,436 | Philippine Long Distance Telephone | 529,878 | |||||||||
4,200 | Philippine Long Distance Telephone ADR | 144,900 | |||||||||
1,930,995 | |||||||||||
Poland — 1.1% | |||||||||||
16,800 | Bank Pekao SA | 989,918 | |||||||||
168,300 | Big Bank Gdanski SA | 341,654 | |||||||||
42,400 | KGHM Polska Miedz SA | 957,607 | |||||||||
79,100 | Polski Koncern Naftowy Orlen SA | 1,454,662 | |||||||||
114,100 | Telekomunikacja Polska SA | 794,339 | |||||||||
4,538,180 | |||||||||||
Russia — 6.1% | |||||||||||
18,200 | JSC Mining & Smelting Co ADR | 1,619,800 | |||||||||
156,900 | Lukoil ADR | 12,552,000 | |||||||||
4,100 | Lukoil ADR 144A | 328,000 | |||||||||
14,300 | Mobile Telesystems ADR | 515,801 | |||||||||
54,700 | OAO Gazprom ADR | 4,627,620 | |||||||||
16,300 | Polyus Gold Co ZAO ADR * | 586,800 | |||||||||
19,300 | Rostelecom ADR (a) | 388,123 | |||||||||
390 | Sberbank RF | 606,450 | |||||||||
14,700 | Unified Energy Systems ADR | 1,010,625 | |||||||||
18,600 | Unified Energy Systems GDR | 1,282,470 | |||||||||
24,400 | Vimpel-Communications ADR * | 1,073,600 | |||||||||
24,591,289 | |||||||||||
South Africa — 7.6% | |||||||||||
13,452 | ABSA Group Ltd | 249,874 | |||||||||
31,200 | AECI Ltd | 270,316 | |||||||||
9,800 | Anglo American Platinum Corp | 777,855 | |||||||||
6,000 | AngloGold Ashanti Ltd | 306,900 |
See accompanying notes to the financial statements.
7
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
South Africa — continued | |||||||||||
54,700 | Barlow Ltd | 1,054,964 | |||||||||
143,600 | Foschini Ltd | 1,326,566 | |||||||||
21,300 | Impala Platinum Holdings Ltd | 3,616,518 | |||||||||
20,500 | Investec Ltd | 1,025,989 | |||||||||
41,167 | Mittal Steel South Africa Ltd | 405,549 | |||||||||
20,100 | Naspers Ltd Class N | 397,577 | |||||||||
32,694 | Nedcor Ltd | 631,061 | |||||||||
1,240,738 | Old Mutual Plc | 3,899,241 | |||||||||
8,100 | Pretoria Portland Cement Co Ltd | 498,296 | |||||||||
213,507 | Remgro Ltd | 4,478,041 | |||||||||
1,297,240 | Sanlam Ltd | 3,358,164 | |||||||||
122,000 | Sasol Ltd | 4,177,866 | |||||||||
68,900 | Telkom SA Ltd | 1,812,785 | |||||||||
46,860 | Tiger Brands Ltd | 1,161,583 | |||||||||
465,850 | Woolworths Holdings | 1,187,228 | |||||||||
30,636,373 | |||||||||||
South Korea — 19.9% | |||||||||||
3,000 | Amorepacific Corp | 1,046,342 | |||||||||
50,570 | Cheil Industries Inc | 1,946,189 | |||||||||
40,660 | Daesang Corp * | 620,051 | |||||||||
9,900 | Daewoo International Corp | 376,136 | |||||||||
100,700 | Daewoo Securities Co Ltd * | 1,750,318 | |||||||||
66,120 | Doosan Infracore Co Ltd | 1,110,532 | |||||||||
14,510 | GS Engineering & Construction Corp | 787,967 | |||||||||
48,581 | Hana Financial Group Inc | 2,076,325 | |||||||||
74,600 | Hanjin Heavy Industry & Construction | 1,867,721 | |||||||||
21,600 | Hanjin Shipping | 505,618 | |||||||||
146,300 | Hynix Semiconductor Inc * | 4,935,113 | |||||||||
34,100 | Hyundai Development Co | 1,547,551 | |||||||||
19,800 | Hyundai Mobis | 1,664,721 | |||||||||
95,940 | Hyundai Motor Co | 8,153,906 | |||||||||
139,000 | Industrial Bank of Korea | 2,279,041 | |||||||||
245,300 | KIA Motors Corp | 5,266,243 |
See accompanying notes to the financial statements.
8
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
97,660 | Kookmin Bank | 7,402,358 | |||||||||
2,200 | Kookmin Bank ADR | 166,650 | |||||||||
68,500 | Korea Electric Power Corp | 2,923,029 | |||||||||
50,100 | Korean Air Lines Co Ltd | 1,651,477 | |||||||||
29,200 | KT Corp | 1,156,711 | |||||||||
1,700 | KT Corp ADR | 34,714 | |||||||||
18,300 | KT Freetel Co Ltd | 486,846 | |||||||||
101,000 | KT&G Corp | 5,987,347 | |||||||||
14,500 | KT&G Corp GDR 144A * (a) | 419,050 | |||||||||
65,700 | LG Corp | 2,282,301 | |||||||||
7,300 | LG Electronics Inc | 599,450 | |||||||||
61,300 | LG Telecom Co Ltd * | 504,913 | |||||||||
7,935 | NHN Corp * | 2,236,878 | |||||||||
13,200 | POSCO | 3,110,913 | |||||||||
25,900 | Samsung Corp | 663,590 | |||||||||
574 | Samsung Electronics Co Ltd | 402,416 | |||||||||
1,614 | Samsung Electronics Co Ltd GDR 144A (Non Voting) | 431,745 | |||||||||
46,900 | Samsung Heavy Industries Co Ltd | 804,552 | |||||||||
15,300 | Samsung SDI Co Ltd | 1,351,911 | |||||||||
25,430 | Samsung Securities | 1,493,022 | |||||||||
51,363 | Shinhan Financial Group Co Ltd | 2,006,663 | |||||||||
90,446 | SK Corp | 5,573,108 | |||||||||
129,000 | Woori Finance Holdings Co Ltd | 2,534,002 | |||||||||
80,157,420 | |||||||||||
Taiwan — 16.4% | |||||||||||
1,395,918 | Acer Inc | 3,088,760 | |||||||||
2,594,489 | Asustek Computer Inc | 7,311,957 | |||||||||
163,000 | AU Optronics Corp | 260,429 | |||||||||
863,940 | Benq Corp | 847,564 | |||||||||
5,439,533 | China Development Financial Holding Corp * | 2,082,764 | |||||||||
2,609,759 | China Steel Corp | 2,361,341 | |||||||||
686,540 | Chinatrust Financial Holding Co | 575,851 | |||||||||
1,271,000 | Chunghwa Telecom Co Ltd | 2,313,921 |
See accompanying notes to the financial statements.
9
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
31,050 | Chunghwa Telecom Co Ltd ADR | 586,845 | |||||||||
463,707 | Compal Electronics Inc | 431,321 | |||||||||
640,400 | Evergreen Marine Corp | 414,594 | |||||||||
1,010,190 | Far Eastern Textile Co Ltd | 743,510 | |||||||||
528,300 | Formosa Chemicals & Fibre Co | 830,548 | |||||||||
403,655 | Formosa Petrochemical Corp | 720,376 | |||||||||
833,270 | Formosa Plastics Corp | 1,318,570 | |||||||||
79,000 | Foxconn Technology Co Ltd | 382,841 | |||||||||
53,000 | High Tech Computer Corp | 1,135,287 | |||||||||
1,231,915 | Hon Hai Precision Industry Co Ltd | 7,789,728 | |||||||||
2,352,662 | Inventec Co Ltd | 1,434,232 | |||||||||
935,300 | Lite-On Technology Corp | 1,260,468 | |||||||||
315,800 | MediaTek Inc | 3,232,277 | |||||||||
3,307,000 | Mega Financial Holdings Co Ltd | 2,508,441 | |||||||||
246,000 | Mitac International Corp | 345,828 | |||||||||
303,425 | Nan Ya Plastic Corp | 429,205 | |||||||||
389,800 | Novatek Microelectronics | 2,687,013 | |||||||||
715,759 | Shin Kong Financial Holdings | 618,713 | |||||||||
698,563 | Siliconware Precision Industries Co | 885,422 | |||||||||
1,876,960 | Sinopac Holdings Co | 992,928 | |||||||||
1,445,000 | Taishin Financial Holdings Co Ltd | 877,901 | |||||||||
2,325,000 | Taiwan Cellular Corp | 2,145,480 | |||||||||
3,875,074 | Taiwan Cement Corp | 2,920,268 | |||||||||
4,935,235 | Taiwan Semiconductor Manufacturing Co Ltd | 9,144,781 | |||||||||
61,499 | Taiwan Semiconductor Manufacturing Co Ltd ADR | 598,385 | |||||||||
3,107,687 | Walsin Lihwa Corp | 1,010,667 | |||||||||
410,288 | Wan Hai Lines Ltd | 252,079 | |||||||||
2,293,000 | Yang Ming Marine Transport | 1,403,245 | |||||||||
65,943,540 | |||||||||||
Thailand — 1.4% | |||||||||||
262,900 | Advanced Info Service Pcl (Foreign Registered) (b) | 632,993 | |||||||||
182,300 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (b) | 110,160 | |||||||||
112,600 | Kasikornbank Pcl (Foreign Registered) (b) | 197,483 |
See accompanying notes to the financial statements.
10
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Thailand — continued | |||||||||||
1,030,000 | Kasikornbank Pcl NVDR (b) | 1,754,100 | |||||||||
51,440 | PTT Exploration & Production Pcl (Foreign Registered) (b) | 684,439 | |||||||||
173,902 | Ptt Pcl (Foreign Registered) (b) | 1,107,809 | |||||||||
136,000 | Siam Cement Pcl (Foreign Registered) NVDR (b) | 840,788 | |||||||||
258,400 | Thai Airways International Pcl (Foreign Registered) (b) | 280,249 | |||||||||
5,608,021 | |||||||||||
Turkey — 1.7% | |||||||||||
308,764 | Akbank TAS | 3,125,585 | |||||||||
22,372 | Aksa Akrilik Kimya Sanayii AS | 209,801 | |||||||||
20,674 | Tupras-Turkiye Petrol Rafineriler AS | 394,189 | |||||||||
68,528 | Turkcell Iletisim Hizmet AS | 491,388 | |||||||||
103,134 | Turkiye IS Bankasi Class C | 973,871 | |||||||||
275,061 | Yapi Ve Kredi Bankasi AS * | 1,608,981 | |||||||||
6,803,815 | |||||||||||
Venezuela — 0.1% | |||||||||||
19,500 | Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR | 337,740 | |||||||||
TOTAL COMMON STOCKS (COST $212,383,180) | 333,261,678 | ||||||||||
PREFERRED STOCKS — 15.3% | |||||||||||
Brazil — 9.8% | |||||||||||
63,000 | Banco Bradesco SA 3.66% | 2,598,917 | |||||||||
131,000 | Banco Itau Holding Financeira SA 2.79% | 4,238,145 | |||||||||
213,600 | Caemi Mineracao e Metalurgica SA 1.35% | 368,154 | |||||||||
59,098,500 | Companhia Energetica de Minas Gerais 4.11% | 3,033,547 | |||||||||
17,700 | Companhia Vale do Rio Doce Class A 0.36% | 753,511 | |||||||||
23,565,000 | Geracao Tiete 8.80% | 615,786 | |||||||||
73,770 | Gerdau SA 4.84% | 1,702,251 | |||||||||
1,975,126 | Investimentos Itau SA 4.28% | 8,603,680 | |||||||||
5,327,800 | Lojas Americanas SA 1.99% | 229,320 | |||||||||
818,912 | Petroleo Brasileiro SA (Petrobras) 0.44% | 17,257,505 | |||||||||
39,400,816 |
See accompanying notes to the financial statements.
11
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
South Korea — 5.5% | |||||||||||
10,200 | Hyundai Motor Co 2.48% | 547,711 | |||||||||
40,860 | Samsung Electronics Co Ltd (Non Voting) 1.18% * | 21,620,903 | |||||||||
3,000 | Samsung SDI Co Ltd 3.36% | 163,098 | |||||||||
22,331,712 | |||||||||||
TOTAL PREFERRED STOCKS (COST $18,650,136) | 61,732,528 | ||||||||||
DEBT OBLIGATION(S) — 1.9% | |||||||||||
United States — 1.9% | |||||||||||
7,279,582 | U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (c) (d) (e) | 7,537,213 | |||||||||
TOTAL DEBT OBLIGATION(S) (COST $7,515,256) | 7,537,213 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
Thailand — 0.0% | |||||||||||
116,526 | True Corp Pcl Warrants, Expires 04/03/08 * (b) | — | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | — | ||||||||||
SHORT-TERM INVESTMENT(S) — 4.2% | |||||||||||
1,985,125 | The Boston Global Investment Trust (f) | 1,985,125 | |||||||||
15,100,000 | Bank of Montreal Time Deposit, 4.64%, due 03/01/06 | 15,100,000 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $17,085,125) | 17,085,125 | ||||||||||
TOTAL INVESTMENTS — 104.1% (Cost $255,633,697) | 419,616,544 | ||||||||||
Other Assets and Liabilities (net) — (4.1%) | (16,462,856 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 403,153,688 |
See accompanying notes to the financial statements.
12
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Receive | (Pay) | Index | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
1,521,535 USD | 1/09/2007 | Deutsche Bank | Return on Index | 1 month LIBOR + 0.55% | Gazprom | $ | 209,748 | ||||||||||||||||||||
2,182,981 USD | 2/02/2007 | Deutsche Bank | Return on Index | 1 month LIBOR + 0.55% | Gazprom | 60,757 | |||||||||||||||||||||
2,099,475 USD | 2/02/2007 | Deutsche Bank | Return on Index | 1 month LIBOR + 0.55% | Gazprom | 11,262 | |||||||||||||||||||||
1,731,350 USD | 2/02/2007 | Deutsche Bank | Return on Index | 1 month LIBOR + 0.55% | Gazprom | 9,287 | |||||||||||||||||||||
$ | 291,054 |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
GDR - Global Depository Receipt
LIBOR - London Interbank Offered Rate
NVDR - Non-Voting Depository Receipt
OTC - Over-the-counter
USD - United States Dollar
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2).
(d) Rate shown represents yield-to-maturity.
(e) All or a portion of this security has been segregated to cover open margin requirements on open swap contracts (Note 2).
(f) All or a portion of this security represents investment of security lending collateral (Note 2).
As of February 28, 2006, 66.0% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor.
See accompanying notes to the financial statements.
13
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $1,884,486 (cost $255,633,697) (Note 2) | $ | 419,616,544 | |||||
Cash | 79,121 | ||||||
Foreign currency, at value (cost $4,241,286) (Note 2) | 4,229,115 | ||||||
Receivable for investments sold | 25,574 | ||||||
Receivable for Fund shares sold | 768,841 | ||||||
Dividends and interest receivable | 1,444,123 | ||||||
Foreign taxes receivable | 219,975 | ||||||
Receivable for open swap contracts (Note 2) | 291,054 | ||||||
Payable for closed swap contracts (Note 2) | 18,489 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 25,468 | ||||||
Total assets | 426,718,304 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 16,084 | ||||||
Collateral on securities loaned (Note 2) | 1,985,125 | ||||||
Payable for Fund shares repurchased | 20,958,310 | ||||||
Accrued capital gain and repatriation taxes payable (Note 2) | 64,485 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 209,755 | ||||||
Shareholder service fee | 41,858 | ||||||
Administration fee – Class M | 8,730 | ||||||
Trustees and Chief Compliance Officer fees | 840 | ||||||
Payable for 12b-1 fee – Class M | 22,946 | ||||||
Accrued expenses | 256,483 | ||||||
Total liabilities | 23,564,616 | ||||||
Net assets | $ | 403,153,688 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 208,000,428 | |||||
Distributions in excess of net investment income | (1,446,929 | ) | |||||
Accumulated net realized gain | 32,328,488 | ||||||
Net unrealized appreciation | 164,271,701 | ||||||
$ | 403,153,688 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 346,017,693 | |||||
Class M shares | $ | 57,135,995 | |||||
Shares outstanding: | |||||||
Class III | 18,022,434 | ||||||
Class M | 2,999,491 | ||||||
Net asset value per share: | |||||||
Class III | $ | 19.20 | |||||
Class M | $ | 19.05 |
See accompanying notes to the financial statements.
14
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,086,376) | $ | 9,480,638 | |||||
Interest (including securities lending income of $19,015) | 247,200 | ||||||
Total investment income | 9,727,838 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 2,240,795 | ||||||
Shareholder service fee – Class III (Note 3) | 425,349 | ||||||
12b-1 fee – Class M (Note 3) | 152,929 | ||||||
Administration fee – Class M (Note 3) | 122,344 | ||||||
Custodian and fund accounting agent fees | 876,363 | ||||||
Transfer agent fees | 45,989 | ||||||
Audit and tax fees | 83,782 | ||||||
Legal fees | 7,904 | ||||||
Trustees fees and related expenses (Note 3) | 6,537 | ||||||
Registration fees | 31,808 | ||||||
Miscellaneous | 11,045 | ||||||
Total expenses | 4,004,845 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (30,576 | ) | |||||
Net expenses | 3,974,269 | ||||||
Net investment income (loss) | 5,753,569 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax and CPMF tax of $24,591 and $11,524, respectively) (Note 2) | 57,174,525 | ||||||
Closed swap contracts | 18,489 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (284,262 | ) | |||||
Net realized gain (loss) | 56,908,752 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of foreign capital gains tax accrual of $65,555) (Note 2) | 53,124,531 | ||||||
Open swap contracts | 291,054 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (16,597 | ) | |||||
Net unrealized gain (loss) | 53,398,988 | ||||||
Net realized and unrealized gain (loss) | 110,307,740 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 116,061,309 |
See accompanying notes to the financial statements.
15
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,753,569 | $ | 5,625,787 | |||||||
Net realized gain (loss) | 56,908,752 | 46,634,322 | |||||||||
Change in net unrealized appreciation (depreciation) | 53,398,988 | 12,243,929 | |||||||||
Net increase (decrease) in net assets from operations | 116,061,309 | 64,504,038 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (6,104,851 | ) | (4,433,864 | ) | |||||||
Class M | (951,842 | ) | (1,026,623 | ) | |||||||
Total distributions from net investment income | (7,056,693 | ) | (5,460,487 | ) | |||||||
Net realized gains | |||||||||||
Class III | (31,132,069 | ) | (34,276,629 | ) | |||||||
Class M | (6,343,672 | ) | (9,292,661 | ) | |||||||
Total distributions from net realized gains | (37,475,741 | ) | (43,569,290 | ) | |||||||
(44,532,434 | ) | (49,029,777 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class III | 37,400,362 | (12,170,481 | ) | ||||||||
Class M | (23,889,400 | ) | 6,619,994 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 13,510,962 | (5,550,487 | ) | ||||||||
Total increase (decrease) in net assets | 85,039,837 | 9,923,774 | |||||||||
Net assets: | |||||||||||
Beginning of period | 318,113,851 | 308,190,077 | |||||||||
End of period (including distributions in excess of net investment income of $1,446,929 and $814,888, respectively) | $ | 403,153,688 | $ | 318,113,851 |
See accompanying notes to the financial statements.
16
GMO Emerging Countries Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.99 | $ | 14.99 | $ | 8.54 | $ | 9.65 | $ | 8.81 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss) | 0.28 | † | 0.30 | † | 0.18 | 0.08 | 0.14 | ||||||||||||||||
Net realized and unrealized gain (loss) | 5.09 | 3.43 | 6.71 | (1.04 | ) | 0.77 | |||||||||||||||||
Total from investment operations | 5.37 | 3.73 | 6.89 | (0.96 | ) | 0.91 | |||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.35 | ) | (0.31 | ) | (0.22 | ) | (0.15 | ) | (0.07 | ) | |||||||||||||
From net realized gains | (1.81 | ) | (2.42 | ) | (0.22 | ) | — | — | |||||||||||||||
Total distributions | (2.16 | ) | (2.73 | ) | (0.44 | ) | (0.15 | ) | (0.07 | ) | |||||||||||||
Net asset value, end of period | $ | 19.20 | $ | 15.99 | $ | 14.99 | $ | 8.54 | $ | 9.65 | |||||||||||||
Total Return(a) | 36.38 | % | 28.76 | % | 81.45 | % | (10.15 | )%(b) | 10.49 | %(b) | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 346,018 | $ | 249,005 | $ | 249,844 | $ | 89,042 | $ | 72,405 | |||||||||||||
Net expenses to average daily net assets | 1.10 | % | 1.10 | % | 1.16 | % | 1.27 | % | 1.40 | % | |||||||||||||
Net investment income to average daily net assets | 1.68 | % | 2.12 | % | 1.82 | % | 0.78 | % | 2.12 | % | |||||||||||||
Portfolio turnover rate | 35 | % | 53 | % | 57 | % | 108 | % | 109 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.05 | % | 0.06 | % | 0.31 | % | 0.17 | % | |||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts: | — | — | — | $ | 0.00 | (c) | $ | 0.04 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(b) Calculations exclude purchase premiums and redemption fees which are borne by the shareholder.
(c) Purchase premiums and redemption fees were less than $0.01 per share. The purchase premium and redemption fee were rescinded effective April 1, 2002.
† Calculated using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
17
GMO Emerging Countries Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class M share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||
2006 | 2005 | 2004 | 2003(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 15.87 | $ | 14.91 | $ | 8.51 | $ | 9.85 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss) | 0.27 | † | 0.26 | † | 0.11 | 0.01 | |||||||||||||
Net realized and unrealized gain (loss) | 5.00 | 3.39 | 6.71 | (1.35 | ) | ||||||||||||||
Total from investment operations | 5.27 | 3.65 | 6.82 | (1.34 | ) | ||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.28 | ) | (0.27 | ) | (0.20 | ) | — | ||||||||||||
From net realized gains | (1.81 | ) | (2.42 | ) | (0.22 | ) | — | ||||||||||||
Total distributions | (2.09 | ) | (2.69 | ) | (0.42 | ) | — | ||||||||||||
Net asset value, end of period | $ | 19.05 | $ | 15.87 | $ | 14.91 | $ | 8.51 | |||||||||||
Total Return(b) | 35.99 | % | 28.30 | % | 80.98 | % | (13.60)%** | ||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 57,136 | $ | 69,109 | $ | 58,346 | $ | 579 | |||||||||||
Net expenses to average daily net assets | 1.39 | % | 1.40 | % | 1.45 | % | 1.57 | %* | |||||||||||
Net investment income to average daily net assets | 1.65 | % | 1.82 | % | 1.27 | % | 0.20 | %* | |||||||||||
Portfolio turnover rate | 35 | % | 53 | % | 57 | % | 108 | %*** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | % | 0.05 | % | 0.06 | % | 0.41 | %* |
(a) Period from July 9, 2002 (commencement of operations) through February 28, 2003.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding during the period.
* Annualized.
** Not annualized.
*** Calculation represents portfolio turnover of the Fund for the year ended February 28, 2003.
See accompanying notes to the financial statements.
18
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Emerging Countries Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities traded in the securities markets of emerging countries in Asia, Latin America, the Middle East, Africa and Europe ("Emerging Countries"). The Fund's benchmark is the S&P/IFCI Investable Composite Index.
Throughout the year ended February 28, 2006, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administration fee and a 12b-1 fee, while Class III shares bear a shareholder service fee (See Note 3). The principle economic difference between the classes of shares is the type and level of fees.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many
19
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. As of February 28, 2006, the Fund did not enter into any forward currency contracts.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver
20
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2006, the Fund did not enter into any futures contracts.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts.
21
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Indexed securities
The Fund may invest in indexed securities where the redemption values and/or coupons are linked to the prices of a specific instrument or financial statistic. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets in which it may be difficult to invest through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for indexed securities held by the Fund as of February 28, 2006.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. See the Schedule of Investments for a summary of open swap agreements entered into by the Fund as of February 28, 2006.
22
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $1,884,486 collateralized by cash in the amount of $1,985,125 which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $64,485 for potential capital gains and repatriation taxes as of February 28, 2006. The accrual for capital gains and repatriation taxes is included in net unrealized gain (loss) in the Statement of Operations. For the year ended February 28, 2006, the Fund incurred $24,591 in capital gains taxes which is included in net realized gain (loss) in the Statement of Operations.
The Fund is subject to a Contribuição Provisória sobre Movimentações Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to/from the Brazilian market. The CPMF tax has been included in the net realized gain (loss) on investments throughout the year.
23
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
During the year ended February 28, 2006, the Fund incurred $11,524 in CPMF tax which is included in net realized gain (loss) on investments in the Statement of Operations.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $8,983,811 and $16,833,004, respectively and long-term capital gains – $35,548,623 and $32,196,773, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $2,959,480 and $30,867,970 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 258,560,339 | $ | 165,479,032 | $ | (4,422,827 | ) | $ | 161,056,205 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to passive foreign investment company transactions. The financial highlights exclude these adjustments.
Distributions In Excess Of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | 671,083 | $ | (671,083 | ) | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities
24
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Investment risks
Investments in securities of issuers in emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets in emerging countries are typically less liquid than those of developed markets. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.65% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares.
Class M shares of the Fund pay GMO an administration fee monthly at an annual rate of 0.20% of average daily Class M net assets for support services provided to Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, Class M shares of the Fund may pay a fee, at the annual rate of 1.00% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of certain other services incidental thereto. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net asset value
25
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
attributable to its Class M shares. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administration fees (Class M only), 12b-1 fees (Class M only), fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses and transfer taxes) exceed 1.00% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $3,809 and $2,404, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $118,770,612 and $132,736,782, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 28.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
As of February 28, 2006, 0.1% of the Fund's shares were held by ten related parties comprised of certain GMO employee accounts and, 14.0% of the Fund's shares were held by accounts for which the Manager has investment discretion.
26
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,414,349 | $ | 76,364,209 | 2,384,407 | $ | 34,258,956 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,108,709 | 34,716,984 | 2,421,224 | 33,371,388 | |||||||||||||||
Shares repurchased | (4,068,752 | ) | (73,680,831 | ) | (5,901,106 | ) | (79,800,825 | ) | |||||||||||
Net increase (decrease) | 2,454,306 | $ | 37,400,362 | (1,095,475 | ) | $ | (12,170,481 | ) | |||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,020,576 | $ | 16,564,539 | 1,851,406 | $ | 26,301,677 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 456,256 | 7,295,513 | 756,405 | 10,319,284 | |||||||||||||||
Shares repurchased | (2,830,875 | ) | (47,749,452 | ) | (2,168,546 | ) | (30,000,967 | ) | |||||||||||
Net increase (decrease) | (1,354,043 | ) | $ | (23,889,400 | ) | 439,265 | $ | 6,619,994 |
27
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Countries Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Countries Fund (the "Fund") (a series of GMO Trust) at February 28, 2006, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
28
GMO Emerging Countries Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution and/or service (12b-1) fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 1.12 | % | $ | 1,000.00 | $ | 1,301.60 | $ | 6.39 | ||||||||||
2) Hypothetical | 1.12 | % | $ | 1,000.00 | $ | 1,019.24 | $ | 5.61 | |||||||||||
Class M | |||||||||||||||||||
1 | ) Actual | 1.41 | % | $ | 1,000.00 | $ | 1,300.40 | $ | 8.04 | ||||||||||
2) Hypothetical | 1.41 | % | $ | 1,000.00 | $ | 1,017.80 | $ | 7.05 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
29
GMO Emerging Countries Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $1,110,968 and recognized foreign source income of $10,566,463.
The Fund's distributions to shareholders include $35,548,623 from long-term capital gains.
For taxable, non-corporate shareholders, 53.20% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006 $0 and $1,927,118, respectively, or if determined to be different, the qualified short-term capital gains of such year.
30
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005) ; Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
31
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
32
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
33
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer,October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
34
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's complete schedule of portfolio holdings is also available at www.gmo.com.
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO International Intrinsic Value Fund returned +18.3% for the fiscal year ended February 28, 2006, as compared to +17.4% for the MSCI EAFE Index and +20.3% for the S&P/Citigroup PMI EPAC Value Style Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in international equity securities throughout the period.
Relative to the S&P/Citigroup PMI EPAC Value Style Index, the strongest positive stock selection impacts came from benchmark stocks not held or held at an underweight. Several of these came from the telecommunications sector and included Vodafone, Telefonica, Telecom Italia, and France Telecom. Compared to MSCI EAFE Index, overweights in energy stocks such as Canadian Natural Resources and OMV helped relative returns.
Country and currency weighting had a negative impact against the value index. Not holding Korea, which as an emerging market is not part of the strategy, hurt returns. Also an overweight position in the weak yen hurt relative returns and outweighed the effects of a smaller overweight in the outperforming Japanese market. The strong U.S. dollar relative to most foreign currencies detracted from returns for U.S. investors. The MSCI EAFE Index returned 12% less in U.S. dollar terms than in local currency.
Sector allocation was positive against both the S&P/Citigroup PMI EPAC Value Style Index and MSCI EAFE Index. The underweight in telecommunications was the most significant positive impact. The position in financials, which outperformed, was greater than EAFE, but lower than the value index, and so was a positive contributor against the former, but a negative against the latter.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Classes II, IV and M will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting www.gmo.com.
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.6 | % | |||||
Preferred Stocks | 0.6 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Futures | 0.2 | ||||||
Short-Term Investment(s) | 8.0 | ||||||
Other | (4.5 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
Japan | 26.2 | % | |||||
United Kingdom | 24.0 | ||||||
France | 8.9 | ||||||
Germany | 8.5 | ||||||
Netherlands | 8.1 | ||||||
Italy | 3.7 | ||||||
Finland | 3.3 | ||||||
Switzerland | 2.6 | ||||||
Canada | 2.5 | ||||||
Australia | 2.5 | ||||||
Belgium | 1.9 | ||||||
Spain | 1.9 | ||||||
Hong Kong | 1.2 | ||||||
Austria | 1.2 | ||||||
Norway | 0.9 | ||||||
Singapore | 0.8 | ||||||
Sweden | 0.8 | ||||||
Ireland | 0.7 | ||||||
Denmark | 0.3 | ||||||
Malaysia | 0.0 | ||||||
100.0 | % |
1
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 33.0 | % | |||||
Consumer Discretionary | 13.6 | ||||||
Health Care | 11.8 | ||||||
Energy | 10.5 | ||||||
Utilities | 8.0 | ||||||
Materials | 7.3 | ||||||
Industrials | 7.2 | ||||||
Consumer Staples | 4.3 | ||||||
Telecommunication Services | 2.4 | ||||||
Information Technology | 1.9 | ||||||
100.0 | % |
2
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.6% | |||||||||||
Australia — 2.4% | |||||||||||
1,121,666 | Australia and New Zealand Banking Group Ltd | 21,333,203 | |||||||||
661,658 | Commonwealth Bank of Australia | 21,964,538 | |||||||||
1,410,612 | General Property Trust Units | 4,335,313 | |||||||||
162,153 | Macquarie Bank Ltd | 7,669,885 | |||||||||
1,401,987 | National Australia Bank Ltd | 38,052,542 | |||||||||
830,172 | Promina Group Ltd | 3,345,156 | |||||||||
197,889 | Rio Tinto Ltd | 10,367,460 | |||||||||
888,224 | Santos Ltd | 7,465,612 | |||||||||
2,398,754 | Stockland | 11,948,519 | |||||||||
277,519 | Suncorp-Metway Ltd | 4,201,623 | |||||||||
5,190,003 | Telstra Corp Ltd | 14,768,449 | |||||||||
828,068 | Woolworths Ltd | 11,277,650 | |||||||||
156,729,950 | |||||||||||
Austria — 1.2% | |||||||||||
72,291 | Austrian Airlines * (a) | 722,948 | |||||||||
61,096 | Boehler Uddeholm (Bearer) | 11,461,737 | |||||||||
69,213 | Flughafen Wien AG | 5,582,117 | |||||||||
37,322 | Generali Holding Vienna AG (a) | 1,778,955 | |||||||||
595,933 | OMV AG | 36,959,312 | |||||||||
126,213 | RHI AG * (a) | 3,600,322 | |||||||||
132,648 | Voestalpine AG (a) | 15,460,181 | |||||||||
75,565,572 | |||||||||||
Belgium — 1.8% | |||||||||||
23,203 | Colruyt SA | 3,342,614 | |||||||||
84,992 | Delhaize Group (a) | 5,669,931 | |||||||||
1,337,827 | Dexia | 33,226,395 | |||||||||
1,653,958 | Fortis | 58,916,067 | |||||||||
260,067 | UCB SA | 12,318,475 | |||||||||
38,820 | Umicore | 5,514,244 | |||||||||
118,987,726 |
See accompanying notes to the financial statements.
3
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Canada — 2.4% | |||||||||||
228,100 | BCE Inc | 5,543,686 | |||||||||
360,800 | Canadian Imperial Bank of Commerce | 25,382,516 | |||||||||
857,900 | Canadian Natural Resources | 46,871,407 | |||||||||
229,400 | EnCana Corp | 9,487,263 | |||||||||
75,400 | Magna International Inc Class A | 5,622,905 | |||||||||
255,100 | National Bank of Canada | 14,545,717 | |||||||||
695,100 | Petro - Canada | 31,842,057 | |||||||||
21,400 | Quebecor Inc Class B | 508,425 | |||||||||
205,200 | Royal Bank of Canada | 17,146,194 | |||||||||
156,950,170 | |||||||||||
Denmark — 0.3% | |||||||||||
509 | AP Moller - Maersk A/S Class A | 4,583,709 | |||||||||
359 | AP Moller - Maersk A/S Class B | 3,290,405 | |||||||||
331,200 | Danske Bank A/S | 11,809,608 | |||||||||
19,683,722 | |||||||||||
Finland — 3.2% | |||||||||||
993,600 | Fortum Oyj | 24,038,238 | |||||||||
303,000 | Kesko Oyj Class B (a) | 9,522,482 | |||||||||
259,700 | Metso Oyj | 9,569,686 | |||||||||
4,610,750 | Nokia Oyj | 85,796,678 | |||||||||
267,800 | Outokumpu Oyj | 4,859,314 | |||||||||
596,154 | Rautaruukki Oyj | 20,090,006 | |||||||||
1,970,300 | Sampo Oyj Class A | 39,490,284 | |||||||||
38,760 | Stockmann Oyj AB Class A | 1,524,112 | |||||||||
38,200 | Wartsila Oyj Class A | 1,394,471 | |||||||||
169,100 | Wartsila Oyj Class B | 6,162,204 | |||||||||
132,950 | Yit Yhtymae Oyj | 6,745,575 | |||||||||
209,193,050 | |||||||||||
France — 8.6% | |||||||||||
1,099,329 | Arcelor | 40,170,935 | |||||||||
61,134 | Assurances Generales de France | 6,350,531 |
See accompanying notes to the financial statements.
4
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
673,979 | Axa | 23,830,740 | |||||||||
1,311,222 | BNP Paribas | 121,349,525 | |||||||||
35,055 | Bongrain SA | 2,223,538 | |||||||||
116,097 | Carrefour SA | 5,763,276 | |||||||||
330,057 | Cie de Saint-Gobain | 22,019,412 | |||||||||
165,028 | Credit Agricole SA | 6,027,784 | |||||||||
79,325 | Etablissements Economiques du Casino Guichard-Perrachon SA | 4,944,565 | |||||||||
104,914 | European Aero Defense | 3,846,128 | |||||||||
5,686 | Fromageries Bel Vache qui Rit | 1,077,107 | |||||||||
198,717 | Michelin SA Class B (a) | 12,122,162 | |||||||||
700,080 | Peugeot SA | 40,812,834 | |||||||||
305,242 | Renault SA | 29,331,630 | |||||||||
328,458 | Sanofi-Aventis | 27,960,066 | |||||||||
154,020 | Schneider Electric SA | 15,738,207 | |||||||||
3,462,983 | SCOR SA | 8,322,083 | |||||||||
315,849 | Societe Generale | 44,728,593 | |||||||||
557,025 | Total SA | 140,091,101 | |||||||||
93,867 | Veolia Environnement | 4,907,772 | |||||||||
561,617,989 | |||||||||||
Germany — 7.7% | |||||||||||
94,330 | Aareal Bank AG * (a) | 4,176,951 | |||||||||
48,325 | Adidas-Salomon AG | 9,444,052 | |||||||||
240,580 | Allianz AG (Registered) | 38,854,900 | |||||||||
241,567 | Altana AG | 12,973,831 | |||||||||
116,288 | Bankgesellschaft Berlin AG * (a) | 673,852 | |||||||||
113,054 | Bayer AG | 4,560,013 | |||||||||
808,735 | Bayerische Motoren Werke AG | 38,879,557 | |||||||||
599,228 | Commerzbank AG | 21,894,797 | |||||||||
711,570 | DaimlerChrysler AG (Registered) | 39,540,234 | |||||||||
670,493 | Depfa Bank Plc | 11,179,495 | |||||||||
427,603 | Deutsche Bank AG (Registered) | 47,306,476 | |||||||||
68,611 | Deutsche Postbank AG (a) | 4,840,451 | |||||||||
610,857 | E. On AG | 67,749,060 |
See accompanying notes to the financial statements.
5
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
118,371 | MAN AG | 7,469,238 | |||||||||
87,101 | Merck KGaA | 8,722,500 | |||||||||
1,009 | Mobilcom AG | 26,572 | |||||||||
324,121 | Muenchener Rueckversicherungs AG (Registered) | 44,000,981 | |||||||||
109,405 | RWE AG | 9,407,617 | |||||||||
143,147 | Salzgitter AG | 9,727,052 | |||||||||
285,891 | Schering AG | 20,505,385 | |||||||||
267,135 | Suedzucker AG (a) | 7,057,812 | |||||||||
1,422,557 | ThyssenKrupp AG (a) | 36,034,357 | |||||||||
659,907 | TUI AG (a) | 13,033,240 | |||||||||
697,603 | Volkswagen AG (a) | 48,854,326 | |||||||||
506,912,749 | |||||||||||
Hong Kong — 1.2% | |||||||||||
1,250,000 | Cheung Kong Holdings Ltd | 13,102,692 | |||||||||
526,000 | Cheung Kong Infrastructure Holdings Ltd | 1,649,348 | |||||||||
2,904,098 | CLP Holdings Ltd | 16,603,659 | |||||||||
285,000 | Guoco Group | 3,547,116 | |||||||||
1,852,511 | Hang Lung Group Co Ltd | 4,079,708 | |||||||||
721,100 | Hong Kong Aircraft Engineering Co Ltd | 5,691,028 | |||||||||
4,049,469 | Hong Kong Electric Holdings Ltd | 18,646,589 | |||||||||
561,700 | Hong Kong Ferry Co Ltd | 685,655 | |||||||||
162 | Jardine Matheson Holdings Ltd | 2,861 | |||||||||
194,911 | Jardine Strategic Holdings Ltd | 2,238,572 | |||||||||
320,862 | Mandarin Oriental International Ltd | 319,322 | |||||||||
602,500 | Swire Pacific Ltd Class A | 5,752,629 | |||||||||
1,560,400 | Yue Yuen Industrial Holdings | 4,817,953 | |||||||||
77,137,132 | |||||||||||
Ireland — 0.6% | |||||||||||
673,041 | Bank of Ireland | 11,973,524 | |||||||||
901,538 | CRH Plc | 29,571,983 | |||||||||
41,545,507 |
See accompanying notes to the financial statements.
6
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Italy — 3.4% | |||||||||||
893,080 | Banca Intesa SPA - Di RISP | 4,910,442 | |||||||||
4,153,158 | Banca Monte dei Paschi di Siena SPA (a) | 21,481,806 | |||||||||
559,623 | Banca Popolare di Milano | 7,073,543 | |||||||||
811,612 | Capitalia SPA | 6,130,224 | |||||||||
4,614,857 | ENI SPA | 131,930,029 | |||||||||
1,158,482 | Fiat SPA * (a) | 12,540,963 | |||||||||
185,747 | Fiat SPA - Di RISP * | 1,767,978 | |||||||||
83,051 | Fondiaria - Sai SPA | 3,326,502 | |||||||||
256,425 | Fondiaria - Sai SPA - Di RISP | 7,639,355 | |||||||||
588,000 | Grassetto SPA * (b) (c) | 7,010 | |||||||||
317,390 | Italcementi SPA - Di RISP | 4,523,717 | |||||||||
24,342 | Italmobiliare SPA | 1,868,966 | |||||||||
607,433 | Milano Assicurazioni SPA | 4,644,656 | |||||||||
96,800 | Natuzzi SPA ADR | 719,224 | |||||||||
663,010 | Sanpaolo IMI SPA | 11,700,147 | |||||||||
491,236 | SMI (Societa Metallurgica Italy) * | 245,133 | |||||||||
220,509,695 | |||||||||||
Japan — 25.2% | |||||||||||
135,130 | Acom Co Ltd | 8,282,744 | |||||||||
216,100 | Aeon Co Ltd | 5,155,469 | |||||||||
480,000 | AIOI Insurance Co Ltd | 3,542,246 | |||||||||
81,000 | Aisin Seiki Co Ltd | 2,874,600 | |||||||||
579,000 | Asahi Kasei Corp | 3,819,297 | |||||||||
122,100 | Autobacs Seven Co Ltd | 6,130,841 | |||||||||
1,419,300 | Chubu Electric Power Co Inc | 37,621,461 | |||||||||
225,200 | Chugoku Electric Power Co Inc | 4,877,792 | |||||||||
797,000 | Cosmo Oil Co Ltd (a) | 4,052,120 | |||||||||
1,270,000 | Daido Steel Co Ltd | 11,087,113 | |||||||||
405,100 | Daiei Inc * (a) | 11,175,904 | |||||||||
974,280 | Daiichi Sankyo Co Ltd * | 20,116,014 | |||||||||
1,671,000 | Daikyo Inc * (a) | 8,795,751 | |||||||||
221,900 | Daito Trust Construction Co Ltd | 10,391,209 | |||||||||
162,000 | Daiwa House Industry Co Ltd | 2,592,767 |
See accompanying notes to the financial statements.
7
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
371,000 | Daiwa Kosho Lease Co Ltd | 2,263,595 | |||||||||
1,009,000 | Daiwa Securities Co Ltd | 11,979,005 | |||||||||
433 | East Japan Railway Co | 3,080,320 | |||||||||
574,800 | Eisai Co Ltd | 26,582,978 | |||||||||
132,000 | Ezaki Glico Co Ltd | 1,235,737 | |||||||||
1,027,000 | Fuji Electric Holdings Co Ltd | 4,801,365 | |||||||||
3,206,000 | Fuji Heavy Industries Ltd (a) | 17,372,294 | |||||||||
747,000 | Fujikura Ltd | 8,295,560 | |||||||||
1,538,000 | Furukawa Electric Co Ltd * | 12,001,802 | |||||||||
5,789,000 | Haseko Corp * (a) | 20,171,305 | |||||||||
110,800 | Hitachi Chemical Co Ltd | 3,073,388 | |||||||||
352,100 | Hokkaido Electric Power | 8,264,357 | |||||||||
2,093,000 | Honda Motor Co Ltd | 122,252,737 | |||||||||
2,719,000 | Isuzu Motors Ltd (a) | 9,362,742 | |||||||||
4,280,000 | Itochu Corp | 35,573,302 | |||||||||
515 | Japan Tobacco Inc | 8,847,852 | |||||||||
137,000 | Kajima Corp | 802,842 | |||||||||
307,000 | Kandenko Co | 2,210,945 | |||||||||
867,600 | Kansai Electric Power Co Inc | 20,188,897 | |||||||||
1,064,000 | Kao Corp | 28,900,857 | |||||||||
3,959,000 | Kawasaki Heavy Industries Ltd (a) | 13,561,508 | |||||||||
1,195,000 | Kawasaki Kisen Kaisha Ltd (a) | 7,433,141 | |||||||||
768,000 | Keisei Electric Railway Co (a) | 4,939,390 | |||||||||
4,077,000 | Kobe Steel Ltd | 15,493,734 | |||||||||
968,000 | Komatsu Ltd | 17,167,073 | |||||||||
218,600 | Konami Corp | 5,389,637 | |||||||||
1,131,000 | Kubota Corp | 11,060,991 | |||||||||
887,200 | Kyushu Electric Power Co Inc | 21,400,798 | |||||||||
616,000 | Leopalance21 Corp | 22,156,776 | |||||||||
508,000 | Maeda Corp | 3,148,179 | |||||||||
69,000 | Makita Corp | 2,006,664 | |||||||||
4,185,000 | Marubeni Corp | 20,756,241 | |||||||||
1,900 | Maruichi Steel Tube | 48,237 | |||||||||
330,000 | Matsushita Electric Industrial Co Ltd | 6,939,707 |
See accompanying notes to the financial statements.
8
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
3,014,000 | Mazda Motor Corp (a) | 17,141,423 | |||||||||
2,583,100 | Mitsubishi Corp | 59,930,872 | |||||||||
443,000 | Mitsubishi Electric Corp | 3,527,673 | |||||||||
1,627,000 | Mitsubishi Heavy Industries | 7,641,629 | |||||||||
2,819,000 | Mitsubishi Materials Corp (a) | 14,573,262 | |||||||||
8,194,000 | Mitsubishi Motors Corp * (a) | 16,944,078 | |||||||||
1,343,000 | Mitsubishi Rayon Co Ltd | 10,791,523 | |||||||||
1,003 | Mitsubishi Tokyo Financial Group Inc | 14,894,862 | |||||||||
145,000 | Mitsubishi UFJ Securities Corp | 2,110,219 | |||||||||
1,282,000 | Mitsui & Co | 17,539,641 | |||||||||
224,000 | Mitsui Fudosan Co Ltd | 4,653,037 | |||||||||
462,000 | Mitsui Sumitomo Insurance Co Ltd | 6,093,085 | |||||||||
2,533,000 | Mitsui Trust Holding Inc | 37,138,185 | |||||||||
3,626 | Mizuho Financial Group Inc | 28,903,636 | |||||||||
54,700 | Murata Manufacturing Co Ltd | 3,373,060 | |||||||||
219,000 | Nagase & Co | 2,798,260 | |||||||||
292,000 | NGK Spark Plug Co Ltd | 6,619,823 | |||||||||
361,000 | Nikko Cordial Corp | 5,682,951 | |||||||||
67,300 | Nintendo Co Ltd | 9,925,248 | |||||||||
151,000 | Nippon Corp | 1,191,231 | |||||||||
1,692,000 | Nippon Light Metal (a) | 4,735,988 | |||||||||
893,500 | Nippon Mining Holdings Inc | 6,672,506 | |||||||||
7,260 | Nippon Telegraph & Telephone Corp | 31,348,093 | |||||||||
1,444,000 | Nippon Yusen Kabushiki Kaisha | 9,393,536 | |||||||||
675,000 | Nishimatsu Construction (a) | 2,863,489 | |||||||||
5,423,300 | Nissan Motor Co | 62,258,060 | |||||||||
166,400 | Nissin Food Products Co Ltd | 5,076,173 | |||||||||
405,100 | Nomura Securities Co Ltd | 7,730,573 | |||||||||
318,000 | NSK Ltd | 2,437,259 | |||||||||
7,100 | NTT Docomo Inc | 10,504,864 | |||||||||
162,900 | Ono Pharmaceutical Co Ltd | 7,285,941 | |||||||||
1,966,000 | Orient Corp * (a) | 6,973,069 | |||||||||
103,410 | ORIX Corp | 27,224,817 | |||||||||
6,145,000 | Osaka Gas Co Ltd | 23,527,103 |
See accompanying notes to the financial statements.
9
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
137,050 | Promise Co Ltd | 8,270,486 | |||||||||
12,492 | Resona Holdings Inc * | 44,049,403 | |||||||||
483,000 | Ricoh Company Ltd | 8,942,914 | |||||||||
3,000 | Royal Co Ltd | 45,387 | |||||||||
101,100 | Ryosan Co | 2,757,952 | |||||||||
7,215 | SBI Holdings Inc (a) | 3,807,679 | |||||||||
941,000 | Shimizu Corp | 6,605,563 | |||||||||
900,000 | Shinko Securities Co Ltd | 4,626,674 | |||||||||
546,000 | Showa Denko | 2,336,221 | |||||||||
357,500 | Showa Shell Sekiyu KK | 4,065,911 | |||||||||
1,015,200 | Sojitz Corp * (a) | 5,570,846 | |||||||||
82,000 | Stanley Electric Co Ltd | 1,575,969 | |||||||||
1,455,000 | Sumitomo Corp | 19,656,479 | |||||||||
917,000 | Sumitomo Heavy Industries Ltd | 8,200,913 | |||||||||
7,228,000 | Sumitomo Metal Industries Ltd | 32,088,455 | |||||||||
1,621,000 | Taiheiyo Cement Co Ltd | 6,975,009 | |||||||||
644,000 | Taisho Pharmaceutical Co Ltd | 13,632,032 | |||||||||
381,000 | Takashimaya Co Ltd | 5,519,318 | |||||||||
3,243,200 | Takeda Pharmaceutical Co Ltd | 180,660,717 | |||||||||
74,490 | Takefuji Corp | 4,780,253 | |||||||||
868,300 | Tohoku Electric Power Co Inc | 19,647,416 | |||||||||
341,000 | Tokuyama Corp (a) | 5,087,531 | |||||||||
791,300 | Tokyo Electric Power Co Inc | 21,360,615 | |||||||||
3,569,000 | Tokyo Gas Co Ltd | 16,249,706 | |||||||||
208,000 | Tokyo Tatemono Co Ltd | 2,011,806 | |||||||||
1,547,000 | Tomen Corp * (a) | 2,459,601 | |||||||||
892,000 | TonenGeneral Sekiyu KK (a) | 8,915,319 | |||||||||
574,000 | Toray Industries Inc | 4,422,644 | |||||||||
158,000 | Toyo Suisan Kaisha Ltd | 2,303,711 | |||||||||
121,800 | Toyota Industries Corp | 4,872,827 | |||||||||
1,184,600 | Toyota Motor Corp | 63,148,004 | |||||||||
89,000 | Toyota Tsusho Kaisha (a) | 2,060,003 | |||||||||
2,231,000 | Ube Industries Ltd | 6,583,031 | |||||||||
105,000 | Wacoal Corp (a) | 1,447,633 |
See accompanying notes to the financial statements.
10
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
240,000 | Yamaha Corp Ltd | 4,123,919 | |||||||||
192,200 | Yamaha Motor Co Ltd | 4,383,388 | |||||||||
1,652,029,788 | |||||||||||
Malaysia — 0.0% | |||||||||||
751,000 | Promet Berhad * (b) (c) | 2,021 | |||||||||
Netherlands — 7.8% | |||||||||||
5,634,452 | ABN Amro Holdings NV | 164,192,243 | |||||||||
4,215,749 | Aegon NV | 69,519,550 | |||||||||
488,346 | Akzo Nobel NV | 24,791,167 | |||||||||
168,337 | Corio NV | 11,060,839 | |||||||||
255,681 | DSM NV | 10,633,464 | |||||||||
14,788 | Gamma Holdings NV | 660,890 | |||||||||
382,222 | Heineken NV | 14,392,289 | |||||||||
5,231,075 | ING Groep NV | 196,614,972 | |||||||||
177,968 | Koninklijke Wessanen NV (a) | 2,799,585 | |||||||||
372,504 | OCE NV (a) | 6,444,361 | |||||||||
127,686 | TNT NV | 4,153,446 | |||||||||
61,825 | Wereldhave NV | 6,590,978 | |||||||||
511,853,784 | |||||||||||
Norway — 0.9% | |||||||||||
85,530 | Aker ASA | 3,406,756 | |||||||||
219,169 | DnB NOR ASA | 2,659,211 | |||||||||
330,717 | Norsk Hydro ASA | 38,737,878 | |||||||||
425,200 | Statoil ASA | 10,888,849 | |||||||||
55,692,694 | |||||||||||
Singapore — 0.7% | |||||||||||
1,429,000 | Capitaland Ltd | 3,681,227 | |||||||||
2,440,000 | DBS Group Holdings Ltd | 24,541,362 | |||||||||
393,000 | Fraser & Neave Ltd | 4,606,735 | |||||||||
254,193 | Haw Par Corp Ltd | 891,313 | |||||||||
810,104 | Hotel Properties Ltd | 802,015 |
See accompanying notes to the financial statements.
11
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Singapore — continued | |||||||||||
469,000 | Overseas Chinese Town Group | 1,959,336 | |||||||||
3,241,100 | Sembcorp Industrie | 6,202,536 | |||||||||
1,881,201 | Straits Trading Co Ltd | 3,542,919 | |||||||||
46,227,443 | |||||||||||
Spain — 1.8% | |||||||||||
555,739 | Banco Santander Central Hispano SA | 8,119,093 | |||||||||
507,138 | Endesa SA | 16,981,645 | |||||||||
38,036 | Fomento de Construcciones y Contratas SA | 2,585,999 | |||||||||
300,886 | Gas Natural SDG SA | 9,152,560 | |||||||||
1,033,457 | Iberdrola SA | 32,595,342 | |||||||||
90,910 | Metrovacesa SA | 6,768,075 | |||||||||
1,244,380 | Repsol YPF SA | 34,782,320 | |||||||||
280,805 | Sacyr Vallehermoso SA | 7,895,023 | |||||||||
118,880,057 | |||||||||||
Sweden — 0.8% | |||||||||||
428,200 | Electrolux AB | 11,842,937 | |||||||||
302,300 | Holmen AB Class B (a) | 11,727,276 | |||||||||
414,400 | Nordea AB | 4,684,209 | |||||||||
136,300 | Svenska Cellulosa - Series B Free | 5,715,693 | |||||||||
348,300 | Swedish Match AB | 4,664,009 | |||||||||
971,300 | Tele2 AB Class B (a) | 10,483,289 | |||||||||
49,117,413 | |||||||||||
Switzerland — 2.5% | |||||||||||
5,373 | Banque Cantonale Vaudoise | 1,720,129 | |||||||||
390,650 | Credit Suisse Group | 21,636,224 | |||||||||
42,148 | Nestle SA (Registered) | 12,391,666 | |||||||||
54,477 | Swiss Life Holding | 10,099,424 | |||||||||
197,369 | Swiss Reinsurance Co (Registered) | 14,059,647 | |||||||||
12,415 | Valora Holding AG * | 2,522,800 | |||||||||
433,908 | Zurich Financial Services AG * | 102,464,665 | |||||||||
164,894,555 |
See accompanying notes to the financial statements.
12
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — 23.1% | |||||||||||
831,195 | Alliance & Leicester Plc | 15,581,783 | |||||||||
366,365 | AMEC | 2,547,364 | |||||||||
582,328 | Anglo American Plc | 21,693,290 | |||||||||
318,997 | Arriva Plc | 3,370,745 | |||||||||
3,127,313 | AstraZeneca Plc | 144,428,139 | |||||||||
2,622,709 | Aviva Plc | 36,287,775 | |||||||||
1,479,491 | Barclays Plc | 17,329,282 | |||||||||
1,346,923 | Barratt Developments Plc | 24,400,613 | |||||||||
1,048,520 | BBA Group Plc | 4,923,194 | |||||||||
259,103 | Berkeley Group Holdings Plc * | 5,061,638 | |||||||||
1,265,525 | Boots Group Plc | 15,737,235 | |||||||||
4,337,308 | BP Plc | 47,979,545 | |||||||||
1,231,772 | British American Tobacco Plc | 29,347,046 | |||||||||
511,082 | British Energy Plc (Deferred Shares) * (b) (c) | — | |||||||||
19,363,957 | BT Group Plc | 69,841,541 | |||||||||
1,943,886 | Cadbury Schweppes Plc | 19,747,003 | |||||||||
7,404,830 | Centrica Plc | 37,719,511 | |||||||||
3,395,729 | Cobham Group Plc | 10,114,645 | |||||||||
6,228,832 | DSG International Plc | 18,782,877 | |||||||||
880,034 | Friends Provident Plc | 3,190,761 | |||||||||
484,609 | Gallaher Group Plc | 7,509,195 | |||||||||
10,454,585 | GlaxoSmithKline Plc | 265,536,184 | |||||||||
723,962 | GUS Plc | 13,322,539 | |||||||||
793,197 | Hanson Plc | 9,683,218 | |||||||||
5,608,797 | HBOS Plc | 104,453,211 | |||||||||
974,275 | IMI Plc | 8,931,620 | |||||||||
947,656 | Imperial Chemical Industries Plc | 5,588,929 | |||||||||
1,194,881 | Imperial Tobacco Group Plc | 35,935,952 | |||||||||
115,430 | Inchcape Plc | 4,873,187 | |||||||||
2,355,235 | J Sainsbury Plc | 13,224,348 | |||||||||
4,427,945 | Kingfisher Plc | 17,710,446 | |||||||||
720,308 | Ladbrokes Group | 4,649,652 | |||||||||
6,818,983 | Lloyds TSB Group Plc | 66,241,004 | |||||||||
75,156 | Man Group Plc | 3,044,495 |
See accompanying notes to the financial statements.
13
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,415,404 | National Grid Plc | 14,881,913 | |||||||||
896,954 | Next Plc | 25,942,919 | |||||||||
2,824,310 | Northern Foods Plc | 6,820,340 | |||||||||
535,419 | Northern Rock Plc | 10,577,779 | |||||||||
1,047,897 | Rio Tinto Plc | 49,316,288 | |||||||||
9,940,572 | Royal & Sun Alliance Insurance Group | 22,666,041 | |||||||||
2,022,242 | Royal Bank of Scotland Group | 67,641,837 | |||||||||
2,257,433 | Royal Dutch Shell Group Class A | 68,055,947 | |||||||||
873,161 | Royal Dutch Shell Plc B Shares | 27,452,608 | |||||||||
181,255 | Schroders Plc | 3,654,523 | |||||||||
1,682,746 | Scottish & Southern Energy Plc | 33,892,360 | |||||||||
2,619,749 | Scottish Power Plc | 26,797,962 | |||||||||
758,229 | Smith WH Plc | 5,425,375 | |||||||||
2,324,291 | Taylor Woodrow Plc | 16,940,096 | |||||||||
636,083 | Tomkins Plc | 3,713,450 | |||||||||
445,740 | Unilever Plc | 4,586,152 | |||||||||
545,066 | United Utilities Plc | 6,526,532 | |||||||||
5,783,081 | Vodafone Group Plc | 11,080,403 | |||||||||
1,814,617 | Wimpey (George) Plc | 17,593,186 | |||||||||
1,512,353,678 | |||||||||||
TOTAL COMMON STOCKS (COST $4,950,527,466) | 6,255,884,695 | ||||||||||
PREFERRED STOCKS — 0.6% | |||||||||||
Germany — 0.4% | |||||||||||
14,406 | Fresenius Medical Care AG (Non Voting) 0.92% | 2,311,722 | |||||||||
32,886 | Henkel KGaA 1.46% | 3,628,357 | |||||||||
75,505 | RWE AG 2.70% | 5,944,777 | |||||||||
9,000 | Villeroy & Boch AG (Non Voting) 5.64% | 140,469 | |||||||||
308,783 | Volkswagen AG 2.82% | 15,911,537 | |||||||||
27,936,862 |
See accompanying notes to the financial statements.
14
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) |
Italy — 0.2% | |||||||||||
2,815,875 | Compagnia Assicuratrice Unipol 5.02% | 7,372,886 | |||||||||
155,430 | Fiat SPA * | 1,341,764 | |||||||||
275,190 | IFI Istituto Finanziario Industries * | 5,164,751 | |||||||||
13,879,401 | |||||||||||
TOTAL PREFERRED STOCKS (COST $30,853,715) | 41,816,263 | ||||||||||
SHORT-TERM INVESTMENT(S) — 8.0% | |||||||||||
183,400,000 | Royal Bank of Canada Time Deposit, 4.53%, due 03/01/06 | 183,400,000 | |||||||||
314,278,281 | The Boston Global Investment Trust (d) | 314,278,281 | |||||||||
25,950,000 | U.S. Treasury Bill, 4.64%, due 08/24/06 (e) (f) | 25,379,411 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $523,054,884) | 523,057,692 | ||||||||||
TOTAL INVESTMENTS — 104.2% (Cost $5,504,436,065) | 6,820,758,650 | ||||||||||
Other Assets and Liabilities (net) — (4.2%) | (277,111,102 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,543,647,548 |
See accompanying notes to the financial statements.
15
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward Currency Contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
5/26/06 | AUD | 6,657,304 | $ | 4,934,427 | $ | 28,294 | |||||||||||||
5/26/06 | CAD | 2,069,075 | 1,824,853 | 30,873 | |||||||||||||||
5/26/06 | CHF | 230,704,930 | 177,398,352 | (46,554 | ) | ||||||||||||||
5/26/06 | HKD | 129,297,010 | 16,688,689 | (15,488 | ) | ||||||||||||||
5/26/06 | JPY | 50,530,897,923 | 441,498,791 | 9,719,458 | |||||||||||||||
5/26/06 | NOK | 1,550,521,687 | 231,029,489 | 587,799 | |||||||||||||||
5/26/06 | SEK | 2,498,307,015 | 317,781,360 | (2,405,824 | ) | ||||||||||||||
5/26/06 | SGD | 47,776,510 | 29,537,407 | 197,229 | |||||||||||||||
$ | 8,095,787 | ||||||||||||||||||
Sales | |||||||||||||||||||
5/26/06 | DKK | 141,173,848 | $ | 22,665,392 | $ | (29,921 | ) | ||||||||||||
5/26/06 | EUR | 337,344,053 | 404,216,327 | (412,604 | ) | ||||||||||||||
5/26/06 | GBP | 266,689,292 | 468,165,274 | (3,424,506 | ) | ||||||||||||||
5/26/06 | HKD | 732,262,417 | 94,514,946 | 724 | |||||||||||||||
5/26/06 | JPY | 3,432,150,000 | 29,987,397 | (583,670 | ) | ||||||||||||||
$ | (4,449,977 | ) |
See accompanying notes to the financial statements.
16
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
66 | CAC 40 | March 2006 | $ | 3,936,684 | $ | 32,081 | |||||||||||||
701 | DAX | March 2006 | 121,254,517 | 8,830,031 | |||||||||||||||
8 | Hang Seng | March 2006 | 816,664 | 12,519 | |||||||||||||||
9 | IBEX 35 | March 2006 | 1,262,738 | 34,751 | |||||||||||||||
167 | MSCI Singapore | March 2006 | 6,066,552 | 97,885 | |||||||||||||||
67 | OMXS30 | March 2006 | 841,654 | (1,949 | ) | ||||||||||||||
96 | S&P / MIB | March 2006 | 21,579,680 | 1,391,934 | |||||||||||||||
1,834 | TSE TOPIX | March 2006 | 262,690,337 | 9,441,413 | |||||||||||||||
$ | 19,838,665 | ||||||||||||||||||
Sales | |||||||||||||||||||
1,644 | FTSE 100 | March 2006 | $ | 166,233,215 | $ | (2,846,675 | ) | ||||||||||||
764 | S&P Toronto 60 | March 2006 | 88,685,714 | (3,714,242 | ) | ||||||||||||||
153 | SPI 200 | March 2006 | 13,984,468 | (288,607 | ) | ||||||||||||||
$ | (6,849,524 | ) |
At February 28, 2006 the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) Bankrupt issuer.
(c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(d) All or a portion of this security represents investment of security lending collateral (Note 2).
(e) Rate shown represents yield-to-maturity.
(f) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
As of February 28, 2006, 93.4% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor.
Currency Abbreviations:
AUD - Australian Dollar | HKD - Hong Kong Dollar | ||||||
CAD - Canadian Dollar | JPY - Japanese Yen | ||||||
CHF - Swiss Franc | NOK - Norwegian Krone | ||||||
DKK - Danish Krone | SEK - Swedish Krona | ||||||
EUR - Euro | SGD - Singapore Dollar | ||||||
GBP - British Pound | |||||||
See accompanying notes to the financial statements.
17
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $295,552,197 (cost $5,504,436,065) (Note 2) | $ | 6,820,758,650 | |||||
Cash | 765,346 | ||||||
Foreign currency, at value (cost $8,021,285) (Note 2) | 8,065,221 | ||||||
Receivable for Fund shares sold | 31,230,489 | ||||||
Dividends and interest receivable | 10,853,822 | ||||||
Foreign taxes receivable | 927,803 | ||||||
Unrealized appreciation on open forward currency and cross currency contracts (Note 2) | 10,564,377 | ||||||
Receivable for variation margin on open futures contracts (Note 2) | 1,193,873 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 383,913 | ||||||
Total assets | 6,884,743,494 | ||||||
Liabilities: | |||||||
Collateral on securities loaned (Note 2) | 314,278,281 | ||||||
Payable for Fund shares repurchased | 15,644,761 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 2,676,221 | ||||||
Shareholder service fee | 630,677 | ||||||
Administration fee – Class M | 4,512 | ||||||
Trustees and Chief Compliance Officer fees | 11,550 | ||||||
Payable for 12b-1 fee – Class M | 11,562 | ||||||
Unrealized depreciation on open forward currency and cross currency contracts (Note 2) | 6,918,567 | ||||||
Accrued expenses | 919,815 | ||||||
Total liabilities | 341,095,946 | ||||||
Net assets | $ | 6,543,647,548 |
See accompanying notes to the financial statements.
18
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006 — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 5,025,408,553 | |||||
Distributions in excess of net investment income | (2,009,307 | ) | |||||
Accumulated net realized gain | 187,238,893 | ||||||
Net unrealized appreciation | 1,333,009,409 | ||||||
$ | 6,543,647,548 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 567,312,901 | |||||
Class III shares | $ | 2,795,609,547 | |||||
Class IV shares | $ | 3,150,741,286 | |||||
Class M shares | $ | 29,983,814 | |||||
Shares outstanding: | |||||||
Class II | 17,534,037 | ||||||
Class III | 85,781,273 | ||||||
Class IV | 96,707,685 | ||||||
Class M | 928,967 | ||||||
Net asset value per share: | |||||||
Class II | $ | 32.35 | |||||
Class III | $ | 32.59 | |||||
Class IV | $ | 32.58 | |||||
Class M | $ | 32.28 |
See accompanying notes to the financial statements.
19
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Operations — Year Ended February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $12,991,279) | $ | 145,700,602 | |||||
Interest (including securities lending income of $4,900,909) | 13,556,327 | ||||||
Total investment income | 159,256,929 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 27,990,882 | ||||||
Shareholder service fee – Class II (Note 3) | 818,481 | ||||||
Shareholder service fee – Class III (Note 3) | 3,432,060 | ||||||
Shareholder service fee – Class IV (Note 3) | 2,250,832 | ||||||
12b-1 fee – Class M (Note 3) | 56,219 | ||||||
Administration fee – Class M (Note 3) | 44,975 | ||||||
Custodian and fund accounting agent fees | 2,345,673 | ||||||
Transfer agent fees | 79,069 | ||||||
Audit and tax fees | 72,293 | ||||||
Legal fees | 99,642 | ||||||
Trustees fees and related expenses (Note 3) | 95,630 | ||||||
Registration fees | 215,299 | ||||||
Miscellaneous | 151,299 | ||||||
Total expenses | 37,652,354 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (2,909,623 | ) | |||||
Net expenses | 34,742,731 | ||||||
Net investment income (loss) | 124,514,198 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 360,335,198 | ||||||
Closed futures contracts | 33,263,055 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (54,323,162 | ) | |||||
Net realized gain (loss) | 339,275,091 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 500,232,826 | ||||||
Open futures contracts | 11,439,002 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,575,256 | ) | |||||
Net unrealized gain (loss) | 510,096,572 | ||||||
Net realized and unrealized gain (loss) | 849,371,663 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 973,885,861 |
See accompanying notes to the financial statements.
20
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 124,514,198 | $ | 63,901,035 | |||||||
Net realized gain (loss) | 339,275,091 | 201,214,536 | |||||||||
Change in net unrealized appreciation (depreciation) | 510,096,572 | 419,859,759 | |||||||||
Net increase (decrease) in net assets from operations | 973,885,861 | 684,975,330 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (5,167,158 | ) | (4,280,990 | ) | |||||||
Class III | (30,272,073 | ) | (35,499,046 | ) | |||||||
Class IV | (33,052,892 | ) | (41,320,160 | ) | |||||||
Class M | (236,681 | ) | (300,026 | ) | |||||||
Total distributions from net investment income | (68,728,804 | ) | (81,400,222 | ) | |||||||
Net realized gains | |||||||||||
Class II | (19,940,346 | ) | (306,128 | ) | |||||||
Class III | (115,581,160 | ) | (2,370,968 | ) | |||||||
Class IV | (123,159,753 | ) | (2,783,896 | ) | |||||||
Class M | (1,142,022 | ) | (22,496 | ) | |||||||
Total distributions from net realized gains | (259,823,281 | ) | (5,483,488 | ) | |||||||
(328,552,085 | ) | (86,883,710 | ) | ||||||||
Net share transactions (Note 7): | |||||||||||
Class II | 285,566,330 | 115,923,125 | |||||||||
Class III | 711,856,761 | 196,107,018 | |||||||||
Class IV | 643,540,098 | 1,022,324,690 | |||||||||
Class M | 8,835,593 | 8,573,018 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 1,649,798,782 | 1,342,927,851 | |||||||||
Total increase (decrease) in net assets | 2,295,132,558 | 1,941,019,471 | |||||||||
Net assets: | |||||||||||
Beginning of period | 4,248,514,990 | 2,307,495,519 | |||||||||
End of period (including distributions in excess of net investment income of $2,009,307 and $10,937,487, respectively) | $ | 6,543,647,548 | $ | 4,248,514,990 |
See accompanying notes to the financial statements.
21
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 29.04 | $ | 24.18 | $ | 16.04 | $ | 17.41 | $ | 20.30 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.65 | 0.49 | 0.44 | 0.37 | 0.28 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 4.45 | 5.07 | 8.31 | (1.05 | ) | (2.44 | ) | ||||||||||||||||
Total from investment operations | 5.10 | 5.56 | 8.75 | (0.68 | ) | (2.16 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.36 | ) | (0.66 | ) | (0.61 | ) | (0.69 | ) | (0.73 | ) | |||||||||||||
From net realized gains | (1.43 | ) | (0.04 | ) | — | — | — | ||||||||||||||||
Total distributions | (1.79 | ) | (0.70 | ) | (0.61 | ) | (0.69 | ) | (0.73 | ) | |||||||||||||
Net asset value, end of period | $ | 32.35 | $ | 29.04 | $ | 24.18 | $ | 16.04 | $ | 17.41 | |||||||||||||
Total Return(a) | 18.16 | % | 23.17 | % | 54.99 | % | (4.11 | )% | (10.71 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 567,313 | $ | 231,695 | $ | 85,625 | $ | 67,896 | $ | 42,495 | |||||||||||||
Net expenses to average daily net assets | 0.76 | % | 0.76 | % | 0.76 | % | 0.76 | % | 0.76 | % | |||||||||||||
Net investment income to average daily net assets | 2.16 | % | 1.88 | % | 2.15 | % | 2.06 | % | 1.56 | % | |||||||||||||
Portfolio turnover rate | 38 | % | 46 | % | 44 | % | 51 | % | 51 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | % | 0.07 | % | 0.09 | % | 0.10 | % | 0.10 | % |
† Calculated using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
See accompanying notes to the financial statements.
22
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 29.23 | $ | 24.32 | $ | 16.13 | $ | 17.50 | $ | 20.37 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.72 | 0.59 | 0.45 | 0.40 | 0.44 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 4.44 | 5.02 | 8.36 | (1.08 | ) | (2.59 | ) | ||||||||||||||||
Total from investment operations | 5.16 | 5.61 | 8.81 | (0.68 | ) | (2.15 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.37 | ) | (0.66 | ) | (0.62 | ) | (0.69 | ) | (0.72 | ) | |||||||||||||
From net realized gains | (1.43 | ) | (0.04 | ) | — | — | — | ||||||||||||||||
Total distributions | (1.80 | ) | (0.70 | ) | (0.62 | ) | (0.69 | ) | (0.72 | ) | |||||||||||||
Net asset value, end of period | $ | 32.59 | $ | 29.23 | $ | 24.32 | $ | 16.13 | $ | 17.50 | |||||||||||||
Total Return(a) | 18.26 | % | 23.28 | % | 55.05 | % | (4.05 | )% | (10.60 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,795,610 | $ | 1,804,485 | $ | 1,350,850 | $ | 845,997 | $ | 1,053,104 | |||||||||||||
Net expenses to average daily net assets | 0.69 | % | 0.69 | % | 0.69 | % | 0.69 | % | 0.69 | % | |||||||||||||
Net investment income to average daily net assets | 2.39 | % | 2.30 | % | 2.22 | % | 2.26 | % | 2.37 | % | |||||||||||||
Portfolio turnover rate | 38 | % | 46 | % | 44 | % | 51 | % | 51 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | % | 0.07 | % | 0.09 | % | 0.10 | % | 0.10 | % |
† Calculated using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
See accompanying notes to the financial statements.
23
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||
Net asset value, beginning of period | $ | 29.22 | $ | 24.31 | $ | 16.12 | $ | 17.50 | $ | 20.37 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.74 | 0.54 | 0.43 | 0.38 | 0.36 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 4.43 | 5.09 | 8.39 | (1.05 | ) | (2.49 | ) | ||||||||||||||||
Total from investment operations | 5.17 | 5.63 | 8.82 | (0.67 | ) | (2.13 | ) | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.38 | ) | (0.68 | ) | (0.63 | ) | (0.71 | ) | (0.74 | ) | |||||||||||||
From net realized gains | (1.43 | ) | (0.04 | ) | — | — | — | ||||||||||||||||
Total distributions | (1.81 | ) | (0.72 | ) | (0.63 | ) | (0.71 | ) | (0.74 | ) | |||||||||||||
Net asset value, end of period | $ | 32.58 | $ | 29.22 | $ | 24.31 | $ | 16.12 | $ | 17.50 | |||||||||||||
Total Return(a) | 18.32 | % | 23.37 | % | 55.15 | % | (4.02 | )% | (10.52 | )% | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,150,741 | $ | 2,193,988 | $ | 863,612 | $ | 334,240 | $ | 248,579 | |||||||||||||
Net expenses to average daily net assets | 0.63 | % | 0.63 | % | 0.63 | % | 0.63 | % | 0.63 | % | |||||||||||||
Net investment income to average daily net assets | 2.45 | % | 2.06 | % | 2.08 | % | 2.13 | % | 1.97 | % | |||||||||||||
Portfolio turnover rate | 38 | % | 46 | % | 44 | % | 51 | % | 51 | % | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | % | 0.07 | % | 0.09 | % | 0.10 | % | 0.10 | % |
† Calculated using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
See accompanying notes to the financial statements.
24
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||
2006 | 2005 | 2004(a) | |||||||||||||
Net asset value, beginning of period | $ | 28.98 | $ | 24.15 | $ | 20.92 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.61 | 0.44 | 0.01 | ||||||||||||
Net realized and unrealized gain (loss) | 4.41 | 5.04 | 3.73 | ||||||||||||
Total from investment operations | 5.02 | 5.48 | 3.74 | ||||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | (0.29 | ) | (0.61 | ) | (0.51 | ) | |||||||||
From net realized gains | (1.43 | ) | (0.04 | ) | — | ||||||||||
Total distributions | (1.72 | ) | (0.65 | ) | (0.51 | ) | |||||||||
Net asset value, end of period | $ | 32.28 | $ | 28.98 | $ | 24.15 | |||||||||
Total Return(b) | 17.92 | % | 22.88 | % | 18.06 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 29,984 | $ | 18,347 | $ | 7,408 | |||||||||
Net expenses to average daily net assets | 0.99 | % | 0.99 | % | 0.99 | %* | |||||||||
Net investment income to average daily net assets | 2.07 | % | 1.72 | % | 0.12 | %* | |||||||||
Portfolio turnover rate | 38 | % | 46 | % | 44 | %†† | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | % | 0.07 | % | 0.09 | %* |
(a) Period from October 2, 2003 (commencement of operations) to February 29, 2004.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 29, 2004.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
25
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO International Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the S&P/Citigroup Primary Market Index ("PMI") Europe, Pacific, Asia Composite ("EPAC") Value Style Index.
Throughout the year ended February 28, 2006, the Fund had four classes of shares outstanding: Class II, Class III, Class IV and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 3). The principal economic difference among the classes of shares is the type and level of fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares, except Class M, is generally based on the total amount of assets invested in the Fund or with GMO, as more fully outlined in the Fund's prospectus.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the
26
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with
27
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the pric e of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts are generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to
28
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of February 28, 2006, the Fund did not enter into any purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
29
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Delayed delivery commitments
The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained with the custodian in an amount at least equal to these commitments. As of February 28, 2006, the Fund did not enter into any delayed delivery commitments.
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006, t he Fund had loaned securities having a market value of $295,552,197, collateralized by cash in the amount of $314,278,281, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income, if any, and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests.
30
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the years ended February 28, 2006 and February 28, 2005, the tax basis of distributions paid were as follows: ordinary income – $136,329,451 and $81,400,222, respectively and long-term capital gains – $192,222,634 and $5,483,488, respectively.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $66,204,933 and $138,284,659 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions, foreign currency transactions and losses on wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 5,520,174,370 | $ | 1,341,862,016 | $ | (41,277,736 | ) | $ | 1,300,584,280 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and passive foreign investment company transactions. The financial highlights exclude these adjustments.
Distributions in Excess of Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (46,857,214 | ) | $ | 46,865,230 | $ | (8,016 | ) |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of
31
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% of average daily Class M net assets for support services provided to Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund may pay a fee, at the annual rate of 1.00% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of certain other services incidental thereto. The Trustees currently limit payments on class M shares to 0.25% of the Fund's average net asset value attributable to its Class M shares. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts.
32
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class II, Class III and Class IV only), administration fees (Class M only), 12b-1 fees (Class M only), fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.54% of the average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the year ended February 28, 2006 was $57,691 and $35,918, respectively. No remuneration was paid to any other officer of the Trust.
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2006 aggregated $3,198,738,380 and $1,860,632,262, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders and related parties
As of February 28, 2006, 12.4% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund.
As of February 28, 2006, 0.4% of the Fund's shares were held by nine related parties comprised of certain GMO employee accounts, and 56.2% of the Fund's shares were held by accounts for which the Manager has investment discretion.
33
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 10,781,673 | $ | 322,871,948 | 6,377,984 | $ | 168,794,136 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 775,560 | 23,182,022 | 144,228 | 3,997,525 | |||||||||||||||
Shares repurchased | (2,000,773 | ) | (60,487,640 | ) | (2,085,668 | ) | (56,868,536 | ) | |||||||||||
Net increase (decrease) | 9,556,460 | $ | 285,566,330 | 4,436,544 | $ | 115,923,125 | |||||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 46,072,831 | $ | 1,375,785,693 | 28,163,066 | $ | 756,569,217 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,646,865 | 139,574,505 | 1,025,850 | 28,475,859 | |||||||||||||||
Shares repurchased | (26,670,593 | ) | (803,503,437 | ) | (22,996,855 | ) | (588,938,058 | ) | |||||||||||
Net increase (decrease) | 24,049,103 | $ | 711,856,761 | 6,192,061 | $ | 196,107,018 | |||||||||||||
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 31,247,212 | $ | 932,957,292 | 45,473,301 | $ | 1,175,551,297 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,986,675 | 149,411,212 | 1,351,198 | 37,496,919 | |||||||||||||||
Shares repurchased | (14,616,668 | ) | (438,828,406 | ) | (7,251,746 | ) | (190,723,526 | ) | |||||||||||
Net increase (decrease) | 21,617,219 | $ | 643,540,098 | 39,572,753 | $ | 1,022,324,690 |
34
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Year Ended February 28, 2006 | Year Ended February 28, 2005 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 327,947 | $ | 9,736,006 | 357,710 | $ | 9,318,333 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 46,378 | 1,378,703 | 11,712 | 322,522 | |||||||||||||||
Shares repurchased | (78,413 | ) | (2,279,116 | ) | (43,165 | ) | (1,067,837 | ) | |||||||||||
Net increase (decrease) | 295,912 | $ | 8,835,593 | 326,257 | $ | 8,573,018 |
35
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO International Intrinsic Value Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Intrinsic Value Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
36
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution and/or service (12b-1) fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
37
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
February 28, 2006 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class II | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 1,140.00 | $ | 4.03 | |||||||||||
2) Hypothetical | 0.76 | % | $ | 1,000.00 | $ | 1,021.03 | $ | 3.81 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.69 | % | $ | 1,000.00 | $ | 1,140.70 | $ | 3.66 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.46 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.63 | % | $ | 1,000.00 | $ | 1,141.10 | $ | 3.34 | |||||||||||
2) Hypothetical | 0.63 | % | $ | 1,000.00 | $ | 1,021.67 | $ | 3.16 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.99 | % | $ | 1,000.00 | $ | 1,139.00 | $ | 5.25 | |||||||||||
2) Hypothetical | 0.99 | % | $ | 1,000.00 | $ | 1,019.89 | $ | 4.96 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
38
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
During the year ended February 28, 2006, the Fund paid foreign taxes of $12,992,650 and recognized foreign source income of $158,679,269.
The Fund's distributions to shareholders include $192,222,634 from long-term capital gains.
For taxable, non-corporate shareholders, 83.43% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2006, $3,890,924 and $51,453,041, respectively, or if determined to be different, the qualified interest income and qualified short-term gains of such year.
39
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000 | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
40
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
41
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
42
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
43
GMO Developed World Stock Fund
(A Series of GMO Trust)
Annual Report
February 28, 2006
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
GMO Developed World Stock Fund
(A Series of GMO Trust)
Portfolio Management
Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative team at Grantham, Mayo, Van Otterloo & Co. LLC.
Management Discussion and Analysis of Fund Performance
Since inception on August 1, 2005, the Class III shares of the GMO Developed World Stock Fund returned +11.5% for the fiscal year ended February 28, 2006, as compared to +10.8% for the MSCI World Index for the same period. Consistent with the Fund's investment objectives and policies, the Fund was substantially invested throughout the period in equity securities drawn from the world's developed markets.
Stock selection had a positive impact on performance relative to the benchmark. Among the Fund's holdings with the largest contribution to relative returns were Apple Computer Inc. of the U.S., and Toyota Motor Corp. and Mitsubishi Corp. of Japan. Less successful holdings included Pfizer and Dell of the U.S.
The Fund benefited from country selection. Overweighting Japan and underweighting the U.S. made the largest contributions.
Industry weightings detracted from relative returns, particularly an overweight in energy and an underweight in materials stocks.
Currency forwards had a positive impact. The Fund's overweight position in the Canadian dollar and underweight in the euro explained much of the foreign exchange result.
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. They are not meant as investment advice.
Performance shown is net of all fees after reimbursement from the Manager. Returns and net asset values of Fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes a purchase at the beginning and a redemption at the end of the stated period and reflects a transaction fee of .30% on the purchase and .30% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Performance for Class IV will vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end ma y be obtained by visiting www.gmo.com.
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2006 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.7 | % | |||||
Preferred Stocks | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures | 0.2 | ||||||
Short-Term Investment(s) | 4.4 | ||||||
Other | (0.4 | ) | |||||
100.0 | % | ||||||
Country Summary | % of Equity Investments | ||||||
United States | 44.8 | % | |||||
Japan | 16.5 | ||||||
United Kingdom | 10.7 | ||||||
Germany | 4.5 | ||||||
Netherlands | 3.7 | ||||||
France | 3.5 | ||||||
Italy | 2.6 | ||||||
Switzerland | 2.2 | ||||||
Canada | 2.0 | ||||||
Finland | 1.7 | ||||||
Belgium | 1.6 | ||||||
Singapore | 1.5 | ||||||
Norway | 1.1 | ||||||
Sweden | 0.9 | ||||||
Spain | 0.6 | ||||||
Austria | 0.6 | ||||||
Australia | 0.6 | ||||||
Hong Kong | 0.5 | ||||||
Ireland | 0.4 | ||||||
100.0 | % |
1
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2006 (Unaudited)
Industry Sector Summary | % of Equity Investments | ||||||
Financials | 25.7 | % | |||||
Consumer Discretionary | 13.1 | ||||||
Health Care | 11.9 | ||||||
Energy | 10.7 | ||||||
Industrials | 8.8 | ||||||
Information Technology | 7.5 | ||||||
Utilities | 7.3 | ||||||
Consumer Staples | 6.3 | ||||||
Materials | 4.9 | ||||||
Telecommunication Services | 3.8 | ||||||
100.0 | % |
2
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.7% | |||||||||||
Australia — 0.6% | |||||||||||
55,197 | BHP Billiton Ltd | 993,229 | |||||||||
141,670 | Qantas Airways Ltd | 429,333 | |||||||||
12,038 | Woodside Petroleum Ltd | 361,360 | |||||||||
1,783,922 | |||||||||||
Austria — 0.6% | |||||||||||
1,846 | Boehler Uddeholm (Bearer) | 346,313 | |||||||||
10,578 | OMV AG | 656,040 | |||||||||
11,787 | Telekom Austria AG | 269,608 | |||||||||
4,767 | Voestalpine AG | 555,596 | |||||||||
1,827,557 | |||||||||||
Belgium — 1.6% | |||||||||||
48,478 | Dexia | 1,204,004 | |||||||||
61,066 | Fortis | 2,175,248 | |||||||||
6,524 | KBC Groep NV | 681,083 | |||||||||
2,730 | Solvay SA | 302,040 | |||||||||
13,886 | UCB SA | 657,732 | |||||||||
5,020,107 | |||||||||||
Canada — 1.9% | |||||||||||
23,600 | BCE Inc | 573,569 | |||||||||
10,800 | Canadian National Railway Co | 505,574 | |||||||||
22,900 | Canadian Natural Resources | 1,251,143 | |||||||||
10,000 | EnCana Corp | 413,569 | |||||||||
9,000 | Husky Energy Inc | 550,873 | |||||||||
7,300 | Imperial Oil Ltd | 704,017 | |||||||||
25,500 | Petro - Canada | 1,168,138 | |||||||||
10,400 | Royal Bank of Canada | 869,008 | |||||||||
6,035,891 |
See accompanying notes to the financial statements.
3
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Finland — 1.6% | |||||||||||
60,800 | Fortum Oyj | 1,470,939 | |||||||||
6,300 | Metso Oyj | 232,149 | |||||||||
60,250 | Nokia Oyj | 1,121,130 | |||||||||
20,750 | Rautaruukki Oyj | 699,262 | |||||||||
30,000 | Sampo Oyj Class A | 601,283 | |||||||||
44,400 | UPM-Kymmene Oyj | 941,987 | |||||||||
5,066,750 | |||||||||||
France — 3.3% | |||||||||||
15,558 | Air France | 359,991 | |||||||||
3,783 | Assurances Generales de France | 392,974 | |||||||||
23,314 | BNP Paribas | 2,157,638 | |||||||||
9,877 | Carrefour SA | 490,313 | |||||||||
14,668 | Cie de Saint-Gobain | 978,560 | |||||||||
6,119 | Etablissements Economiques du Casino Guichard-Perrachon SA | 381,416 | |||||||||
6,199 | Lafarge SA | 648,510 | |||||||||
7,488 | Michelin SA Class B | 456,784 | |||||||||
14,780 | Peugeot SA | 861,635 | |||||||||
9,928 | Renault SA | 954,012 | |||||||||
16,874 | Sanofi-Aventis | 1,436,403 | |||||||||
16,313 | Suez SA | 599,142 | |||||||||
3,468 | Total SA | 872,198 | |||||||||
10,589,576 | |||||||||||
Germany — 4.2% | |||||||||||
14,203 | Altana AG | 762,800 | |||||||||
8,773 | BASF AG | 663,720 | |||||||||
19,595 | Bayer AG | 790,361 | |||||||||
28,638 | Bayerische Motoren Werke AG | 1,376,758 | |||||||||
11,217 | Commerzbank AG | 409,851 | |||||||||
7,476 | DaimlerChrysler AG (Registered) | 415,423 | |||||||||
3,099 | Deutsche Boerse AG | 389,312 | |||||||||
24,526 | Deutsche Post AG (Registered) | 638,172 | |||||||||
5,874 | Deutsche Postbank AG | 414,406 |
See accompanying notes to the financial statements.
4
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
5,285 | E. On AG | 586,150 | |||||||||
7,779 | Hannover Rueckversicherungs AG (Registered) (a) | 295,300 | |||||||||
4,745 | Hypo Real Estate Holding AG | 311,443 | |||||||||
21,589 | KarstadtQuelle AG * (a) | 521,012 | |||||||||
4,526 | Linde AG | 358,074 | |||||||||
2,827 | Merck KGaA | 283,102 | |||||||||
6,499 | Muenchener Rueckversicherungs AG (Registered) | 882,270 | |||||||||
11,175 | RWE AG | 960,926 | |||||||||
9,667 | Schering AG | 693,361 | |||||||||
39,147 | ThyssenKrupp AG | 991,621 | |||||||||
22,902 | Volkswagen AG | 1,603,866 | |||||||||
13,347,928 | |||||||||||
Hong Kong — 0.5% | |||||||||||
120,000 | CLP Holdings Ltd | 686,078 | |||||||||
187,000 | Hong Kong & China Gas | 446,885 | |||||||||
110,000 | Hong Kong Electric Holdings Ltd | 506,517 | |||||||||
1,639,480 | |||||||||||
Ireland — 0.4% | |||||||||||
62,472 | Bank of Ireland | 1,111,388 | |||||||||
Italy — 2.4% | |||||||||||
38,284 | Banca Intesa SPA | 226,197 | |||||||||
51,834 | Banca Monte dei Paschi di Siena SPA | 268,106 | |||||||||
16,974 | Banche Popolari Unite Scrl | 426,335 | |||||||||
64,305 | Capitalia SPA | 485,705 | |||||||||
209,117 | Enel SPA | 1,739,933 | |||||||||
112,390 | ENI SPA | 3,213,017 | |||||||||
45,328 | Fiat SPA * | 490,691 | |||||||||
22,676 | Sanpaolo IMI SPA | 400,164 | |||||||||
222,624 | Telecom Italia Di RISP | 511,513 | |||||||||
7,761,661 |
See accompanying notes to the financial statements.
5
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — 15.8% | |||||||||||
15,000 | Aeon Co Ltd | 357,853 | |||||||||
47,000 | Bank of Yokohama | 379,011 | |||||||||
48,200 | Chubu Electric Power Co Inc | 1,277,640 | |||||||||
60,000 | Cosmo Oil Co Ltd | 305,053 | |||||||||
82,000 | Dainippon Ink and Chemicals Inc | 332,554 | |||||||||
37,000 | Daiwa Securities Co Ltd | 439,270 | |||||||||
49 | East Japan Railway Co | 348,581 | |||||||||
15,300 | Eisai Co Ltd | 707,584 | |||||||||
13,080 | Electric Power Development Co | 416,358 | |||||||||
98,000 | Fuji Heavy Industries Ltd | 531,031 | |||||||||
95,000 | Hitachi Ltd | 661,784 | |||||||||
31,000 | Hokuhoku Financial Group Inc | 133,441 | |||||||||
22,800 | Honda Motor Co Ltd | 1,331,755 | |||||||||
12,000 | Hoya Corp | 476,090 | |||||||||
44 | Inpex Corp | 421,796 | |||||||||
172,000 | Isuzu Motors Ltd (a) | 592,273 | |||||||||
125,000 | Itochu Corp | 1,038,940 | |||||||||
59 | Japan Tobacco Inc | 1,013,637 | |||||||||
14,000 | JGC Corp | 297,394 | |||||||||
35,000 | Kajima Corp | 205,106 | |||||||||
39,700 | Kansai Electric Power Co Inc | 923,812 | |||||||||
18,000 | Kao Corp | 488,924 | |||||||||
44,000 | Kawasaki Kisen Kaisha Ltd (a) | 273,689 | |||||||||
160,000 | Kobe Steel Ltd | 608,045 | |||||||||
24,000 | Komatsu Ltd | 425,630 | |||||||||
29,000 | Kyushu Electric Power Co Inc | 699,530 | |||||||||
163,000 | Marubeni Corp | 808,427 | |||||||||
33,000 | Matsushita Electric Industrial Co Ltd | 693,971 | |||||||||
119,000 | Mazda Motor Corp | 676,785 | |||||||||
101,800 | Mitsubishi Corp | 2,361,876 | |||||||||
17,000 | Mitsubishi Estate Co Ltd | 358,510 | |||||||||
76,000 | Mitsubishi Heavy Industries | 356,954 | |||||||||
77 | Mitsubishi Tokyo Financial Group Inc | 1,143,246 | |||||||||
104,000 | Mitsui & Co | 1,422,873 |
See accompanying notes to the financial statements.
6
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
35,000 | Mitsui Chemicals Inc | 280,329 | |||||||||
18,000 | Mitsui Fudosan Co Ltd | 373,905 | |||||||||
38,000 | Mitsui Trust Holding Inc | 557,146 | |||||||||
142 | Mizuho Financial Group Inc | 1,131,913 | |||||||||
24,000 | Nikko Cordial Corp | 377,814 | |||||||||
135,300 | Nissan Motor Co | 1,553,208 | |||||||||
21,700 | Nomura Securities Co Ltd | 414,104 | |||||||||
59 | NTT Data Corp | 272,788 | |||||||||
22,000 | Olympus Optical Co Ltd | 633,415 | |||||||||
2,930 | ORIX Corp | 771,383 | |||||||||
167,000 | Osaka Gas Co Ltd | 639,386 | |||||||||
25,800 | Pioneer Corp | 403,309 | |||||||||
189 | Resona Holdings Inc * | 666,453 | |||||||||
15,000 | Ricoh Company Ltd | 277,730 | |||||||||
7,000 | Secom Co | 347,318 | |||||||||
16,000 | Seven & I Holdings Co Ltd | 654,483 | |||||||||
47,000 | Shimizu Corp | 329,927 | |||||||||
6,400 | Shin-Etsu Chemical Co Ltd | 340,755 | |||||||||
14,400 | Softbank Corp. | 440,338 | |||||||||
102,000 | Sumitomo Corp | 1,377,980 | |||||||||
21,000 | Sumitomo Electric Industries Ltd | 315,567 | |||||||||
181,000 | Sumitomo Metal Industries Ltd | 803,543 | |||||||||
69 | Sumitomo Mitsui Financial Group Inc | 753,576 | |||||||||
11,000 | Sumitomo Realty & Development Co Ltd | 255,644 | |||||||||
41,000 | Sumitomo Trust & Banking | 415,682 | |||||||||
79,000 | Taisei Corp | 382,672 | |||||||||
25,000 | Taisho Pharmaceutical Co Ltd | 529,194 | |||||||||
41,900 | Takeda Pharmaceutical Co Ltd | 2,334,017 | |||||||||
31,000 | Teijin Ltd | 209,179 | |||||||||
34,200 | Tohoku Electric Power Co Inc | 773,859 | |||||||||
42,900 | Tokyo Electric Power Co Inc | 1,158,057 | |||||||||
153,000 | Tokyo Gas Co Ltd | 696,611 | |||||||||
57,000 | TonenGeneral Sekiyu KK (a) | 569,701 | |||||||||
32,000 | Toppan Printing Co Ltd | 408,795 |
See accompanying notes to the financial statements.
7
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
39,000 | Toray Industries Inc | 300,493 | |||||||||
15,500 | Toyo Seikan Kaisha Ltd | 267,280 | |||||||||
87,100 | Toyota Motor Corp | 4,643,079 | |||||||||
15,000 | UNY Co Ltd | 228,179 | |||||||||
15,000 | Urban Corp | 219,788 | |||||||||
69 | West Japan Railway Co | 279,683 | |||||||||
9,800 | Yamaha Motor Co Ltd | 223,503 | |||||||||
50,121,209 | |||||||||||
Netherlands — 3.5% | |||||||||||
89,673 | ABN Amro Holdings NV | 2,613,140 | |||||||||
75,145 | Aegon NV | 1,239,174 | |||||||||
14,213 | Akzo Nobel NV | 721,531 | |||||||||
5,197 | Corio NV | 341,477 | |||||||||
7,778 | DSM NV | 323,478 | |||||||||
25,693 | Heineken NV | 967,451 | |||||||||
120,266 | ING Groep NV | 4,520,313 | |||||||||
4,168 | Rodamco Europe NV | 382,105 | |||||||||
11,108,669 | |||||||||||
Norway — 1.1% | |||||||||||
33,600 | DnB NOR ASA | 407,674 | |||||||||
4,550 | Frontline Ltd (a) | 175,075 | |||||||||
4,860 | Norsk Hydro ASA | 569,266 | |||||||||
7,600 | Orkla ASA | 331,268 | |||||||||
73,100 | Statoil ASA | 1,872,001 | |||||||||
3,355,284 | |||||||||||
Singapore — 1.4% | |||||||||||
206,000 | Capitaland Ltd | 530,674 | |||||||||
30,000 | Fraser & Neave Ltd | 351,659 | |||||||||
46,000 | Keppel Corp Ltd | 395,328 | |||||||||
145,000 | Keppel Land Ltd | 392,568 | |||||||||
234,000 | Sembcorp Industrie | 447,809 |
See accompanying notes to the financial statements.
8
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
Singapore — continued | |||||||||||
26,000 | Singapore Airlines Ltd | 235,977 | |||||||||
297,000 | Singapore Technologies Engineering Ltd | 555,047 | |||||||||
1,008,000 | Singapore Telecommunications | 1,615,906 | |||||||||
4,524,968 | |||||||||||
Spain — 0.6% | |||||||||||
27,091 | Endesa SA | 907,149 | |||||||||
29,225 | Iberdrola SA | 921,760 | |||||||||
1,828,909 | |||||||||||
Sweden — 0.9% | |||||||||||
14,600 | Electrolux AB | 403,799 | |||||||||
28,850 | Hennes & Mauritz AB Class B | 1,051,214 | |||||||||
68,500 | Nordea AB | 774,296 | |||||||||
10,100 | Svenska Cellulosa Series B | 423,540 | |||||||||
13,600 | Swedish Match AB | 182,115 | |||||||||
2,834,964 | |||||||||||
Switzerland — 2.1% | |||||||||||
34,198 | ABB Ltd * | 409,748 | |||||||||
7,800 | Alcon Inc | 898,248 | |||||||||
15,680 | Credit Suisse Group | 868,440 | |||||||||
11,128 | Roche Holding AG (Non Voting) | 1,644,128 | |||||||||
731 | Serono SA | 518,684 | |||||||||
1,824 | Swisscom AG (Registered) | 547,767 | |||||||||
7,500 | Zurich Financial Services AG * | 1,771,078 | |||||||||
6,658,093 | |||||||||||
United Kingdom — 10.3% | |||||||||||
14,287 | Anglo American Plc | 532,229 | |||||||||
12,744 | AstraZeneca Plc | 588,554 | |||||||||
77,144 | Aviva Plc | 1,067,364 | |||||||||
41,781 | BAA Plc | 586,187 | |||||||||
54,664 | BAE Systems Plc | 402,386 |
See accompanying notes to the financial statements.
9
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
69,679 | Barclays Plc | 816,150 | |||||||||
22,131 | Barratt Developments Plc | 400,921 | |||||||||
42,766 | BG Group Plc | 500,911 | |||||||||
41,695 | BHP Billiton Plc | 700,713 | |||||||||
20,319 | Boots Group Plc | 252,674 | |||||||||
64,115 | BP Plc | 709,244 | |||||||||
63,085 | British Airways Plc * | 363,034 | |||||||||
40,070 | British American Tobacco Plc | 954,670 | |||||||||
296,989 | BT Group Plc | 1,071,174 | |||||||||
47,673 | Cadbury Schweppes Plc | 484,287 | |||||||||
212,828 | Centrica Plc | 1,084,126 | |||||||||
156,659 | DSG International Plc | 472,401 | |||||||||
34,740 | Gallaher Group Plc | 538,309 | |||||||||
42,793 | GKN Plc | 254,945 | |||||||||
32,635 | GlaxoSmithKline Plc | 828,897 | |||||||||
17,546 | Hanson Plc | 214,199 | |||||||||
68,780 | HBOS Plc | 1,280,897 | |||||||||
30,832 | Imperial Tobacco Group Plc | 927,270 | |||||||||
91,077 | J Sainsbury Plc | 511,386 | |||||||||
133,244 | Lloyds TSB Group Plc | 1,294,360 | |||||||||
76,146 | National Grid Plc | 800,618 | |||||||||
19,150 | Next Plc | 553,882 | |||||||||
14,657 | Persimmon Plc | 358,809 | |||||||||
110,031 | Pilkington | 312,514 | |||||||||
10,215 | Rio Tinto Plc | 480,740 | |||||||||
176,081 | Royal Bank of Scotland Group | 5,889,722 | |||||||||
75,395 | Royal Dutch Shell Group Class A | 2,272,970 | |||||||||
36,537 | Royal Dutch Shell Plc A Shares | 1,098,482 | |||||||||
32,262 | Scottish & Newcastle Plc | 289,705 | |||||||||
28,890 | Scottish & Southern Energy Plc | 581,876 | |||||||||
15,518 | Severn Trent Plc | 313,785 | |||||||||
36,404 | Taylor Woodrow Plc | 265,323 | |||||||||
153,823 | Tesco Plc | 911,563 | |||||||||
63,290 | Tomkins Plc | 369,487 |
See accompanying notes to the financial statements.
10
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
37,303 | United Utilities Plc | 446,660 | |||||||||
37,756 | Wimpey (George) Plc | 366,054 | |||||||||
19,058 | Wolseley Plc | 472,782 | |||||||||
32,622,260 | |||||||||||
United States — 42.9% | |||||||||||
9,300 | Abercrombie & Fitch Co.-Class A | 626,076 | |||||||||
6,900 | Adobe Systems, Inc. | 266,478 | |||||||||
20,400 | Aetna, Inc. | 1,040,400 | |||||||||
12,200 | Agilent Technologies, Inc. * | 439,200 | |||||||||
32,100 | Albertson's, Inc. | 816,624 | |||||||||
30,100 | Allied Waste Industries, Inc. * | 322,371 | |||||||||
20,100 | Allstate Corp. (The) | 1,101,078 | |||||||||
8,400 | Alltel Corp. | 530,460 | |||||||||
59,300 | Altria Group, Inc. | 4,263,670 | |||||||||
6,400 | AMBAC Financial Group, Inc. | 480,960 | |||||||||
11,400 | American Electric Power Co., Inc. | 416,100 | |||||||||
6,600 | American Financial Group, Inc. | 273,240 | |||||||||
15,800 | AmerisourceBergen Corp. | 726,642 | |||||||||
3,900 | Amgen, Inc. * | 294,411 | |||||||||
2,700 | Anadarko Petroleum Corp. | 267,732 | |||||||||
17,400 | Apple Computer, Inc. * | 1,192,596 | |||||||||
8,700 | Archer-Daniels-Midland Co. | 275,964 | |||||||||
66,957 | AT&T, Inc. | 1,847,344 | |||||||||
15,500 | Autonation, Inc. * | 324,105 | |||||||||
4,200 | Autozone, Inc. * | 406,056 | |||||||||
5,400 | Baker Hughes, Inc. | 367,038 | |||||||||
12,183 | Bank of America Corp. | 558,591 | |||||||||
2,800 | Bear Stearns Cos. (The), Inc. | 376,432 | |||||||||
25,400 | Bed Bath & Beyond, Inc. * | 915,416 | |||||||||
65,100 | BellSouth Corp. | 2,055,858 | |||||||||
8,300 | BJ Services Co. | 259,873 | |||||||||
14,400 | Boeing Co. | 1,046,736 | |||||||||
9,000 | Broadcom Corp.-Class A * | 405,810 |
See accompanying notes to the financial statements.
11
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
14,800 | Burlington Northern Santa Fe Corp. | 1,163,872 | |||||||||
9,500 | Burlington Resources, Inc. | 856,710 | |||||||||
19,500 | Capital One Financial Corp. | 1,708,200 | |||||||||
12,300 | Cardinal Health, Inc. | 892,980 | |||||||||
8,700 | Caremark Rx, Inc. * | 432,825 | |||||||||
12,500 | Caterpillar, Inc. | 913,500 | |||||||||
22,800 | Cendant Corp. | 378,936 | |||||||||
11,700 | Centex Corp. | 791,037 | |||||||||
6,800 | Chesapeake Energy Corp. | 201,892 | |||||||||
38,005 | Chevron Corp. | 2,146,522 | |||||||||
500 | Chicago Mercantile Exchange | 212,800 | |||||||||
5,800 | Cigna Corp. | 711,950 | |||||||||
12,500 | CNA Financial Corp. * | 386,500 | |||||||||
13,400 | Computer Sciences Corp. * | 728,156 | |||||||||
27,700 | Compuware Corp. * | 227,417 | |||||||||
48,100 | ConocoPhillips | 2,932,176 | |||||||||
13,000 | Conseco, Inc. * | 322,920 | |||||||||
17,100 | Convergys Corp. * | 297,027 | |||||||||
41,100 | Corning, Inc. * | 1,003,251 | |||||||||
6,400 | Coventry Health Care, Inc. * | 381,568 | |||||||||
5,100 | CSX Corp. | 282,438 | |||||||||
16,700 | CVS Corp. | 473,111 | |||||||||
24,900 | D.R. Horton, Inc. | 849,339 | |||||||||
119,500 | Dell, Inc. * | 3,465,500 | |||||||||
7,700 | Devon Energy Corp. | 451,451 | |||||||||
4,000 | Diamond Offshore Drilling, Inc. | 309,560 | |||||||||
11,000 | Dow Chemical Co. | 473,330 | |||||||||
20,900 | Eastman Kodak Co. | 586,245 | |||||||||
9,500 | Edison International | 421,420 | |||||||||
5,600 | Emerson Electric Co. | 458,136 | |||||||||
5,600 | EOG Resources, Inc. | 377,440 | |||||||||
6,800 | Equity Residential REIT | 307,904 | |||||||||
4,200 | Everest RE Group Ltd. | 415,968 | |||||||||
9,000 | Exelon Corp. | 513,990 |
See accompanying notes to the financial statements.
12
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
4,600 | Express Scripts, Inc. * | 401,442 | |||||||||
9,300 | Exxon Mobil Corp. | 552,141 | |||||||||
55,400 | Fannie Mae | 3,029,272 | |||||||||
8,216 | Federated Department Stores, Inc. | 583,665 | |||||||||
5,000 | Federated Investors, Inc.-Class B | 194,450 | |||||||||
3,400 | FedEx Corp. | 364,616 | |||||||||
13,900 | Fidelity National Financial, Inc. | 524,864 | |||||||||
11,800 | First American Corp. | 497,488 | |||||||||
8,200 | First Data Corp. | 370,066 | |||||||||
5,700 | First Horizon National Corp. | 222,927 | |||||||||
7,100 | FirstEnergy Corp. | 362,668 | |||||||||
142,800 | Ford Motor Co. | 1,138,116 | |||||||||
12,200 | FPL Group, Inc. | 511,546 | |||||||||
6,000 | Franklin Resources, Inc. | 616,080 | |||||||||
43,300 | Freddie Mac | 2,917,987 | |||||||||
6,300 | Freeport-McMoRan Copper & Gold, Inc.-Class B | 318,969 | |||||||||
34,100 | Gap (The), Inc. | 632,214 | |||||||||
21,700 | Genentech, Inc. * | 1,859,473 | |||||||||
2,800 | General Dynamics Corp. | 345,156 | |||||||||
35,300 | General Motors Corp. (a) | 716,943 | |||||||||
20,400 | Genworth Financial, Inc.-Class A | 649,128 | |||||||||
7,000 | Gilead Sciences, Inc. * | 435,890 | |||||||||
4,500 | Global Santa Fe Corp | 249,030 | |||||||||
6,200 | Goldman Sachs Group, Inc. | 875,998 | |||||||||
3,500 | Google, Inc.-Class A * | 1,269,170 | |||||||||
12,800 | Halliburton Co. | 870,400 | |||||||||
17,600 | Harley-Davidson, Inc. | 924,176 | |||||||||
4,900 | Hartford Financial Services Group, Inc. | 403,662 | |||||||||
8,700 | Health Net, Inc. * | 417,165 | |||||||||
80,200 | Hewlett-Packard Co. | 2,631,362 | |||||||||
86,200 | Home Depot, Inc. | 3,633,330 | |||||||||
6,400 | Hovnanian Enterprises, Inc. * | 295,104 | |||||||||
6,800 | IndyMac Bancorp, Inc. | 263,976 | |||||||||
56,300 | Intel Corp. | 1,159,780 |
See accompanying notes to the financial statements.
13
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
5,000 | ITT Industries, Inc. | 262,500 | |||||||||
20,700 | Janus Capital Group, Inc. | 453,951 | |||||||||
4,000 | JC Penney Co., Inc. | 234,560 | |||||||||
42,400 | Johnson & Johnson | 2,444,360 | |||||||||
6,200 | Johnson Controls, Inc. | 441,874 | |||||||||
9,100 | Jones Apparel Group, Inc. | 263,172 | |||||||||
9,100 | KB Home | 609,973 | |||||||||
23,600 | Kraft Foods, Inc. | 710,124 | |||||||||
25,600 | Kroger Co. * | 513,024 | |||||||||
3,200 | Lafarge North America, Inc. | 265,184 | |||||||||
5,300 | Lehman Brothers Holdings, Inc. | 773,535 | |||||||||
10,400 | Lennar Corp.-Class A | 622,544 | |||||||||
8,600 | Lexmark International, Inc. * | 404,974 | |||||||||
8,600 | Lincare Holdings, Inc. * | 351,740 | |||||||||
5,000 | Loews Corp. | 461,300 | |||||||||
10,700 | Lowe's Cos., Inc. | 729,526 | |||||||||
10,200 | Marathon Oil Corp. | 720,120 | |||||||||
14,900 | Marsh & McLennan Cos., Inc. | 460,559 | |||||||||
7,100 | MBIA, Inc. | 417,054 | |||||||||
4,500 | MDC Holdings, Inc. | 275,805 | |||||||||
6,000 | Medco Health Solutions, Inc. * | 334,320 | |||||||||
22,700 | Merck & Co., Inc. | 791,322 | |||||||||
5,800 | Metlife, Inc. | 290,696 | |||||||||
6,600 | MGIC Investment Corp. | 420,750 | |||||||||
7,300 | Morgan Stanley | 435,518 | |||||||||
62,200 | Motorola, Inc. | 1,331,080 | |||||||||
32,800 | National City Corp. | 1,141,440 | |||||||||
9,000 | National Semiconductor Corp. | 252,450 | |||||||||
5,300 | New Century Financial Corp. | 205,375 | |||||||||
6,900 | NII Holdings, Inc.-Class B * | 353,418 | |||||||||
10,200 | Nordstrom, Inc. | 387,600 | |||||||||
3,300 | Northrop Grumman Corp. | 211,530 | |||||||||
600 | NVR, Inc. * | 451,800 | |||||||||
11,200 | Occidental Petroleum Corp. | 1,025,248 |
See accompanying notes to the financial statements.
14
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares | Description | Value ($) | |||||||||
United States — continued | |||||||||||
16,625 | Old Republic International Corp. | 353,946 | |||||||||
42,000 | Oracle Corp. * | 521,640 | |||||||||
6,800 | Paychex, Inc. | 272,340 | |||||||||
8,800 | Peabody Energy Corp. | 424,776 | |||||||||
6,400 | PepsiCo, Inc. | 378,304 | |||||||||
364,600 | Pfizer, Inc. | 9,548,874 | |||||||||
6,100 | PMI Group (The), Inc. | 264,130 | |||||||||
5,700 | PNC Financial Services Group, Inc. | 400,995 | |||||||||
7,600 | Precision Castparts Corp. | 403,104 | |||||||||
10,700 | Progress Energy, Inc. | 474,866 | |||||||||
10,900 | Prudential Financial, Inc. | 839,736 | |||||||||
13,300 | Qualcomm, Inc. | 627,893 | |||||||||
7,000 | Radian Group, Inc. | 397,250 | |||||||||
7,700 | Rockwell Collins, Inc. | 409,255 | |||||||||
6,100 | Ryder Systems, Inc. | 270,474 | |||||||||
3,900 | Ryland Group, Inc. | 272,025 | |||||||||
11,600 | Sabre Holdings Corp. | 279,908 | |||||||||
30,200 | Safeway, Inc. | 734,162 | |||||||||
5,900 | SanDisk Corp. * | 356,006 | |||||||||
18,900 | Sara Lee Corp. | 333,963 | |||||||||
11,500 | Schlumberger Ltd. | 1,322,500 | |||||||||
6,500 | SEI Investment Co. | 271,635 | |||||||||
4,700 | Simon Property Group, Inc. REIT | 389,959 | |||||||||
10,000 | SPX Corp. | 492,500 | |||||||||
20,900 | St. Paul Travelers Cos. (The), Inc. | 898,282 | |||||||||
6,700 | Starwood Hotels & Resorts Worldwide, Inc. | 425,450 | |||||||||
3,800 | Sunoco, Inc. | 281,580 | |||||||||
49,900 | Tellabs, Inc. * | 733,031 | |||||||||
40,900 | Texas Instruments, Inc. | 1,220,865 | |||||||||
10,200 | Toll Brothers, Inc. * | 330,072 | |||||||||
5,200 | Transocean, Inc. * | 385,736 | |||||||||
13,100 | TXU Corp. | 686,309 | |||||||||
28,100 | UnitedHealth Group, Inc. | 1,636,263 | |||||||||
36,000 | UnumProvident Corp. | 744,840 |
See accompanying notes to the financial statements.
15
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2006
Shares / Par Value ($) | Description | Value ($) | |||||||||
United States — continued | |||||||||||
4,200 | USG Corp. * | 354,816 | |||||||||
14,100 | Valero Energy Corp. | 758,439 | |||||||||
67,600 | Verizon Communications, Inc. | 2,278,120 | |||||||||
2,800 | Vornado Realty Trust | 249,172 | |||||||||
37,300 | Wachovia Corp. | 2,091,411 | |||||||||
10,800 | Walgreen Co. | 484,488 | |||||||||
33,649 | Washington Mutual, Inc. | 1,436,812 | |||||||||
13,400 | WellPoint, Inc. * | 1,028,986 | |||||||||
30,000 | Wells Fargo & Co. | 1,926,000 | |||||||||
4,700 | Whirlpool Corp. | 422,013 | |||||||||
3,400 | Whole Foods Market, Inc. | 217,192 | |||||||||
135,890,130 | |||||||||||
TOTAL COMMON STOCKS (COST $280,489,791) | 303,128,746 | ||||||||||
PREFERRED STOCKS — 0.1% | |||||||||||
Germany — 0.1% | |||||||||||
8,638 | Volkswagen AG 2.82% | 445,115 | |||||||||
TOTAL PREFERRED STOCKS (COST $357,352) | 445,115 | ||||||||||
SHORT-TERM INVESTMENT(S) — 4.4% | |||||||||||
11,000,000 | Barclays Time Deposit, 4.56%, due 03/01/06 | 11,000,000 | |||||||||
2,110,020 | The Boston Global Investment Trust (b) | 2,110,020 | |||||||||
1,000,000 | U.S. Treasury Bill, 4.64%, due 08/24/06 (c) (d) | 978,012 | |||||||||
TOTAL SHORT-TERM INVESTMENT(S) (COST $14,087,922) | 14,088,032 | ||||||||||
TOTAL INVESTMENTS — 100.2% (Cost $294,935,065) | 317,661,893 | ||||||||||
Other Assets and Liabilities (net) — (0.2%) | (786,803 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 316,875,090 |
See accompanying notes to the financial statements.
16
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
A summary of outstanding financial instruments at February 28, 2006 is as follows:
Forward currency contracts
Settlement Date | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
5/26/06 | CAD | 11,195,845 | $ | 9,874,348 | $ | 127,717 | |||||||||||||
5/26/06 | CHF | 1,281,660 | 985,520 | (6,949 | ) | ||||||||||||||
5/26/06 | JPY | 852,959,340 | 7,452,480 | 167,220 | |||||||||||||||
5/26/06 | NOK | 64,899,395 | 9,670,083 | 27,035 | |||||||||||||||
5/26/06 | NZD | 1,891,753 | 1,245,048 | (9,718 | ) | ||||||||||||||
5/26/06 | SEK | 75,157,230 | 9,559,901 | (44,415 | ) | ||||||||||||||
5/26/06 | SGD | 3,853,682 | 2,382,505 | 18,138 | |||||||||||||||
$ | 279,028 | ||||||||||||||||||
Sales | |||||||||||||||||||
5/26/06 | AUD | 936,155 | $ | 693,882 | $ | (3,758 | ) | ||||||||||||
5/26/06 | CHF | 6,998,207 | 5,381,204 | (12,038 | ) | ||||||||||||||
5/26/06 | EUR | 2,647,552 | 3,172,381 | (10,823 | ) | ||||||||||||||
5/26/06 | GBP | 9,382,286 | 16,470,329 | (150,066 | ) | ||||||||||||||
5/26/06 | HKD | 9,168,168 | 1,183,358 | 45 | |||||||||||||||
5/26/06 | JPY | 159,461,070 | 1,393,244 | (19,113 | ) | ||||||||||||||
$ | (195,753 | ) |
See accompanying notes to the financial statements.
17
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
February 28, 2006
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
53 | DAX | March 2006 | $ | 9,167,607 | $ | 620,121 | |||||||||||||
23 | TOPIX | March 2006 | 3,294,372 | (28,089 | ) | ||||||||||||||
$ | 592,032 | ||||||||||||||||||
Sales | |||||||||||||||||||
29 | FTSE 100 | March 2006 | $ | 2,932,338 | $ | (11,312 | ) | ||||||||||||
17 | SPI 200 | March 2006 | 1,553,830 | (87,549 | ) | ||||||||||||||
$ | (98,861 | ) |
As of February 28, 2006, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
(a) All or a portion of this security is out on loan (Note 2).
(b) All or a portion of this security represents investment of security lending collateral (Note 2).
(c) Rate shown represents yield-to-maturity.
(d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2).
As of February 28, 2006, 50.7% of the Net Assets of the Fund was valued using fair value prices based on tools by a third party vendor (Note 2).
Currency Abbreviations:
AUD - Australian Dollar | JPY - Japanese Yen | ||||||
CAD - Canadian Dollar | NOK - Norwegian Krone | ||||||
CHF - Swiss Franc | NZD - New Zealand Dollar | ||||||
EUR - Euro | SEK - Swedish Krona | ||||||
GBP - British Pound | SGD - Singapore Dollar | ||||||
HKD - Hong Kong Dollar | |||||||
See accompanying notes to the financial statements.
18
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — February 28, 2006
Assets: | |||||||
Investments, at value, including securities on loan of $1,961,166 (cost $294,935,065) (Note 2) | $ | 317,661,893 | |||||
Cash | 886,178 | ||||||
Foreign currency, at value (cost $289,806) (Note 2) | 291,118 | ||||||
Dividends and interest receivable | 395,595 | ||||||
Foreign taxes receivable | 4,574 | ||||||
Unrealized appreciation on open forward currency contracts (Note 2) | 340,155 | ||||||
Receivable for expenses reimbursed by Manager (Note 3) | 41,608 | ||||||
Total assets | 319,621,121 | ||||||
Liabilities: | |||||||
Collateral on securities loaned (Note 2) | 2,110,020 | ||||||
Payable to affiliate for (Note 3): | |||||||
Management fee | 113,049 | ||||||
Shareholder service fee | 30,864 | ||||||
Trustees and Chief Compliance Officer fees | 1,031 | ||||||
Unrealized depreciation on open forward currency contracts (Note 2) | 256,880 | ||||||
Payable for variation margin on open futures contracts (Note 2) | 120,098 | ||||||
Accrued expenses | 114,089 | ||||||
Total liabilities | 2,746,031 | ||||||
Net assets | $ | 316,875,090 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 290,390,263 | |||||
Accumulated undistributed net investment income | 369,601 | ||||||
Accumulated net realized gain | 2,809,942 | ||||||
Net unrealized appreciation | 23,305,284 | ||||||
$ | 316,875,090 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 179,466,422 | |||||
Class IV shares | $ | 137,408,668 | |||||
Shares outstanding: | |||||||
Class III | 8,068,115 | ||||||
Class IV | 6,174,319 | ||||||
Net asset value per share: | |||||||
Class III | $ | 22.24 | |||||
Class IV | $ | 22.25 |
See accompanying notes to the financial statements.
19
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Operations — Period from August 1, 2005
(commencement of operations) through February 28, 2006
Investment Income: | |||||||
Dividends (net of withholding taxes of $59,898) | $ | 1,991,876 | |||||
Interest (including securities lending income of $31,474) | 427,806 | ||||||
Total investment income | 2,419,682 | ||||||
Expenses: | |||||||
Management fee (Note 3) | 619,034 | ||||||
Shareholder service fee – Class III (Note 3) | 102,330 | ||||||
Shareholder service fee – Class IV (Note 3) | 63,489 | ||||||
Custodian and fund accounting agent fees | 129,995 | ||||||
Transfer agent fees | 23,231 | ||||||
Audit and tax fees | 50,007 | ||||||
Legal fees | 6,007 | ||||||
Trustees fees and related expenses (Note 3) | 2,287 | ||||||
Registration fees | 36,065 | ||||||
Miscellaneous | 6,151 | ||||||
Total expenses | 1,038,596 | ||||||
Fees and expenses reimbursed by Manager (Note 3) | (249,673 | ) | |||||
Net expenses | 788,923 | ||||||
Net investment income (loss) | 1,630,759 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 1,550,226 | ||||||
Closed futures contracts | 1,263,016 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (511,435 | ) | |||||
Net realized gain (loss) | 2,301,807 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 22,726,828 | ||||||
Open futures contracts | 493,171 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 85,285 | ||||||
Net unrealized gain (loss) | 23,305,284 | ||||||
Net realized and unrealized gain (loss) | 25,607,091 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 27,237,850 |
See accompanying notes to the financial statements.
20
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Period from August 1, 2005 (commencement of operations) through February 28, 2006 | |||||||
Increase (decrease) in net assets: | |||||||
Operations: | |||||||
Net investment income (loss) | $ | 1,630,759 | |||||
Net realized gain (loss) | 2,301,807 | ||||||
Change in net unrealized appreciation (depreciation) | 23,305,284 | ||||||
Net increase (decrease) in net assets from operations | 27,237,850 | ||||||
Distributions to shareholders from: | |||||||
Net investment income | |||||||
Class III | (395,896 | ) | |||||
Class IV | (357,127 | ) | |||||
Total distributions from net investment income | (753,023 | ) | |||||
Net share transactions (Note 7): | |||||||
Class III | 164,617,846 | ||||||
Class IV | 124,982,127 | ||||||
Increase (decrease) in net assets resulting from net share transactions | 289,599,973 | ||||||
Purchase premiums and redemption fees (Notes 2 and 7): | |||||||
Class III | 415,290 | ||||||
Class IV | 375,000 | ||||||
Increase in net assets resulting from net purchase premiums and redemption fees | 790,290 | ||||||
Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees | 290,390,263 | ||||||
Total increase (decrease) in net assets | 316,875,090 | ||||||
Net assets: | |||||||
Beginning of period | — | ||||||
End of period (including accumulated undistributed net investment income of $369,601) | $ | 316,875,090 |
See accompanying notes to the financial statements.
21
GMO Developed World Stock Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Period from August 1, 2005 (commencement of operations) through February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 20.00 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.15 | ||||||
Net realized and unrealized gain (loss) | 2.15 | ||||||
Total from investment operations | 2.30 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.06 | ) | |||||
Total distributions | (0.06 | ) | |||||
Net asset value, end of period | $ | 22.24 | |||||
Total Return(a) | 11.51 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 179,466 | |||||
Net expenses to average daily net assets | 0.62 | %* | |||||
Net investment income to average daily net assets | 1.27 | %* | |||||
Portfolio turnover rate | 15 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.20 | %* | |||||
Purchase premiums and redemption fees consisted of the following per share amounts: | $ | 0.07 |
† Calculated using average shares outstanding throughout the period.
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO Developed World Stock Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class IV share outstanding throughout the period)
Period from September 1, 2005 (commencement of operations) through February 28, 2006 | |||||||
Net asset value, beginning of period | $ | 20.24 | |||||
Income (loss) from investment operations: | |||||||
Net investment income (loss)† | 0.12 | ||||||
Net realized and unrealized gain (loss) | 1.95 | ||||||
Total from investment operations | 2.07 | ||||||
Less distributions to shareholders: | |||||||
From net investment income | (0.06 | ) | |||||
Total distributions | (0.06 | ) | |||||
Net asset value, end of period | $ | 22.25 | |||||
Total Return(a) | 10.23 | %** | |||||
Ratios/Supplemental Data: | |||||||
Net assets, end of period (000's) | $ | 137,409 | |||||
Net expenses to average daily net assets | 0.57 | %* | |||||
Net investment income to average daily net assets | 1.20 | %* | |||||
Portfolio turnover rate†† | 15 | %** | |||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.17 | %* | |||||
Purchase premiums and redemption fees consisted of the following per share amounts: | $ | 0.06 |
† Calculated using average shares outstanding throughout the period.
(a) The total return would have been lower had certain expenses not been reimbursed during the periods shown. Calculations excludes purchase premiums and redemption fees which are borne by the shareholder.
* Annualized.
** Not annualized.
†† Calculation represents portfolio turnover rate of the Fund for the period August 1, 2005 through February 28, 2006.
See accompanying notes to the financial statements.
23
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 2006
1. Organization
GMO Developed World Stock Fund (the "Fund"), which commenced operations on August 1, 2005, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide a series of shares into classes.
The Fund seeks a high total return through investing primarily in equity securities from the world's developed markets, including the U.S. The Fund's benchmark is the MSCI World Index (a global developed markets equity index that is independently maintained and published by Morgan Stanley Capital International).
For the period August 1, 2005 through February 28, 2006, the Fund offered Class III shares and for the period September 1, 2005 through February 28, 2006, the Fund offered Class IV shares. The principle economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested in the Fund and with GMO, as more fully outlined in the Fund's prospectus.
2. Significant accounting policies
The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates fair value. Shares of mutual funds are valued at their net asset value. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange
24
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of currencies and forward currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount o f investment income and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss ref lected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2006.
Futures Contracts
The Fund may purchase and sell futures contracts. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit, with the futures clearing broker, an amount of cash, U.S. government and agency obligations or other liquid assets in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or
25
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from changes in the value of the underlying instrument if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. Futures contracts a re generally valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for open futures contracts entered into by the Fund as of February 28, 2006.
Options
The Fund may write call and put options on futures, securities or currencies. Writing options increases the Fund's exposure to the underlying instrument by, in the case of a call option, obligating the Fund to sell the underlying instrument at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying instrument at a set price from the option-holder. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying instrument increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 2006, the Fund did not enter into any written option contracts.
The Fund may also purchase put and call options. Purchasing options alters the Fund's exposure to the underlying instrument by, in the case of a call option, entitling the Fund to purchase the underlying instrument at a set price from the writer of the option and, in the case of a put option, entitling the Fund to sell the underlying instrument at a set price to the writer of the option. The Fund pays a premium as a cost for a purchased option disclosed in the Schedule of Investments which is subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As o f February 28, 2006, the Fund did not enter into any purchased option contracts. Exchange traded options are valued at the last sale price, or if no sale is reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager.
26
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Swap agreements
The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or fa lls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily using standard models that incorporate quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts are recorded as realized gain or loss in the Statement of Operations. Gains or losses are realized upon early termination of the swap agreement. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized in the Sta tement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their obligations to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2006, the Fund did not enter into any swap agreements.
Repurchase agreements
The Fund may enter into repurchase agreements with banks and broker-dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of February 28, 2006, the Fund did not enter into any repurchase agreements.
27
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Securities lending
The Fund may lend its securities to certain qualified broker-dealers. The loans are collateralized with cash or liquid securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in and/or inability to exercise its rights with respect to the collateral, and the risk of delay in recovery or loss of rights in the loaned securities should the borrower of the securities fail financially. If a loan is collateralized by U.S. government securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in interest-bearing, short-term securities and pays a fee to the borrower that normally represents a portion of the Fund's earnings on the collateral. As of February 28, 2006 th e Fund had loaned securities having a market value of $1,961,166, collateralized by cash in the amount of $2,110,020, which was invested in short-term instruments.
Taxes and distributions
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding tax rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund may be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests.
Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. During the year ended February 28, 2006, the tax basis of distributions paid were as follows: ordinary income – $753,023.
As of February 28, 2006, the components of distributable earnings on a tax basis consisted of $3,072,408 and $354,071 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary
28
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and wash sale transactions.
As of February 28, 2006, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 295,116,908 | $ | 28,508,963 | $ | (5,963,978 | ) | $ | 22,544,985 |
The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2006. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Investment Income | Accumulated Net Realized Gain | Paid-in Capital | |||||||||
$ | (508,135 | ) | $ | 508,135 | $ | — |
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro rata between the classes of shares of the Fund based on the
29
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Purchase and redemption of Fund shares
As of the date of this report, the premium on cash purchases and fee on redemptions of Fund shares were each 0.30% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee in an amount approximately equal to the fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transactions costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the period ended February 28, 2006, the Fund received $785,790 in purchase premiums and $4,500 in redemption fees, respectively.
Investment risks
There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets.
3. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 0.47% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
GMO has entered into a binding agreement effective until at least June 30, 2006 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the Chief Compliance Officer ("CCO") and independent Trustees (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed 0.47% of average daily net assets.
The Fund's portion of the fees paid by the Trust to the independent Trustees and CCO during the period ended February 28, 2006, was $1,366 and $1,783, respectively. No remuneration was paid to any other officer of the Trust.
30
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
4. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 28, 2006 aggregated $309,838,502 and $30,272,273, respectively.
5. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Fund.
6. Principal shareholders
As of February 28, 2006, 71.3% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund.
7. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from August 1, 2005 (commencement of operations) through February 28, 2006 | |||||||||||
Class III: | Shares | Amount | |||||||||
Shares sold | 8,121,989 | $ | 165,726,450 | ||||||||
Shares issued to shareholders in reinvestment of distributions | 18,807 | 395,896 | |||||||||
Shares repurchased | (72,681 | ) | (1,504,500 | ) | |||||||
Purchase premiums and redemption fees | — | 415,290 | |||||||||
Net increase (decrease) | 8,068,115 | $ | 165,033,136 |
31
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
February 28, 2006
Period from September 1, 2005 (commencement of operations) through February 28, 2006 | |||||||||||
Class IV: | Shares | Amount | |||||||||
Shares sold | 6,157,362 | $ | 124,625,000 | ||||||||
Shares issued to shareholders in reinvestment of distributions | 16,957 | 357,127 | |||||||||
Shares repurchased | — | — | |||||||||
Purchase premiums and redemption fees | — | 375,000 | |||||||||
Net increase (decrease) | 6,174,319 | $ | 125,357,127 |
32
Report of Independent Registered Public Accounting Firm
To the Trustees of GMO Trust and the Shareholders of
GMO Developed World Stock Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Developed World Stock Fund (the "Fund") (a series of GMO Trust) at February 28, 2006 and the results of its operations, the changes in its net assets and the financial highlights for the period from August 1, 2005 (commencement of operations) to February 28, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in acc ordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2006 by correspondence with the custodian, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2006
33
GMO Developed World Stock Fund
(A Series of GMO Trust)
Fund Expenses
February 28, 2006 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2006.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2005 through February 28, 2006.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $5,000,000 account value divided by $1,000 = 5,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.62 | % | $ | 1,000.00 | $ | 1,109.00 | $ | 3.24 | * | ||||||||||
2) Hypothetical | 0.62 | % | $ | 1,000.00 | $ | 1,021.72 | $ | 3.11 | * | ||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.57 | % | $ | 1,000.00 | $ | 1,102.30 | $ | 2.95 | ** | ||||||||||
2) Hypothetical | 0.57 | % | $ | 1,000.00 | $ | 1,021.85 | $ | 2.84 | ** |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended February 28, 2006, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.
** Expenses are calculated using the Class's annualized net expense ratio for the period ended February 28, 2006, multiplied by the average account value over the period, multiplied by 180 days in the period, divided by 365 days in the year.
34
GMO Developed World Stock Fund
(A Series of GMO Trust)
Tax Information (Unaudited) for the Tax Year Ended February 28, 2006
For taxable, non-corporate shareholders, 83.28% of the Fund's income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, 92.41% of the income and short-term capital gains, if any, distributed in the Fund's fiscal year ended February 28, 2006 qualified for the dividends-received deduction.
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2006 of $33,359 or if determined to be different, the qualified interest income of such year.
35
Trustees and Officers (Unaudited)
The following tables list the Trust's Trustees and Officers as of the date of this report; their address and date of birth ("DOB"); their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information ("SAI") includes additional information about the Trust's trustees, including changes subsequent to the date of the report. The SAI is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110.
Independent Trustees:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Donald W. Glazer, Esq. c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 07/26/1944 | Chairman of the Board of Trustees | Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. | Consultant – Business and Law2, Vice Chair (since 2002) and Secretary, Provant, Inc.; Author of Legal Treatises. | 54 | None | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
2 As part of Mr. Glazer's work as a consultant, he provides part-time consulting services to Goodwin Procter LLP ("Goodwin"). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2004 and December 31, 2005 these entities paid $373,499 and $489,128 respectively, in legal fees and disbursements to Goodwin.
36
Independent Trustees — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office1 and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee | ||||||||||||||||||
Jay O. Light c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/13/1941 | Trustee | Since May 1996 | Acting Dean (since 2005), Senior Associate Dean (1998 – 2005), and Professor of Business Administration, Harvard Business School. | 54 | Director of Harvard Management, Company, Inc. and Verde, Inc.; Director of Partners HealthCare Systems, Inc.; and Chair of its Investment Committee.3 | ||||||||||||||||||
W. Nicholas Thorndike c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 03/28/1933 | Trustee | Since March 2005 | Director or trustee of various corporations and charitable organizations, including Courier Corporation (a book publisher and manufacturer) (July 1989 – present); Putnam Funds (December 1992 – June 2004); and Providence Journal (a newspaper publisher) (December 1986 – December 2003). | 54 | Director of Courier Corporation (a book publisher and manufacturer); Member of the Investment Committee of Partners HealthCare Systems, Inc. | ||||||||||||||||||
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified.
3 Mr. Light is a director of Harvard Management Company, Inc. and Verde, Inc.; Director of Partners HealthCare System, Inc. and Chair of its Investment Committee. None of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act and none of these companies is a registered investment company.
37
Principal Officers:
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
Scott Eston c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/20/1956 | President and Chief Executive Officer | President and Chief Executive Officer since October 2002; Vice President from August 1998 – October 2002. | Chief Financial Officer, Chief Operating Officer (2000 – present) and Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Susan Randall Harbert c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 04/25/1957 | Chief Financial Officer and Treasurer | Chief Financial Officer since February 2000; Treasurer since February 1998. | Member, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Brent C. Arvidson c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/26/1969 | Assistant Treasurer | Since August 1998. | Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC. | ||||||||||||
Sheppard N. Burnett c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/24/1968 | Assistant Treasurer | Since September 2004. | Fund Administration Staff, Grantham, Mayo, Van Otterloo & Co. LLC (June 2004 – present); Vice President, Director of Tax, Columbia Management Group (2002 – 2004) and Senior Tax Manager (2000 – 2002), PricewaterhouseCoopers LLP. | ||||||||||||
Michael E. Gillespie c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 02/18/1958 | Chief Compliance Officer | Since March 2005. | Vice President of Compliance (June 2004 – February 2005) and Director of Domestic Compliance (March 2002 – June 2004), Fidelity Investments; Vice President and Senior Counsel, State Street Bank and Trust Company (May 1998 – March 2002). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
38
Principal Officers — (Continued)
Name, Address, and DOB | Position(s) Held with Trust | Term of Office4 and Length of Time Served | Principal Occupation(s) During Past Five Years | ||||||||||||
David L. Bohan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 06/21/1964 | Vice President and Clerk | Since March 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC. (September 2003 – present); Attorney, Goodwin Procter LLP (September 1996 – September 2003). | ||||||||||||
Scott D. Hogan c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 01/06/1970 | Vice President and Secretary | Since June 2005; Acting Chief Compliance Officer, October 2004 – February 2005. | Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (2000 – present). | ||||||||||||
Julie L Perniola c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/07/1970 | Vice President | Vice President, February 2003 – present; Anti-Money Laundering Compliance Officer, February 2003 – December 2004. | Chief Compliance Officer (April 1995 – present), Grantham, Mayo, Van Otterloo & Co. LLC and Anti-Money Laundering Reporting Officer (February 2003 – December 2004). | ||||||||||||
Cheryl Wakeham c/o GMO Trust 40 Rowes Wharf Boston, MA 02110 DOB: 10/29/1958 | Vice President and Anti-Money Laundering Officer | Since December 2004. | Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC (February 1999 – present). | ||||||||||||
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office.
39
Item 2. Code of Ethics.
As of February 28, 2006, the registrant has adopted a Code of Ethics that applies to the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. During the year ended February 28, 2006, there were no amendments to a provision of the Code of Ethics nor were there any waivers granted from a provision of the Code of Ethics. A copy of the registrant’s Code of Ethics is filed with this Form N-CSR under item 12 (a).
Item 3. Audit Committee Financial Expert.
The registrant’s Board of Trustees has determined that the registrant does not have an “audit committee financial expert” (as such term has been defined in Form N-CSR) serving on its audit committee. The registrant’s Board believes that, although none of its members individually meets all required elements of the definition of an “audit committee financial expert”, the members of the registrant’s audit committee collectively possess the knowledge and experience necessary to execute all of the audit committee’s functions, duties and powers.
Item 4. Principal Accountant Fees and Services. *
(a) AUDIT FEES: The aggregate fees billed to the registrant for professional services rendered by its independent auditors, PricewaterhouseCoopers LLP for the audit of the registrant’s annual financial statements for 2006 and 2005 were $1,864,500 and $1,410,202, respectively.
(b) AUDIT-RELATED FEES: The aggregate fees billed to the registrant in 2006 and 2005 for engagements for audit-related services rendered by PricewaterhouseCoopers LLP that related directly to the operations and financial reporting of the Funds were $48,100 and $0, respectively. The aggregate fees billed in 2006 and 2005 to the registrant’s Investment Advisor, and any entity controlling, controlled, or under common control with the Advisor that provides ongoing services to the Funds (each, a “Service Affiliate”) for engagements for audit-related services rendered by PricewaterhouseCoopers LLP that related directly to the operations and financial reporting of the Funds were $312,262 and $287,000, respectively.
(c) TAX FEES: The aggregate fees billed to the registrant in 2006 and 2005 for professional services rendered by PricewaterhouseCoopers LLP for tax compliance, tax advice, and tax planning, including the preparation of Form 1120 RIC, Form 8613 and review of excise tax distribution calculations were $715,213 and $598,775, respectively. The aggregate fees billed in 2006 and 2005 to the registrant’s Service Affiliates for engagements for tax services rendered by PricewaterhouseCoopers LLP that related directly to the operations and financial reporting of the Funds were $8,250 and $26,863, respectively.
(d) ALL OTHER FEES: No such fees were billed by PricewaterhouseCoopers LLP to the registrant or to the registrant’s Service Affiliates that related directly to the operations and financial reporting of the Funds in 2006 or 2005.
(e) (1) The Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy (the “Policy”), which sets forth the procedures and the conditions pursuant to which services to be performed by the independent auditor are to be preapproved. Under the Policy, the Audit Committee pre-approves, on an annual basis, the following services: (1) the engagement, scope and terms of the annual audit; (2) certain audit-related services; (3) certain tax services that the Committee believes would not impair, and are consistent with the SEC’s rules on, auditor independence; and (4) those permissible non-audit services that the Committee believes are routine and recurring services and that would not impair, and are consistent with the SEC’s rules on, auditor independence, subject to certain limitations on the projected fees associated with each service. All other types of services not included on the schedule, or for which the projected fees exceed those provided in the schedule, require the specific pre-approval by the Audit Committee or the Chairperson of the Committee (if timing
necessitates that preapproval is required before the Committee’s next regularly scheduled meeting) if they are to be provided by the independent auditor.
(e) (2) None.
(f) Not applicable.
(g) NON-AUDIT FEES: The aggregate fees billed by PricewaterhouseCoopers LLP in 2006 and 2005 for non-audit services rendered to the registrant, the registrant’s Service Affiliates were $1,105,825 and $984,938, respectively. For the fiscal year ended February 28, 2006, this amount reflects the amounts disclosed above in Item 4(b),(c),(d), plus $22,000 in fees billed to the Funds’ Service Affiliates for non-audit services that did not relate directly to the operations and financial reporting of the Funds. For the fiscal year ended February 28, 2005, this amount reflects the amounts disclosed above in Item 4(b),(c),(d), plus $72,300 in fees billed to the Funds’ Service Affiliates for non-audit services that did not relate directly to the operations and financial reporting of the Funds.
(h) The Trust’s Audit Committee has considered whether the provision of non-audit services by registrant’s independent registered public accounting firm to the registrant’s Investment Advisor, and any entity controlling, controlled, or under common control with the Advisor that provided ongoing services to the registrant that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the registrant’s auditors.
*Includes information regarding all series of GMO Trust.
Item 5. Audit Committee of Listed Registrants.
Not applicable to this filing.
Item 6. Schedule of Investments.
The complete schedule of investments for each Covered Series of the registrant is included as part of the annual reports to shareholders filed under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to this registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to this registrant.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to this registrant.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.
Item 11. Controls and Procedures.
(a) The registrant’s Principal Executive Officer and Principal Financial Officer have concluded as of a date within 90 days of the filing of this report, based on their evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940 (17 CFR 270.30a-3(c))) that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the registrant [with respect to the Covered Series] on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940 (17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Code of Ethics described in Item 2 is attached.
(a)(2) Certifications by the Principal Executive Officer and Principal Financial Officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) are attached hereto as EX–99.CERT.
(a)(3) Not applicable to this registrant
(b) Certifications by the Chief Executive Officer and Principal Financial Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) are attached hereto as EX-99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) | GMO Trust | |||
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By (Signature and Title): | /s/ Scott Eston |
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| Scott Eston, Chief Executive Officer | |||
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| Date: | May 8, 2006 |
| |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title): | /s/ Scott Eston |
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| Scott Eston, Chief Executive Officer | |||
|
| |||
| Date: | May 8, 2006 |
| |
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By (Signature and Title): | /s/ Susan Randall Harbert |
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| Susan Randall Harbert, Principal Financial Officer | |||
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| Date : | May 8, 2006 |
| |